STATE FARM VARIABLE PRODUCT TRUST, 485BPOS, 2000-04-28

STATE FARM VARIABLE PRODUCT TRUST
485BPOS, 2000-04-28

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<PAGE>

As filed with the Securities and Exchange Commission on April 28, 2000

Securities Act Registration No. 333-22467
Investment Company Act File No. 811-08073

----------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Post-Effective Amendment No. 3

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 4

State Farm Variable Product Trust

-------------------------------------------------
(Exact name of Registrant as Specified in Charter)

One State Farm Plaza, Bloomington, Illinois 61710-0001

--------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code (309) 766-2029

Janet Olsen
Bell Boyd & Lloyd LLC
Roger Joslin Three First National Plaza
One State Farm Plaza 70 West Madison St., Suite 3300
Bloomington, Illinois 61710-0001 Chicago, Illinois 60602

------------------------------------------
(Names and addresses of agents for service)

----------------------------------------------
Amending Parts A, B and C, and filing exhibits
----------------------------------------------

It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to rule 485(b)
[X] on May 1, 2000 pursuant to rule 485(b)
[ ] 60 days after filing pursuant to rule 485(a)(1)
[ ] on May 1, 1999 pursuant to rule 485(a)(1)
[ ] 75 days after filing pursuant to rule 485(a)(2)
[ ] on ___________ pursuant to rule 485(a)(2)

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

<PAGE>
STATE FARM VARIABLE PRODUCT TRUST

MONEY MARKET FUND
LARGE CAP EQUITY INDEX FUND
SMALL CAP EQUITY INDEX FUND
INTERNATIONAL EQUITY INDEX FUND
BOND FUND
STOCK AND BOND BALANCED FUND

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

The Securities and Exchange Commission has not approved or disapproved the
shares of the funds or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.

PROSPECTUS--MAY 1, 2000

<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INTRODUCTION................................................ 3
Money Market Fund................................... 4
Equity Index Funds.................................. 5
Bond Fund........................................... 10
Stock and Bond Balanced Fund........................ 12
HOW THE FUNDS INVEST........................................ 14
Money Market Fund................................... 14
Equity Index Funds.................................. 15
Bond Fund........................................... 17
Stock and Bond Balanced Fund........................ 17
MANAGING THE INVESTMENTS OF THE FUNDS....................... 19
TAXES....................................................... 21
FINANCIAL HIGHLIGHTS........................................ 22
</TABLE>

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2
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------

State Farm Variable Product Trust has six separate investment portfolios or
"Funds." Shares of each Fund are offered exclusively in connection with variable
annuity and variable life insurance policies issued by State Farm Life Insurance
Company and State Farm Life and Accident Assurance Company. Each Fund is a
separate investment portfolio with its own investment objective, investment
policies, restrictions, and attendant risks. This prospectus describes each
Fund--please read it and retain it for future reference.

The Funds have different levels of short-term risk--the likely volatility of
a Fund's total return and its potential for gain or loss over a relatively short
time period. In the opinion of State Farm Investment Management Corp., the
investment adviser to the Funds, the relative short-term risk of each of the
Funds is shown on a spectrum like this:

[LOGO]

While historical performance is no guarantee of future results, an
historical observation has been made that lower short-term risk may lead to
lower returns over long time periods. Accordingly, investors should consider
their investment time horizon (the length of time that an investor expects to
hold an investment) in deciding the amount of short-term risk that they are
willing to tolerate. The longer the investors' time horizon is, the more
short-term risk they may be willing to tolerate in seeking to achieve their
investment goals.

ALL RISK IS NOT THE SAME.

Different types of mutual funds (for example, stock funds versus bond funds)
are subject to different types of risk. Each Fund, to varying degrees, is
subject to several types of risk, including the following:

CREDIT RISK--The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation.

INTEREST RATE RISK--The risk of a decline in market value of an interest bearing
instrument due to changes in interest rates. For example, a rise in interest
rates typically will cause the value of a fixed rate security to fall. On the
other hand, a decrease in interest rates will cause the value of a fixed rate
security to increase.

LIQUIDITY RISK--The risk that a security or other investment may be difficult or
impossible to sell at the time the Fund would like to sell it for the value the
Fund has placed on it.

MANAGEMENT RISK--The risk that a strategy used by a Fund's investment adviser
may fail to produce the desired result. This risk is common to all mutual funds.

MARKET RISK--The risk that the market value of a security may increase or
decrease, sometimes rapidly and unpredictably. This risk is common to all stocks
and bonds and the mutual funds that invest in them.

VALUATION RISK--The risk that a Fund has valued certain securities at a higher
price than it can sell them for. This risk is common where the security is from
a relatively new issuer with little or no previous market history and a mutual
fund's management is called upon to assign a value to the security.

THE RISK SPECTRUM IS INTENDED TO BE USED FOR COMPARATIVE PURPOSES ONLY AND
IS NOT AN INDICATOR OF FUTURE VOLATILITY OR PERFORMANCE.

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3
<PAGE>

MONEY MARKET FUND

INVESTMENT OBJECTIVE--The Money Market Fund seeks to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity.

INVESTMENT ADVISER--State Farm Investment Management Corp. ("SFIM")

INVESTMENT STRATEGIES

HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?

Unlike most other mutual funds, the Money Market Fund seeks to maintain a
stable net asset value of $1.00 per share. This Fund invests exclusively in
short-term U.S. dollar-denominated money market securities, including those
issued by U.S. and foreign financial institutions, corporate issuers, the U.S.
Government and its agencies and instrumentalities, municipalities, foreign
governments, and multi-national organizations, such as the World Bank.

RISKS

WHAT ARE THE MAIN RISKS OF INVESTING IN THE MONEY MARKET FUND?

[LOGO]

Given the types of securities that the Money Market Fund invests in, the
level of risk associated with the Money Market Fund is lower than most other
types of mutual funds. However, every investment involves some level of risk.

As with any money market mutual fund, the yield paid by the Fund will vary
with changes in interest rates. Also, there is a remote possibility that the
Fund's share value could fall below $1.00, which could reduce the value of your
account.

AN INVESTMENT IN THE MONEY MARKET FUND IS NOT A DEPOSIT OF ANY BANK OR OTHER
INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE MONEY
MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT BY MAINTAINING A
STABLE NET ASSET VALUE OF $1.00 PER SHARE, THE FUND MAY NOT SUCCEED AND YOU MAY
STILL LOSE MONEY BY INVESTING IN THE FUND.

HOW HAS MONEY MARKET FUND PERFORMED?

The following bar chart and table illustrate certain risks of investing in
the Fund. The bar chart shows the Fund's total return for calendar year 1999.
The table shows the Fund's average annual total return for the periods listed.
This information is intended to help you assess the variability of Fund returns
over the periods listed (and consequently, the potential rewards and risks of a
Fund investment). The Fund's past performance doesn't necessarily indicate how
it will perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
1999 4.77%
Total Return
</TABLE>

The Fund's best and worst quarters during the last year were:

Best quarter: 1.31%,
during the fourth quarter of 1999.

Worst quarter: 1.10%,
during the first quarter of 1999.

- -------
4
<PAGE>

The following table shows the average annual total return on an investment
in the Fund for the period 1/29/98 to 12/31/99 and for the 1-year period ended
December 31, 1999:

<TABLE>
<CAPTION>
MONEY MARKET FUND
-----------------
<S> <C>
1/29/98 to 12/31/99 4.97%
1 year 4.77%
</TABLE>

The 7-day yield on December 31, 1999 was 5.46% for the Money Market Fund.

INVESTOR PROFILE

WHO SHOULD CONSIDER INVESTING IN THE MONEY MARKET FUND?

You May Want to Consider Investing in This Fund If You:

- - require stability of principal

- - are seeking an investment for the cash portion of an asset allocation program

- - are looking for an investment with a lower degree of risk during uncertain
economic times or periods of stock market volatility

- - consider yourself a saver rather than an investor

- - are participating in a dollar cost averaging program under your variable life
insurance or annuity contract

You May Not Want to Invest in This Fund If You:

- - are seeking an investment that is likely to outpace inflation

- - are investing for retirement or other longer term goals

- - are investing for growth or maximum current income

EQUITY INDEX FUNDS--
LARGE CAP EQUITY INDEX FUND
SMALL CAP EQUITY INDEX FUND
INTERNATIONAL EQUITY INDEX FUND

The Large Cap, Small Cap, and International Equity Index Funds are equity
index Funds that invest mostly in stocks. By investing in a broad range of
stocks within a specific index (a "benchmark index"), each of these Funds seeks
to match the performance of its benchmark index, whether that index goes up or
down.

WHAT IS AN EQUITY INDEX?

An equity index is an unmanaged group of stocks used to measure and report
changes in a particular market. An index may be comprised of many stocks and
designed to be representative of the overall market, or made up of a smaller
number of stocks and designed to reflect a particular industry or market sector.
The composition of an index is determined by the criteria set by the index
(i.e., market capitalization) rather than an investment strategy developed by an
investment adviser like SFIM. An index is not a mutual fund and you cannot
invest in an index. The composition and weighting of securities in an index can,
and often does, change.

AN INVESTMENT IN AN EQUITY INDEX FUND IS NOT A DEPOSIT IN ANY BANK OR OTHER
INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

INVESTMENT OBJECTIVES

LARGE CAP EQUITY INDEX FUND--The Large Cap Equity Index Fund seeks to match the
performance of the Standard & Poor's Composite Index of 500

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5
<PAGE>
Stocks-Registered Trademark-(1) by investing in the securities that make up the
S&P 500. The S&P 500 tracks the common stock performance of 500 large U.S.
companies in the manufacturing, utility, transportation and financial
industries.

SMALL CAP EQUITY INDEX FUND--The Small Cap Equity Index Fund seeks to match the
performance of the Russell 2000 Small Stock Index-Registered Trademark-(2). This
Fund invests primarily in some of the stocks found in the Russell 2000. The
Russell 2000 tracks the common stock performance of about 2,000 small U.S.
companies.

INTERNATIONAL EQUITY INDEX FUND--The International Equity Index Fund seeks to
match the performance of the Morgan Stanley Capital International Europe,
Australia, and Far East Free Index-Registered Trademark- (the "EAFE Free")(3).
This Fund invests primarily in some of the stocks found in the EAFE Free. The
EAFE Free tracks the common stock (or equivalent) performance of companies in
which U.S. investors can invest in Europe, Australia, New Zealand and the Far
East.

The providers of the benchmark indices calculate those indexes without
taking the Funds into account, and do not sponsor or endorse the Funds in any
way.

INVESTMENT ADVISER--SFIM

INVESTMENT SUB-ADVISER--Barclays Global Fund Advisors ("Barclays")

INVESTMENT STRATEGIES

HOW DO THE EQUITY INDEX FUNDS PURSUE THEIR RESPECTIVE INVESTMENT OBJECTIVES?

Barclays 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, Barclays utilizes a "passive" or indexing investment approach
for each equity index Fund. As a passive manager, Barclays seeks to achieve
investment performance that is similar to a benchmark index. Barclays selects
stocks for the equity index Fund's portfolio so that the investment portfolio of
each Fund is as similar as possible to that of its benchmark.

Each equity index Fund attempts to remain as fully invested as practicable
in a pool of stocks and other equity securities that comprise the applicable
benchmark index in a manner that is expected to approximate the performance of
the benchmark index. Under normal operating conditions, each equity index Fund
seeks to 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.

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

(1) "Standard & Poor's," "S&P," "S&P 500" and "Standard & Poor's 500" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for
use by the Trust. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding
the advisability of investing in the Fund. For more information regarding
the S&P 500 Index, see the Trust's Statement of Additional Information.

(2) The Russell 2000 Small Stock Index is a trademark/service mark, and
"Russell" is a trademark, of the Frank Russell Company. The Fund is not
sponsored, endorsed, sold or promoted by the Frank Russell Company, and the
Frank Russell Company makes no representation regarding the advisability of
investing in the Fund. For more information regarding the Russell 2000
Index, see the Trust's Statement of Additional Information.

(3) EAFE Free 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 Fund is
not sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan Stanley
makes no representation or warranty regarding the advisability of investing
in the Fund. For more information regarding the EAFE Free, see the Trust's
Statement of Additional Information.

- -------
6
<PAGE>
RISKS

WHAT ARE THE MAIN RISKS OF INVESTING IN AN EQUITY INDEX FUND?

[LOGO]

Each equity index Fund has risks that are unique to the issuers of the
securities in which it invests. The equity index Funds are subject to market
risk and there is a risk that you will lose money by investing in these Funds.
For a more detailed discussion of the risks associated with each equity index
Fund and the portfolio securities of each equity index Fund, please refer to the
section entitled "HOW THE FUNDS INVEST--EQUITY INDEX FUNDS" later in this
prospectus.

- - Each equity index Fund attempts to match the performance of its respective
benchmark index, but there is no guarantee that any of the Funds will be able
to do so.

- - Because the Small Cap and International Equity Index Funds do not invest in
every security in their benchmark index, the Small Cap and International
Equity Index Funds will not track their benchmark indices with the same degree
of accuracy as would an investment vehicle that invested in every component
security of its benchmark index. To learn more about how the equity index
Funds select the stocks in which they invest, please read the section entitled
"HOW THE FUNDS INVEST--EQUITY INDEX FUNDS" later in this prospectus.

- - The equity index Funds try to stay fully invested at all times. Even when
stock prices are falling, the equity index Funds will stay fully invested and
each Fund may decline more than the Fund's benchmark index.

ARE THERE ANY SPECIFIC RISKS ASSOCIATED WITH INVESTING IN SECURITIES OF SMALL
CAPITALIZATION ISSUERS?

- - Yes. Small capitalization companies may not have the financial strength to do
well in difficult times, or may have limited product lines. The stocks of
small issuers are often more volatile than the stocks of large companies.

DO ANY OF THE EQUITY INDEX FUNDS INVEST IN SECURITIES ISSUED BY FOREIGN
COMPANIES?

- - Yes. The International Equity Index Fund invests all of its assets in foreign
companies, and the Large Cap Equity Index Fund may make foreign investments.
Investing in foreign securities involves higher trading and custody costs than
investing in U.S. companies. Accounting and reporting practices are different
than in the U.S. and regulation is often less stringent. Potential political
or economic instability presents risks, as does the fluctuation in currency
exchange rates.

HOW HAS LARGE CAP EQUITY INDEX FUND PERFORMED?

The following bar chart and table illustrate certain risks of investing in
the Fund. The bar chart shows the Fund's total return for calendar year 1999.
The table compares the Fund's average annual total return for the periods listed
to a market index. This information is intended to help you assess the
variability of Fund returns over the periods listed (and consequently, the
potential rewards and risks of a Fund investment). The Fund's past performance
doesn't necessarily indicate how it will perform in the future.

-------
7
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
1999 20.36%
Total Return
</TABLE>

The Fund's best and worst quarters during the last year were:

Best quarter: 14.63%,
during the fourth quarter of 1999.

Worst quarter: -6.21%,
during the third quarter of 1999.

The following table shows the average annual total return on an investment
in the Fund compared to a market index for the period 1/22/98 to 12/31/99 and
for the 1-year period ended December 31, 1999:

<TABLE>
<CAPTION>
LARGE CAP
EQUITY INDEX S&P 500
FUND INDEX*
------------ --------
<S> <C> <C>
1/22/98 to 12/31/99 25.59% 26.07%
1 year 20.36% 21.04%
</TABLE>

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

* The S&P 500 Index is a capitalization-weighted measure of the common stocks
of 500 large U.S. companies.

The S&P 500 Index represents an unmanaged group of stocks that differ from
the composition of the Large Cap Equity Index Fund. Unlike an investment in
the Large Cap Equity Index Fund, returns of the S&P 500 Index do not reflect
expenses of investing.

HOW HAS SMALL CAP EQUITY INDEX FUND PERFORMED?

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
1999 20.24%
Total Return
</TABLE>

The Fund's best and worst quarters during the last year were:

Best quarter: 18.37%,
during the fourth quarter of 1999.

Worst quarter: -6.29%,
during the third quarter of 1999.

The following table shows the average annual total return on an investment
in the Fund compared to a market index for the period 1/29/98 to 12/31/99 and
for the 1-year period ended December 31, 1999:

<TABLE>
<CAPTION>
SMALL CAP
EQUITY INDEX RUSSELL
FUND 2000 INDEX*
------------ -----------
<S> <C> <C>
1/29/98 to 12/31/99 8.98% 9.74%
1 year 20.24% 21.26%
</TABLE>

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

* The Russell 2000-Registered Trademark- Index tracks the common stock
performance of the 2,000 smallest U.S. companies in the
Russell 3000-Registered Trademark- Index, which represents approximately 10%
of the total capitalization of the Russell 3000 Index. Unlike an investment
in the Small Cap Equity Index Fund, returns of the Russell 2000 Index do not
reflect expenses of investing.

HOW HAS INTERNATIONAL EQUITY INDEX FUND PERFORMED?

The following bar chart and table illustrate certain risks of investing in
the Fund. The bar chart shows the Fund's total return for calendar year 1999.

- -------
8
<PAGE>

The table compares the Fund's average annual total return for the periods listed
to a market index. This information is intended to help you assess the
variability of Fund returns over the periods listed (and consequently, the
potential rewards and risks of a Fund investment). The Fund's past performance
doesn't necessarily indicate how it will perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
1999 26.21%
Total Return
</TABLE>

The Fund's best and worst quarters during the last year were:

Best quarter: 17.15%,
during the fourth quarter of 1999.

Worst quarter: 1.12%,
during the first quarter of 1999.

The following table shows the average annual total return on an investment
in the Fund compared to a market index for the period 1/22/98 to 12/31/99 and
for the 1-year period ended December 31, 1999:

<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY INDEX EAFE FREE
FUND INDEX*
------------- ---------
<S> <C> <C>
1/22/98 to 12/31/99 22.74% 22.83%
1 year 26.21% 26.72%
</TABLE>

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

* The Morgan Stanley Capital International Europe, Australia and Far East Free
(EAFE-Registered Trademark- Free) index currently measures the performance
of stock markets of Europe, Australia, New Zealand, and the Far East and
takes into account local market restrictions on share ownership by
foreigners. EAFE-Registered Trademark- Free is meant to reflect actual
opportunities for foreign investors in a local market. Unlike an investment
in the International Equity Index Fund, returns of the EAFE Free Index do
not reflect expenses of investing.

INVESTOR PROFILE

WHO SHOULD CONSIDER INVESTING IN AN EQUITY INDEX FUND?

You May Want to Invest in An Equity Index Fund If You:

- - can tolerate the price fluctuations and volatility that are inherent in
investing in a broad based stock mutual fund

- - want to invest in stocks, but with an indexing approach

- - want to diversify your investments

- - are seeking funds for the growth portion of an asset allocation program

- - are investing for retirement or other goals that are many years in the future

You May Not Want to Invest in An Equity Index Fund If You:

- - are investing with a shorter investment time horizon in mind

- - are seeking income rather than capital gains

- - are uncomfortable with an investment whose value is likely to vary
substantially

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9
<PAGE>

BOND FUND

INVESTMENT OBJECTIVE--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 invests primarily in good quality bonds
issued by domestic companies.

INVESTMENT ADVISER--SFIM

INVESTMENT STRATEGIES

HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?

The Bond Fund emphasizes investment grade bonds and maintains an
intermediate (typically, less than 6 years) average portfolio duration. Under
normal circumstances, the Fund invests at least 80% of its assets in investment
grade bonds or, if a bond has not been rated by a recognized rating
organization, bonds determined to be of comparable quality by SFIM. A bond is
investment grade if Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P") have rated the bond in one of their respective four
highest rating categories. The Fund may invest in the following instruments:

- - Corporate debt securities: investment grade securities issued by domestic and
foreign corporations and, to a limited extent (up to 20% of its assets), in
lower rated securities.

- - U.S. Government debt securities: securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities.

- - Foreign Government debt Securities: investment grade securities issued or
guaranteed by a foreign government or its agencies or instrumentalities,
payable in U.S. dollars.

- - Asset Backed & Mortgage Backed Securities: investment grade securities backed
by mortgages, consumer loans & other assets.

- - Other issuer debt securities: the Fund may invest up to 20% of its assets in
debt securities and preferred stocks that are convertible into common stocks
as well as nonconvertible preferred stocks or securities.

RISKS

WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?

[LOGO]

As with most income mutual funds, the Bond Fund is subject to interest rate
risk and credit risk and you could lose money by investing in the Fund. Other
factors also may affect the market price and yield of the Fund's securities,
including investor demand, the average maturity of the Bond Fund's portfolio
securities, and domestic and worldwide economic conditions. To the extent that
the Fund invests in NON-INVESTMENT GRADE SECURITIES, the Fund is also subject to
above-average credit, market and other risks.

These risks, and the risks associated with other higher-risk securities and
practices that the Fund may utilize, are described in more detail later in this
prospectus.

AN INVESTMENT IN THIS FUND IS NOT A DEPOSIT IN ANY BANK OR OTHER INSURED
DEPOSITORY INSTITUTION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

- -------
10
<PAGE>

HOW HAS BOND FUND PERFORMED?

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
1999 -0.57%
Total Return
</TABLE>

The Fund's best and worst quarters during the last year were:

Best quarter: 0.65%,
during the third quarter of 1999.

Worst quarter: -0.83%,
during the second quarter of 1999.

The following table shows the average annual total return on an investment
in the Fund compared to a market index for the period 1/22/98 to 12/31/99 and
for the 1-year period ended December 31, 1999:

<TABLE>
<CAPTION>
LEHMAN BROTHERS
COVT/CORP
BOND INTERMEDIATE
FUND INDEX*
-------- ---------------
<S> <C> <C>
1/22/98 to 12/31/99 2.99% 3.83%
1 year -0.57% 0.39%
</TABLE>

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

* The Lehman Brothers Government/Corporate Intermediate Index contains
approximately 4,700 U.S. Government and corporate bonds maturing within one
to ten years and an outstanding par value of at least $100 million.

The Lehman Brothers Government/Corporate Intermediate Index represents an
unmanaged group of bonds that differ from the composition of the Bond Fund.
Unlike an investment in the Bond Fund, returns of the Lehman Brothers
Government/Corporate Intermediate Index do not reflect expenses of
investing.

INVESTOR PROFILE

WHO SHOULD CONSIDER INVESTING IN THE BOND FUND?

You May Want to Invest in This Fund If You:

- - are seeking higher potential returns than money market funds and are willing
to accept a moderate level of volatility

- - want to diversify your investments

- - are seeking an income mutual fund for an asset allocation program,

- - are retired or nearing retirement

You May Not Want to Invest in This Fund If You:

- - are investing for maximum return over a long time horizon

- - require stability of your principal

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11
<PAGE>

STOCK AND BOND BALANCED FUND

INVESTMENT OBJECTIVE--The Stock and Bond Balanced Fund seeks long-term growth of
capital, balanced with current income.

INVESTMENT ADVISER--SFIM

INVESTMENT STRATEGIES

HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?

The Stock and Bond Balanced Fund invests substantially all of its assets in
shares of the Large Cap Equity Index Fund and the Bond Fund.

RISKS

WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?

[LOGO]

As with any mutual fund that invests in stocks and bonds, the Fund is
subject to MARKET, INTEREST RATE and CREDIT RISKS and there is a risk that you
will lose money by investing in this Fund.

Because the Stock and Bond Balanced Fund invests substantially all its
assets in the Large Cap Equity Index Fund and the Bond Fund, the risks of
investing in the Stock and Bond Balanced Fund are the same as the risks of
investing in those underlying funds. Before you invest, please carefully read
the section entitled "How the Funds Invest--Stock and Bond Balanced Fund" later
in this prospectus.

The Stock and Bond Balanced Fund is "non-diversified" because it invests
almost entirely in shares of Large Cap Equity Index Fund and Bond Fund. A
non-diversified mutual fund is generally more sensitive to changes in the value
of individual investments than a fund that invests in securities from a large
number of different issuers. However, both Large Cap Equity Index Fund and Bond
Fund are diversified.

AN INVESTMENT IN THIS FUND IS NOT A DEPOSIT OF ANY BANK OR OTHER INSURED
DEPOSITORY INSTITUTION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

HOW HAS STOCK AND BOND BALANCED FUND PERFORMED?

The following bar chart and table illustrate certain risks of investing in
the Fund. The bar chart shows the Fund's total return for calendar year 1999.
The table compares the Fund's average annual total return for the periods listed
to market indices. This information is intended to help you assess the
variability of Fund returns over the periods listed (and consequently, the
potential rewards and risks of a Fund investment). The Fund's past performance
doesn't necessarily indicate how it will perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
1999 11.88%
Total Return
</TABLE>

The Fund's best and worst quarters during the last year were:

Best quarter: 8.83%,
during the fourth quarter of 1999.

Worst quarter: -3.62%,
during the third quarter of 1999.

- -------
12
<PAGE>

The following table shows the average annual total return on an investment
in the Fund compared to market indices for for the period 1/29/98 to 12/31/99
and for the 1-year period ended December 31, 1999:

<TABLE>
<CAPTION>
LEHMAN
BALANCED S&P 500 INTERMED.
FUND INDEX* INDEX**
-------- -------- ---------
<S> <C> <C> <C>
1/29/98 to 12/31/99 13.85% 26.89% 3.89%
1 year 11.88% 21.04% 0.39%
</TABLE>

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

* The S&P 500 Index is a capitalization-weighted measure of the common stocks
of 500 large U.S. companies.

** The Lehman Brothers Government/Corporate Intermediate Index contains
approximately 4,700 U.S. Government and corporate bonds maturing within one
to ten years and an outstanding par value of at least $100 million.

The S&P 500 Index and the Lehman Brothers Government/Corporate Intermediate
Index represent unmanaged groups of stocks and bonds that differ from the
composition of the Stock and Bond Balanced Fund. Unlike an investment in the
Stock and Bond Balanced Fund, returns in the indices do not reflect expenses
of investing.

INVESTOR PROFILE

WHO SHOULD CONSIDER INVESTING IN THE STOCK AND BOND BALANCED FUND?

You May Want to Invest in This Fund If You:

- - are looking for a more conservative alternative to a growth-oriented fund

- - want a well-diversified and relatively stable investment allocation

- - need a core investment

- - seek total return over the long term irrespective of its form (i.e., capital
gains or ordinary income)

- - are retired or nearing retirement

You May Not Want to Invest in This Fund If You:

- - are investing for maximum return over a long time horizon

- - require a high degree of stability of your principal

-------
13
<PAGE>

HOW THE FUNDS INVEST

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

Each Fund has its own investment objective. The following section describes
the principal investment policies and techniques that each Fund uses in pursuing
its investment objective. For more detailed information on the investment
policies and techniques of each Fund, please refer to the Statement of
Additional Information (SAI).

MONEY MARKET FUND

WHAT IS A NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO)? An
NRSRO, such as Moody's or S&P, assigns ratings to securities based on its
assessment of the creditworthiness of the issuers. The SAI has a detailed
description of the various rating categories.

WHAT TYPES OF SECURITIES DOES THE MONEY MARKET FUND INVEST IN? In selecting
securities for the Money Market Fund, SFIM seeks highly liquid investments that
present MINIMAL CREDIT RISK. The Money Market Fund primarily invests in high
quality short-term money market instruments. At least 95% of the Fund's assets
must be rated in the highest short-term category by at least two nationally
recognized statistical rating organizations ("NRSROs") (or one NRSRO, if only
one has issued a rating), and 100% of the Fund's assets must be invested in
securities rated in the two highest rating categories.

The Money Market Fund may invest in securities that are not rated by an
NRSRO if SFIM determines that such securities are of comparable quality to, and
present the same amount of risk as, similar securities that have received a
rating from an NRSRO.

Among the securities that the Money Market Fund may invest in are the
following:

- - Securities issued or guaranteed by the U.S. Government or its agencies,
including Treasury Bills, notes, and securities issued by U.S. government
agencies such as the Federal National Mortgage Association.

- - Commercial paper issued or guaranteed by U.S. corporations and certain other
entities that are rated in the two highest rating categories of a NRSRO.

- - Repurchase agreements with certain parties.

- - Certain obligations of large (more than $1 billion in total assets) U.S. banks
and their subsidiaries (including, certain Canadian affiliates), including,
but not limited to, bank notes, commercial paper, and certificates of deposit.

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

The Money Market Fund may also:

- - Lend securities to financial institutions, enter into repurchase agreements
and purchase securities on a when-issued or forward commitment basis.

- - Invest in U.S. dollar-denominated foreign money market securities, although no
more than 25% of the Fund's assets may be invested in foreign money market
securities unless such securities are backed by a U.S. parent financial
institution.

- - Invest in mortgage-backed and asset-backed securities, including those
representing pools of mortgage, commercial or consumer loans originated by
credit unions.

Given the types of securities that the Money Market Fund invests in, the
level of risk associated with the Money Market Fund is lower than most other
types of mutual funds. However every investment involves some kind of risk. To
the extent that the Fund invests in certain securities (e.g., repurchase
agreements, when-issued securities or foreign money market securities), the Fund
may be affected by additional risks.

- -------
14
<PAGE>
EQUITY INDEX FUNDS--
LARGE CAP EQUITY INDEX FUND
SMALL CAP EQUITY INDEX FUND
INTERNATIONAL EQUITY INDEX FUND

IN WHAT TYPES OF SECURITIES DO THE EQUITY INDEX FUNDS INVEST? The Large
Cap, Small Cap and International Equity Index Funds invest mostly in stocks,
although each may also invest in stock index futures contracts and options on
futures contracts. By investing in the broad range of stocks within its
benchmark index, each equity index Fund avoids the risks of individual stock
selection and, instead, tries to match the performance of its benchmark index,
whether that index goes up or down.

Each equity index Fund attempts to remain as fully invested as practicable
in the stocks that are represented in its benchmark index. Under normal
operating conditions, each equity index Fund seeks to invest at least 90% of its
total assets in stocks that are represented in its benchmark index.

Barclays does not manage the equity index Funds according to traditional
methods of "active" investment management, which involve the buying and selling
of securities based on economic, financial and market analysis and investment
judgment. Instead, Barclays utilizes a "passive" or indexing investment approach
for each equity index Fund, attempting to approximate the investment performance
of the appropriate benchmark index. Barclays selects stocks for an equity index
Fund's portfolio so that the overall investment characteristics of each Fund's
investment portfolio (based on market capitalization and industry weightings),
fundamental characteristics (such as return variability, earnings valuation and
yield) and liquidity measures are similar to those of the benchmark index.

WHAT OTHER TYPES OF INVESTMENTS DO THE EQUITY INDEX FUNDS MAKE?

- - An equity index Fund may invest any assets not invested in stocks that are
represented in its benchmark index in:

- the same type of short-term high quality debt securities in which the
Money Market Fund invests (described above);

- other equity securities that are similar to the stocks making up its
benchmark index or that are awaiting disposition after a change in
composition of the benchmark index or a rebalancing of the portfolio;

- stock index futures contracts, options on such futures contracts; and/or

- cash.

An equity index Fund may invest in such financial instruments to find a
short-term investment for uninvested cash balances or to provide liquid assets
for anticipated redemptions by shareholders.

The International Equity Index Fund may also buy and sell foreign currencies
(either for current or future delivery) 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 to avoid the
effects of anticipated adverse changes in exchange rates between foreign
currencies and the U.S. dollar.

DO THE EQUITY INDEX FUNDS HOLD EVERY STOCK IN THEIR INDICES?

- - The Large Cap Equity Index Fund invests in the securities that make up the S&P
500.

- - The Small Cap and International Equity Index Funds generally do not hold all
of the issues that comprise their respective benchmark indices, due in part to
the costs involved and, in certain instances, the potential illiquidity of
certain securities. Instead, both the Small Cap Equity Index Fund and the
International Equity Index Fund attempt to hold a representative sample of the
securities in the appropriate benchmark index, which will be selected by
Barclays utilizing certain sampling and modeling techniques. Please refer to
the SAI for a more detailed discussion of the techniques that Barclays employs
in selecting the portfolio securities of the Small Cap Equity Index Fund and
International Equity Index Fund.

-------
15
<PAGE>
- - From time to time, the portfolio composition of the equity index Funds may be
altered (or "rebalanced") to reflect changes in the characteristics of its
benchmark index or, for the Small Cap Equity Index Fund and International
Equity Index Fund, with a view to bringing the performance and characteristics
of each Fund more closely in line with that of its benchmark index.

WILL THE PERFORMANCE OF THE EQUITY INDEX FUNDS ALWAYS EQUAL THE PERFORMANCE
OF THEIR BENCHMARK INDEX? No. Barclays attempts to track the performance of
each index Fund's benchmark index, but there is no assurance that Barclays will
be successful. The degree to which an equity index Fund fails to track the
performance of its benchmark index is referred to as the "tracking error."
Barclays expects that, over time, the tracking error of an equity index Fund
will be less than 5%. Barclays monitors the tracking error of each equity index
Fund on an ongoing basis and seeks 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. For an explanation of "expected tracking
error" and more information on this subject, see the SAI.

Another reason why the performance of the equity index Funds may not always
equal the performance of their benchmark index is because the performance of the
benchmark indices does not take into account management fees or the other
expenses that the Funds incur.

WHAT ARE THE RISKS OF INVESTING IN SECURITIES OF SMALL CAPITALIZATION
ISSUERS? The Small Cap Equity Index Fund and International Equity Index Fund
invest in securities issued by small capitalization companies. Investing in
smaller companies involves a higher level of risk than investing in larger, more
established companies. Small capitalization companies often do not have the
financial strength needed to do well in difficult economic times. Also, they
often sell limited numbers of products, which can make it harder for them to
compete with larger companies. As a result, their stock prices may fluctuate
more over the short-term, but they have more potential to grow. Thus, the common
stock of certain small capitalization companies may offer greater potential for
appreciation when compared to larger, more established companies.

WHAT ARE THE RISKS OF INVESTING IN FOREIGN SECURITIES? The International
Equity Index Fund may invest all its assets in foreign securities and the Large
Cap Equity Index Fund may invest in some foreign securities. 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 in securities denominated or quoted in foreign currency
("non-dollar securities") typically involves the following risks:

- - fluctuations in currency exchange rates;

- - higher trading and custody charges compared to securities of U.S. companies;

- - different accounting and reporting practices than U.S. companies, or laws
permitting issuers to limit the information they give investors, often making
it more difficult to evaluate financial information from foreign issuers;

- - less stringent securities regulation;

- - potential political or economic instability; and

- - less established securities markets, which may not have developed the sort of
institutional controls that are present in domestic markets.

WHEN AND WHY ARE FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
USED? Each 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 stock market. If an
equity index

- -------
16
<PAGE>

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 for speculation.

BOND FUND

WHAT TYPES OF SECURITIES DOES THE BOND FUND INVEST IN? The Bond Fund
invests primarily in investment grade bonds and in the same types of U.S.
Government securities as the Money Market Fund. Under normal circumstances, at
least 80% of the Fund's total assets will be invested in investment grade bonds
or unrated debt securities that SFIM determines to be of equivalent quality.

In selecting bonds for the Bond Fund, SFIM seeks to maximize current income
while minimizing risk and volatility through prudent investment management.
Accordingly, the Bond Fund seeks to limit its exposure to very risky or
speculative investments by investing primarily in investment grade bonds that
offer the potential for attractive returns.

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.

The Bond Fund may also invest up to 20% of its assets in the following
securities:

- - Non-investment grade debt securities or comparable unrated debt securities.
Non-investment grade bonds are rated lower than BBB by S&P or lower than Baa
by Moody's and are often referred to as "junk bonds." Junk bonds 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.

- - Convertible debt securities, convertible preferred stocks and nonconvertible
preferred stocks. 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.

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. During any such period, the Bond Fund would not be invested in a way
designed to meet its objective.

STOCK AND BOND BALANCED FUND

HOW DOES THE STOCK AND BOND BALANCED FUND INVEST ITS ASSETS? The Stock and
Bond Balanced Fund invests in shares of the Large Cap Equity Index Fund and the
Bond Fund. Generally, the Stock and Bond Balanced Fund attempts 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 never invests 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 mutual fund, it does, from time to time, adjust the
amount of its assets invested in each underlying Fund as economic, market and
financial conditions warrant. Please refer to the descriptions of the
investments of the Large Cap Equity Index Fund and the Bond Fund, above, for a
discussion of the portfolio securities of these Funds and the risks associated
with each. Please refer to MANAGING THE INVESTMENTS OF THE FUNDS--COMPENSATING
SFIM FOR ITS SERVICES for more information on the fees SFIM will receive for
managing these underlying Funds.

-------
17
<PAGE>
WHAT OTHER TYPES OF SECURITIES DOES THE STOCK AND BOND BALANCED FUND INVEST
IN? 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
or another investment company to provide flexibility in meeting redemptions,
expenses, and the timing of new investments, and serve 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.
During periods when the Stock and Bond Balanced Fund has taken a temporary
defensive position, the Fund will not be invested in accordance with its
objective.

THE FUNDS AND BORROWING

From time to time, each Fund may borrow money 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 (for example, to facilitate distributions to
shareholders or to meet redemption requests).

- -------
18
<PAGE>
MANAGING THE INVESTMENTS OF THE FUNDS
- --------------------------------------------------------------------------------

INVESTMENT ADVISER

State Farm Investment Management Corp. serves as the investment adviser to
each Fund. Subject to the supervision of the Board of Trustees of the Trust,
SFIM is responsible for overseeing the day to day operations and business
affairs of the Trust. SFIM's principal office is located at One State Farm
Plaza, Bloomington, Illinois 61710-0001. SFIM is wholly-owned by State Farm
Mutual Automobile Insurance Company.

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.

EXPENSES OF THE FUNDS

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 above.

COMPENSATING SFIM FOR ITS SERVICES

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

<TABLE>
<CAPTION>
RATE OF
FUND ADVISORY FEE
---- ------------
<S> <C>
Money Market Fund .40% of average daily net assets
Large Cap Equity Index Fund .26% of average daily net assets

Small Cap Equity Index Fund .40% of average daily net assets

International Equity Index .55% of average daily net assets
Fund

Bond Fund .50% of average daily net assets

Stock and Bond Balanced None
Fund(4)
</TABLE>

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

(4) 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
reimburse the Stock and Bond Balanced Fund for any other expenses incurred.
(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.

For each of the Funds other than the Stock and Bond Balanced Fund and the
International Equity Index Fund, SFIM has agreed to reimburse the Fund for any
expenses incurred by the Fund, other than the investment advisory fee, that
exceed 0.10% of such Fund's average daily net assets. For the International
Equity Index Fund, SFIM has agreed to reimburse the Fund for any expenses
incurred by the Fund, other than the investment advisory fee, that exceed 0.20%
of the Fund's average daily net assets. These expense limitation arrangements
are voluntary and may be eliminated by SFIM at any time.

The Bond and the Stock and Bond Balanced Funds are each managed by a team of
SFIM employees (each, an "Advisory Team"). The investment decisions for both the
Bond Fund and the Stock and Bond Balanced Fund are made, subject to the
oversight of the Board of Trustees of the Trust, by the Advisory Team for each
Fund.

INVESTMENT SUB-ADVISER

SFIM has engaged Barclays as the investment sub-adviser to provide
day-to-day portfolio

-------
19
<PAGE>

management for the Large Cap, Small Cap, and International Equity Index Funds.
Barclays and its predecessors have been managing index mutual funds since 1976.
Barclays is an indirect subsidiary of Barclays Bank PLC and is located at 45
Fremont Street, San Francisco, California 94105. As of November 30, 1999,
Barclays and its affiliates provided investment advisory services for
approximately $737 billion of assets. For more information regarding Barclays,
including a discussion regarding the compensation that Barclays receives from
SFIM, please read the section entitled "INVESTMENT ADVISORY AGREEMENTS--BETWEEN
SFIM AND BGFA" in the SAI.

CALCULATING NET ASSET VALUE

The offering price of the shares of each Fund is its Net Asset Value (NAV).
NAV is calculated by adding all of the assets of a Fund, subtracting the Fund's
liabilities, then dividing by the number of outstanding shares. A separate NAV
is calculated for each Fund.

The NAV for each Fund is determined as of the time of the close of regular
session trading on the New York Stock Exchange ("NYSE") (currently at 4:00 PM,
E.S.T.) on each day when the NYSE is open for business. Shares will not be
priced on days when the NYSE is closed.

As a general rule, the portfolio securities of each Fund that are traded on
a national exchange are valued at their last sale price on that exchange prior
to the time when the NAV is calculated. 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 or in the case of debt securities, such securities are valued
at the last reported bid price.

If the market quotations described above are not available, portfolio
securities, other than short-term debt securities, may be valued at fair value
as determined in good faith by or under the direction of the Board of Trustees
of the Trust. The effect of this will be that NAV will not be based on the last
quoted price on the security, but on a price which the Board of Trustees or its
delegate believes reflects the current and true price of the security.

Debt instruments held with a remaining maturity of 60 days or less (other
than U.S. Treasury bills) and all of the assets of the Money Market Fund 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.

The foreign securities held by the Large Cap Equity Index Fund and
International Equity Index Fund are traded on securities exchanges throughout
the world. Trading on these foreign securities exchanges is completed at various
times throughout the day and often does not coincide with the close of trading
on the NYSE. The value of the foreign securities used in computing the NAV for a
Fund holding such securities is determined as of the earlier of the time the
exchange on which the securities are traded closes or as of the close of trading
on the NYSE. As a result, it is possible that events affecting the value of such
securities may occur that are not reflected in the computation of the Fund's
NAV. When events occur that materially affect the value of foreign securities
held by a Fund, the securities may be valued at their fair value as determined
in good faith by or under the direction of the Board of Trustees of the Trust.

Foreign securities exchanges may also be open on days when the Funds do not
compute their NAV. Accordingly, there may be occasions when the Large

- -------
20
<PAGE>
Cap or International Equity Index Fund does not calculate its NAV but when the
value of such Fund's portfolio securities is affected by such trading activity.

TAXES

For federal income tax purposes, each Fund will be treated as a separate
entity. Each Fund intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code. By so qualifying, a Fund will not be
subject to federal income taxes to the extent that its net investment income and
net realized capital gains are distributed to the shareholders. Further, each
Fund intends to meet certain diversification requirements applicable to mutual
funds underlying variable insurance products.

The shareholders of the Funds are the separate accounts of participating
insurance companies. Under current law, owners of variable life insurance and
annuity contracts which have invested in a Fund are not subject to federal
income tax on Fund distributions or on gains realized upon the sale or
redemption of Fund shares until they are withdrawn from the contracts. For
information concerning the federal tax consequences to the purchasers of the
variable annuity contracts and variable life insurance policies, see the
accompanying prospectus for such contract or policy.

For more information about the tax status of the Funds, see "Taxes" in the
SAI.

-------
21
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the
financial performance of each Fund. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Ernst & Young LLP, whose report, along with each Fund's
financial statements, is included in the December 31, 1999 annual report. The
annual report may be obtained from SFIM upon request without charge.

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD):

STATE FARM VARIABLE PRODUCT TRUST LARGE CAP EQUITY INDEX FUND

<TABLE>
<CAPTION>
YEAR ENDED FROM INCEPTION DATE OF
DECEMBER 31, JANUARY 22, 1998 TO
1999 DECEMBER 31, 1998
---- -----------------
<S> <C> <C>
Net asset value, beginning of period $12.80 $10.00

INCOME FROM INVESTMENT OPERATIONS

Net investment income 0.20 0.12

Net gain on investments (both realized and unrealized) 2.40 2.80
------ ------

Total from investment operations 2.60 2.92
------ ------

LESS DISTRIBUTIONS

Net investment income (0.20) (0.12)

Net realized gain (0.13) --
------ ------

Total distributions (0.33) (0.12)
------ ------

Net asset value, end of period $15.07 $12.80
====== ======

TOTAL RETURN 20.36% 29.26%(a)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of period (millions) $225.6 $ 53.3

Ratio of expenses to average net assets 0.34% 0.32%(b)

Ratio of net investment income to average net assets 1.25% 1.55%(b)

Portfolio turnover rate 4% 7%
</TABLE>

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

(a) Not annualized.

(b) Determined on an annualized basis.

- -------
22
<PAGE>

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD):

STATE FARM VARIABLE PRODUCT TRUST SMALL CAP EQUITY INDEX FUND

<TABLE>
<CAPTION>
YEAR ENDED FROM INCEPTION DATE OF
DECEMBER 31, JANUARY 29, 1998 TO
1999 DECEMBER 31, 1998
------------ ----------------------
<S> <C> <C>
Net asset value, beginning of period $ 9.54 $10.00

INCOME FROM INVESTMENT OPERATIONS

Net investment income 0.41 0.27

Net gain (loss) on investments (both realized and
unrealized) 1.51 (0.46)
------ ------

Total from investment operations 1.92 (0.19)
------ ------

LESS DISTRIBUTIONS

Net investment income (0.41) (0.09)

Net realized gain (0.15) (0.18)
------ ------

Total distributions (0.56) (0.27)
------ ------

Net asset value, end of period $10.90 $ 9.54
====== ======

TOTAL RETURN 20.24% (1.89)%(a)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of period (millions) $ 95.4 $ 41.6

Ratio of expenses to average net assets 0.50% 0.50%(b)

Ratio of expenses to average net assets, absent of expense
limitation 0.62% 0.55%(b)

Ratio of net investment income to average net assets 1.11% 1.11%(b)

Portfolio turnover rate 46% 38%
</TABLE>

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

(a) Not annualized.

(b) Determined on an annualized basis.

-------
23
<PAGE>

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD):

STATE FARM VARIABLE PRODUCT TRUST INTERNATIONAL EQUITY INDEX FUND

<TABLE>
<CAPTION>
YEAR ENDED FROM INCEPTION DATE OF
DECEMBER 31, JANUARY 22, 1998 TO
1999 DECEMBER 31, 1998
------------ ----------------------
<S> <C> <C>
Net asset value, beginning of period $11.63 $10.00

INCOME FROM INVESTMENT OPERATIONS

Net investment income 0.13 0.13

Net gain on investments (both realized and unrealized) 2.92 1.65
------ ------

Total from investment operations 3.05 1.78
------ ------

LESS DISTRIBUTIONS

Net investment income (0.12) (0.15)

Net realized gain (0.02) --
------ ------

Total distributions (0.14) (0.15)
------ ------

Net asset value, end of period $14.54 $11.63
====== ======

TOTAL RETURN 26.21% 17.90%(a)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of period (millions) $152.7 $ 76.7

Ratio of expenses to average net assets 0.75% 0.75%(b)

Ratio of expenses to average net assets, absent of expense
limitation 0.94% 0.93%(b)

Ratio of net investment income to average net assets 1.02% 1.27%(b)

Portfolio turnover rate 12% 6%
</TABLE>

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

(a) Not annualized.

(b) Determined on an annualized basis.

- -------
24
<PAGE>

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD):

STATE FARM VARIABLE PRODUCT TRUST STOCK AND BOND BALANCED FUND

INCOME FROM INVESTMENT OPERATIONS

Net investment income 0.25 0.14

Net gain on investments (both realized and unrealized) 1.11 1.32
------ ------

Total from investment operations 1.36 1.46
------ ------

LESS DISTRIBUTIONS

Net investment income (0.02) (0.05)
------ ------

Total distributions (0.02) (0.05)
------ ------

Net asset value, end of period $12.75 $11.41
====== ======

TOTAL RETURN 11.88% 14.66%(a)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of period (millions) $ 38.2 $ 5.6

Ratio of expenses to average net assets 0% 0%(b)

Ratio of expenses to average net assets, absent of expense
limitation 0.14% 1.01%(b)

Ratio of net investment income to average net assets 4.50% 3.43%(b)

Portfolio turnover rate 2% 18%
</TABLE>

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

(a) Not annualized

(b) Determined on an annualized basis.

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25
<PAGE>

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD):

STATE FARM VARIABLE PRODUCT TRUST BOND FUND

INCOME FROM INVESTMENT OPERATIONS

Net investment income 0.52 0.49

Net gain (loss) on investments (both realized and
unrealized) (0.58) 0.15
------ ------

Total from investment operations (0.06) 0.64
------ ------

LESS DISTRIBUTIONS

Net investment income (0.52) (0.49)
------ ------

Total distributions (0.52) (0.49)
------ ------

Net asset value, end of period $ 9.57 $10.15
====== ======

TOTAL RETURN (0.57)% 6.49%(a)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of period (millions) $ 70.9 $ 24.7

Ratio of expenses to average net assets 0.60% 0.57%(b)

Ratio of expenses to average net assets, absent of expense
limitation 0.62% 0.57%(b)

Ratio of net investment income to average net assets 5.38% 5.14%(b)

Portfolio turnover rate 7% 26%
</TABLE>

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

(a) Not annualized.

(b) Determined on an annualized basis.

- -------
26
<PAGE>

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD):

STATE FARM VARIABLE PRODUCT TRUST MONEY MARKET FUND

INCOME FROM INVESTMENT OPERATIONS

Net investment income 0.05 0.05
----- -----

Total from investment operations 0.05 0.05
----- -----

LESS DISTRIBUTIONS

Net investment income (0.05) (0.05)
----- -----

Total distributions (0.05) (0.05)
----- -----

Net asset value, end of period $1.00 $1.00
===== =====

TOTAL RETURN 4.77% 4.76%(a)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of period (millions) $38.7 $18.7

Ratio of expenses to average net assets 0.50% 0.43%(b)

Ratio of expenses to average net assets, absent of expense
limitation 0.53% 0.52%(b)

Ratio of net investment income to average net assets 4.75% 5.04%(b)
</TABLE>

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

(a) Not annualized.

(b) Determined on an annualized basis.

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27
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUNDS
- --------------------------------------------------------------------------------

For investors who would like more information about the Funds and the Trust,
the following documents are available free upon request.

STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains additional
information about all aspects of the Funds. A current SAI has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.

ANNUAL AND SEMI-ANNUAL REPORTS. The Funds' annual and semi-annual reports
provide additional information about the Funds' investments and performance. The
annual report contains a discussion of the market conditions and investment
strategies that significantly affected each Fund's performance during the last
fiscal year.

TO OBTAIN THE SAI OR THE MOST RECENT ANNUAL OR SEMI-ANNUAL REPORT
FOR THE FUNDS, WITHOUT CHARGE, YOU MAY WRITE TO STATE FARM
INVESTMENT MANAGEMENT CORP. AT ONE STATE FARM PLAZA, BLOOMINGTON,
IL 61710-0001 OR CALL US AT 309-766-2029 OR 800-447-0740.

Text-only versions of all Fund documents can be viewed online or downloaded
from the SEC at http://www.sec.gov. You can also obtain copies by visiting the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 202-942-8090.
Copies of this information may be obtained, after paying a duplicating fee, by
sending your request to the SEC's Public Reference Section, 450 5th Street,
N.W., Washington, DC 20549-0102 or by electronic mail request at the following
e-mail address: [email protected].

811-08073

- -------
28
<PAGE>

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

STATEMENT OF ADDITIONAL INFORMATION

May 1, 2000

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.

MONEY MARKET FUND
LARGE CAP EQUITY INDEX FUND
SMALL CAP EQUITY INDEX FUND
INTERNATIONAL EQUITY INDEX FUND
BOND FUND
STOCK AND BOND BALANCED FUND
<PAGE>

TABLE OF CONTENTS
<TABLE>
<S> <C>
ABOUT THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ABOUT THE INVESTMENTS OF THE FUNDS . . . . . . . . . . . . . . . . . . . .1
INVESTMENT OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . . .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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
U.S. Government Securities . . . . . . . . . . . . . . . . . . .4
Foreign Investments. . . . . . . . . . . . . . . . . . . . . . .4
Financial Futures Contracts. . . . . . . . . . . . . . . . . . .6
Options On Stock Index Futures Contracts . . . . . . . . . . . .7
Certain Additional Risks Of Futures Contracts and Options
On Futures Contracts . . . . . . . . . . . . . . . . . . . . . .7
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . .9
FUNDAMENTAL RESTRICTIONS . . . . . . . . . . . . . . . . . . . .9
NON-FUNDAMENTAL RESTRICTIONS . . . . . . . . . . . . . . . . . 10
INDUSTRY CONCENTRATIONS. . . . . . . . . . . . . . . . . . . . 11
SELECTION OF INVESTMENTS FOR THE EQUITY INDEX FUNDS . . . . . . . . 12
TRACKING ERROR. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
RELATIONSHIP WITH THE INDEX PROVIDERS . . . . . . . . . . . . . . . 13
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . 15
BOARD OF TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . 15
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . 16
INVESTMENT ADVISORY AGREEMENTS. . . . . . . . . . . . . . . . . . . 21
Between The Trust And SFIM . . . . . . . . . . . . . . . . . . 21
Between SFIM And BGFA. . . . . . . . . . . . . . . . . . . . . 24
SECURITIES ACTIVITIES OF THE INVESTMENT ADVISERS. . . . . . . . . . 25
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . 26
PORTFOLIO TURNOVER. . . . . . . . . . . . . . . . . . . . . . . . . 27
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . 27
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 29
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
General Tax Information . . . . . . . . . . . . . . . . . . . . . . 32
Taxation of Foreign Investments . . . . . . . . . . . . . . . . . . 33
Additional Tax Considerations . . . . . . . . . . . . . . . . . . . 33
OFFERING AND PURCHASE OF SHARES. . . . . . . . . . . . . . . . . . . . . 34
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 35
DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . 35
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 35
SERVICE PROVIDERS . . . . . . . . . . . . . . . . . . . . . . . . . 35
Principal Underwriter. . . . . . . . . . . . . . . . . . . . . 35
Custodians . . . . . . . . . . . . . . . . . . . . . . . . . . 36

-i-

<PAGE>

CODE OF ETHICS. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . . . . . . . . . 37
SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 38
AUDITED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>

APPENDIX A -- Description of Money Market Securities

APPENDIX B -- Ratings

-ii-

<PAGE>

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. With the exception of the Stock and Bond Balanced Fund, each Fund
is "diversified" as that term is defined in the Investment Company Act of 1940,
as amended (the "Act"); the Stock and Bond Balanced Fund is non-diversified.
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.

ABOUT THE INVESTMENTS OF THE FUNDS

INVESTMENT OBJECTIVES

The investment objective of each Fund is set forth and described in the
prospectus. The investment objective of each Fund may only be changed with the
approval of the holders of a majority of the outstanding voting shares of the
Fund affected by the proposed change.

INVESTMENT TECHNIQUES

In addition to the investment objective of each Fund, the policies and certain
techniques by which the Funds 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

The Money Market Fund invests only 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 are, at the time of acquisition, either:

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, determined by SFIM, 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 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

-1-
<PAGE>

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." A description of the
ratings used by NRSROs is found in Appendix B 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.

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 11. Such loans will be secured by collateral
in the form of cash or United States Treasury securities, or other liquid
securities as

-2-
<PAGE>

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. See GENERAL TAX INFORMATION. Each Fund intends to lend portfolio
securities only to the extent that this activity does not jeopardize its status
as a regulated investment company under the Internal Revenue Code of 1986.

The primary risk involved in lending securities is that the borrower will
fail financially and not 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.

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,

-3-
<PAGE>

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 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

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")

-4-
<PAGE>

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.

The Large Cap (and indirectly the Stock and Bond Balanced Fund) and
International Equity Index Funds each may invest in non-dollar denominated
securities and the securities of foreign issuers (collectively, "foreign
investments"). Transactions involving investments in foreign issuers may
involve the use of 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.

-5-
<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 purchasers and sellers 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 Russell 2000 Stock
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 futures
commission merchant ("FCM"), or with its custodian in a segregated account in
the name of the 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 margin for
futures contracts does 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

-6-
<PAGE>

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 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

-7-
<PAGE>

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. 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.

-8-
<PAGE>

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.(1)

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.

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

- -------------------
(1) The Funds also intend to comply with the diversification requirements of
Section 817(h) of the Internal Revenue Code. See "Taxes--General Tax
Information."

-9-
<PAGE>

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.

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.

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.

-10-
<PAGE>

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.

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

-11-
<PAGE>

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.

SELECTION OF INVESTMENTS FOR THE EQUITY INDEX FUNDS

The manner in which stocks are chosen for each of the equity index Funds differs
from the way securities are chosen in most other mutual funds. Unlike other
mutual funds where the portfolio securities are chosen by an investment adviser
based upon the adviser's research and evaluations, 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. As briefly discussed in the prospectus, the Large
Cap Equity Index Fund generally holds every stock in the S&P 500. However, each
of the Small Cap and International Equity Index Funds generally does 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 attempts to hold a
representative sample of the securities in its benchmark index, which are
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 holds securities 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 seeks 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 each equity index fund may be altered
(or "rebalanced") to reflect changes in the characteristics of its benchmark
index or, for the Small Cap Equity Index Fund and the International Equity Index
Fund, 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.

-12-
<PAGE>

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 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.

RELATIONSHIP WITH THE INDEX PROVIDERS

STANDARD & POOR'S

The Large Cap Equity Index Fund seeks to match the performance of the Standard &
Poor's Composite Index of 500 Stocks ("S&P 500"). "Standard & Poor's," "S&P,"
"S&P 500" and "Standard and Poor's 500" are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by the Trust. The Fund is not
sponsored, endorsed sold or promoted by Standard & Poor's, a division of the
McGraw-Hill Companies, Inc. ("S&P").

S&P makes no representation or warranty, express or implied, to the owners of
the Fund or any member of the public regarding the advisability of investing in
securities generally or in the Fund 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 Fund. S&P has no obligation to take the needs of the Trust
or the owners of the Fund 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 Fund or the
timing of the issuance or sale of the Fund or in the determination or
calculation of the equation by which the Fund is to be converted into cash. S&P
has no obligation or liability in connection with the administration, marketing
or trading of the Fund.

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 FUND, 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

-13-
<PAGE>

HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

RUSSELL 2000

The Small Cap Equity Index Fund seeks to match the performance of the Russell
2000 Small Stock Index (the "Russell 2000"). The Russell 2000 tracks the common
stock performance of the 2000 smallest U.S. companies in the Russell 3000 Index,
representing about 10% in the aggregate of the capitalization of the Russell
3000 Index. The Russell 2000 and the Russell 3000 are trademarks/service marks,
and "Russell" is a trademark, of the Frank Russell Company. The 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 nor any associated literature or publications and 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 the Russell 2000. 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 Russell 2000.

Frank Russell Company's publication of the Russell 2000 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 is
based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR GUARANTEE AS
TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE RUSSELL 2000 OR
ANY DATA INCLUDED IN THE RUSSELL 2000. FRANK RUSSELL COMPANY MAKES NO
REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE
RUSSELL 2000 OR ANY DATA INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION
THEREOF) COMPRISING THE RUSSELL 2000. 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 RUSSELL 2000 OR ANY DATA OR
ANY SECURITY (OR COMBINATION THEREOF) INCLUDED THEREIN.

EAFE INDEX

The International Equity Index Fund seeks to match the performance of 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 is a service mark of Morgan
Stanley and has been licensed for use by the Trust. The 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
Fund or any member of the public regarding the advisability of investing in
securities generally or in the shares of the Fund particularly or the ability of
EAFE Free to track general stock market

-14-
<PAGE>

performance. Morgan Stanley is the licensor of certain trademarks, service
marks and trade names of Morgan Stanley and of the EAFE Free which is
determined, composed and calculated by Morgan Stanley without regard to the
Fund. Morgan Stanley has no obligation to take the needs of the Fund or the
owners of the Fund into consideration in determining, composing or calculating
the EAFE Free. Morgan Stanley is not responsible for and has not participated
in the determination of the timing of, prices at, or quantities of the Fund to
be issued or in the determination or calculation of the equation by which the
Fund is redeemable for cash. Morgan Stanley has no obligation or liability to
owners of the Fund in connection with the administration, marketing or trading
of the Fund.

ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN
THE CALCULATION OF THE INDEX FROM SOURCES WHICH MORGAN STANLEY CONSIDERS
RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE ACCURACY
AND/OR THE COMPLETENESS OF THE EAFE FREE 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 EAFE FREE
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 EAFE FREE 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.

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

-15-
<PAGE>

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.

TRUSTEES AND OFFICERS

The Trustees and officers of the Trust, their ages at April 30, 2000, 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.

NAME, AGE AND POSITION(s) HELD PRINCIPAL OCCUPATION(s) DURING PAST FIVE
ADDRESS WITH THE TRUST YEARS
------------- ---------------- ----------------------------------------
<S> <C> <C>
Edward B. Rust, Jr.*, Trustee and Chairman of the Board, CHAIRMAN OF THE BOARD, PRESIDENT, CEO, AND DIRECTOR --
Age 49 President State Farm Mutual Automobile Insurance Company; PRESIDENT,
CEO, AND DIRECTOR -- State Farm Life Insurance Company,
State Farm Life and Accident Assurance Company, State Farm
Annuity and Life Insurance Company, State Farm General
Insurance Company, State Farm Fire and Casualty Company,
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.;
CHAIRMAN OF THE BOARD AND DIRECTOR (SINCE 1999) -- State
Farm Federal Savings Bank; PRESIDENT, CEO, AND DIRECTOR
(SINCE 1997) -- State Farm VP Management Corp.;
PRESIDENT -- State Farm County Mutual Insurance Company
of Texas; DIRECTOR -- State Farm Lloyds, Inc., State
Farm International Services, Inc.; CHAIRMAN OF THE
BOARD, PRESIDENT, AND TREASURER -- State Farm Companies
Foundation; UNDERWRITER -- State Farm Lloyds

</TABLE>

-16-

<PAGE>

NAME, AGE AND POSITION(s) HELD PRINCIPAL OCCUPATION(s) DURING PAST FIVE
ADDRESS WITH THE TRUST YEARS
------------- ---------------- ----------------------------------------
<S> <C> <C>
Roger S. Joslin*, Age 63 Trustee, Vice President and VICE CHAIRMAN, CHIEF FINANCIAL OFFICER, SENIOR VICE
Treasurer PRESIDENT, TREASURER, AND DIRECTOR -- State Farm Mutual
Automobile Insurance Company; DIRECTOR -- State Farm Life
Insurance Company, State Farm Life and Accident Assurance
Company, State Farm Annuity and Life Insurance Company;
DIRECTOR, VICE PRESIDENT, AND TREASURER -- State Farm
General Insurance Company, State Farm Lloyds, Inc., 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 International Services, Inc.,; DIRECTOR, VICE
PRESIDENT AND TREASURER (SINCE 1999) -- State Farm
Federal Savings Bank; DIRECTOR, VICE PRESIDENT, AND
TREASURER (SINCE 1997) -- State Farm VP Management
Corp.; CHAIRMAN OF THE BOARD, TREASURER, AND DIRECTOR --
State Farm Fire and Casualty Company; TREASURER -- State
Farm County Mutual Insurance Company of Texas; ASSISTANT
TREASURER -- State Farm Companies Foundation;
UNDERWRITER -- State Farm Lloyds

Albert H. Hoopes, Trustee ATTORNEY; DIRECTOR -- State Farm Growth Fund, Inc., State
Age 85 Farm Balanced Fund, Inc., State Farm Interim Fund, Inc.,
1001 North Main Street State Farm Municipal Bond Fund, Inc.
Bloomington, IL 61701

Thomas M. Mengler, Trustee DEAN, UNIVERSITY OF ILLINOIS COLLEGE OF LAW (SINCE 1993);
Age 46 DIRECTOR (SINCE 1998) -- State Farm Growth Fund, Inc.,
Swanland Building State Farm Balanced Fund, Inc., State Farm Interim Fund,
601 E. John St. Inc., State Farm Municipal Bond Fund, Inc.
Champaign, IL 61820

Davis U. Merwin, Trustee INVESTOR; DIRECTOR -- State Farm Growth Fund, Inc., State
Age 71 Farm Balanced Fund, Inc., State Farm Interim Fund, Inc.,
P.O. Box 1665 State Farm Municipal Bond Fund, Inc.
Bloomington, IL 61702

James A. Shirk, Age 56 Trustee DIRECTOR AND PRESIDENT -- Beer Nuts, Inc.; DIRECTOR --
103 North Robinson State Farm Growth Fund, Inc., State Farm Balanced Fund,
Bloomington, IL 61701 Inc., State Farm Interim Fund, Inc., State Farm Municipal
Bond Fund, Inc.

</TABLE>

-17-

<PAGE>

NAME, AGE AND POSITION(s) HELD PRINCIPAL OCCUPATION(s) DURING PAST FIVE
ADDRESS WITH THE TRUST YEARS
------------- ---------------- ----------------------------------------
<S> <C> <C>
Kurt G. Moser, Age 55 Vice President SENIOR VICE PRESIDENT -- INVESTMENTS (SINCE 1998) VICE
PRESIDENT -- INVESTMENTS -- State Farm Mutual Automobile
Insurance Company, State Farm County Mutual Insurance
Company of Texas, State Farm Lloyds, Inc.; SENIOR VICE
PRESIDENT -- INVESTMENTS (SINCE 1998), VICE PRESIDENT
INVESTMENTS, AND DIRECTOR -- 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, State Farm General Insurance
Company; SENIOR VICE PRESIDENT -- INVESTMENTS (SINCE 1998),
INVESTMENT OFFICER -- State Farm Indemnity Company; VICE
PRESIDENT -- INVESTMENTS (SINCE 1998) -- State Farm
Florida Insurance Company; SENIOR VICE PRESIDENT (SINCE
1997), VICE PRESIDENT, AND DIRECTOR (PRIOR TO 1997) --
State Farm Investment Management Corp.; VICE PRESIDENT
-- State Farm Growth Fund, Inc., State Farm Balanced
Fund, Inc., State Farm Interim Fund, Inc., State Farm
Municipal Bond Fund, Inc.; DIRECTOR (SINCE 1997) --State
Farm VP Management Corp.; VICE PRESIDENT INVESTMENTS --
State Farm International Services, Inc.; UNDERWRITER --
State Farm Lloyds

Paul N. Eckley, Age 45 Vice President SENIOR VICE PRESIDENT -- INVESTMENTS AND ASSISTANT
SECRETARY -- TREASURER (SINCE 1998), VICE PRESIDENT --
COMMON STOCKS -- State Farm Mutual Automobile Insurance
Company, State Farm Fire and Casualty Company;
SENIOR VICE PRESIDENT INVESTMENTS AND ASSISTANT
SECRETARY TREASURER (SINCE 1998) -- State Farm General
Insurance Company, State Farm Life Insurance Company,
State Farm Life and Accident Assurance Company, State
Farm Annuity and Life Insurance Company,
State Farm Indemnity Company, State Farm County Mutual
Insurance Company of Texas and State Farm Lloyds, Inc.;
SENIOR VICE PRESIDENT (SINCE 1997), AND INVESTMENT
OFFICER (PRIOR TO 1997) -- State Farm Investment
Management Corp.; VICE PRESIDENT (SINCE 1995) State
Farm Growth Fund, Inc., State Farm Balanced Fund, Inc.
</TABLE>

-18-

<PAGE>

<TABLE>
<CAPTION>
NAME, AGE AND POSITION(s) HELD PRINCIPAL OCCUPATION(s) DURING PAST FIVE
ADDRESS WITH THE TRUST YEARS
------------- ---------------- ----------------------------------------
<S> <C> <C>
John S. Concklin, Vice President VICE PRESIDENT -- COMMON STOCKS AND ASSISTANT SECRETARY --
Age 53 TREASURER (SINCE 1997), VICE PRESIDENT -- FIXED INCOME
State Farm Mutual Automobile Insurance Company, State Farm
Life Insurance Company, State Farm Fire
and Casualty Company, State Farm Life and Assurance
Company, State Farm Annuity and Life Insurance Company,
State Farm General Insurance Company; VICE PRESIDENT --
COMMON STOCKS (SINCE 1997) -- State Farm Indemnity
Company, State Farm Lloyds, Inc; INVESTMENT OFFICER
(SINCE 1995) -- State Farm Investment Management Corp.;
VICE PRESIDENT (SINCE 1995) -- State Farm Balanced Fund,
Inc.; VICE PRESIDENT (1995-1998) -- State Farm Interim
Fund, Inc.; VICE PRESIDENT (SINCE 1998) -- State Farm
Growth Fund, Inc.

David R. Grimes, Assistant Vice President and ASSISTANT VICE PRESIDENT OF ACCOUNTING -- State Farm
Age 57 Secretary Mutual 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.,
State Farm Municipal Bond Fund, Inc.; ASSISTANT VICE
PRESIDENT AND SECRETARY (SINCE 1997) -- State Farm VP
Management Corp.

Jerel S. Chevalier, Assistant Secretary - Treasurer DIRECTOR OF MUTUAL FUNDS -- State Farm Mutual Automobile
Age 61 Insurance Company; ASSISTANT SECRETARY -- 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.

Howard Thomas, Assistant Secretary - Treasurer DIRECTOR OF MUTUAL FUNDS (SINCE 1998) --
Age 52 State Farm Mutual Automobile Insurance Company;
MANAGER OF ACCOUNTING BENEFITS (1988 - 1998) --
State Farm Mutual Automobile Insurance Company; ASSISTANT
SECRETARY -- TREASURER (SINCE 1998) --
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.

</TABLE>

-19-

<PAGE>

NAME, AGE AND POSITION(s) HELD PRINCIPAL OCCUPATION(s) DURING PAST FIVE
ADDRESS WITH THE TRUST YEARS
------------- ---------------- ----------------------------------------
<S> <C> <C>
Donald O. Jaynes, Assistant Secretary ASSOCIATE GENERAL COUNSEL -- State Farm Mutual Automobile
Age 52 Insurance Company; ASSISTANT SECRETARY (SINCE 1998) --
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.

Stephen L. Horton, Assistant Secretary COUNSEL -- State Farm Mutual Automobile Insurance Company;
Age 42 ASSISTANT SECRETARY (SINCE 2000) -- 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.; ASSISTANT SECRETARY
(SINCE 1999) -- State Farm VP Management Corp.

David M. Moore, Assistant Secretary COUNSEL (SINCE 1997), ASSISTANT TAX COUNSEL (1995-1997) --
Age 38 State Farm Mutual Automobile Insurance Company; ASSISTANT
SECRETARY (SINCE 2000) -- 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.

Michael L. Tipsord, Assistant Secretary VICE PRESIDENT AND ASSISTANT TREASURER
Age 40 (SINCE 1998), EXECUTIVE ASSISTANT -- OPERATIONS (SINCE
1997), ASSISTANT CONTROLLER (1996-1997), DIRECTOR OF
ACCOUNTING (1995-1996), -- State Farm 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., State Farm Municipal Bond Fund, Inc.;
TREASURER (SINCE 1996) -- Insurance Placement Services,
Inc.

Donald E. Heltner Vice President VICE PRESIDENT -- FIXED INCOME AND ASSISTANT SECRETARY --
Age 52 TREASURER -- State Farm Life Insurance
Company, State Farm Life and Accident Assurance
Company, State Farm Annuity and Life Insurance
Company; VICE PRESIDENT -- FIXED INCOME (Since 1998) --
State Farm Mutual Automobile Insurance Company, State Farm
Fire and Casualty Company, State Farm General Insurance
Company, State Farm Indemnity Company, and State Farm
Lloyds, Inc. (Since 1998); VICE PRESIDENT (since 1998) --
State Farm Balanced Fund, Inc., State Farm Interim Fund,
Inc.; PRIOR TO 1998, VICE PRESIDENT -- Century Investment
Management Co.

Eugene D. Funk IV Assistant Vice President INVESTMENT OFFICER AND ASSISTANT SECRETARY -- TREASURER
Age 39 (since 1997) -- State Farm Life Insurance Company, State
Farm Life and Accident Assurance Company, and State
Farm Annuity and Life Insurance Company, INVESTMENT
OFFICER (since 1997) -- State Farm Mutual Automobile
Insurance Company, State Farm Fire and Casualty Company,
State Farm General Insurance Company, State Farm
Indemnity Company, and State Farm Lloyds, Inc.;
PRIOR TO 1997, INVESTMENT ANALYST

</TABLE>

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

-20-

<PAGE>

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.

AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE TRUST AND OTHER
NAME FROM THE TRUST (1) STATE FARM FUNDS (1)(2)
- ---- ------------------ ------------------------
<S> <C> <C>
Edward B. Rust, Jr. None (3) None (3)
Albert H. Hoopes $7,200 $14,400
Roger S. Joslin None (3) None (3)
Thomas M. Mengler $7,200 $14,400
Davis U. Merwin $7,200 $14,400
James A. Shirk $7,200 $14,400
</TABLE>

(1) For the fiscal year ended December 31, 1999.

(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.

INVESTMENT ADVISORY AGREEMENTS

BETWEEN THE TRUST AND SFIM

SFIM is a wholly-owned subsidiary of State Farm Mutual Automobile Insurance
Company ("SFMAIC"). The duties and responsibilities of SFIM are specified in
the Investment Advisory and Management Services Agreement between the Trust
and SFIM and the separate Service Agreement among the Trust, SFIM and 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 subsequently were approved by the sole
shareholder of each Fund. 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

-21-
<PAGE>

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.

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:

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

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 reimburse the
Stock and Bond Balanced Fund for any expenses incurred. (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 reimburse the
Fund for any 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 reimburse
the Fund for any 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.

For the period from the commencement of each Fund's operations through
December 31, 1998, and for calendar year 1999 the Funds paid the following
advisory fees to SFIM:

-22-
<PAGE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
GROSS EXPENSE
FUND FEE PAID REIMBURSEMENT NET FEE
1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund $117,199 $39,751+ $ 7,330 $10,516+ $109,869 $29,235+
- ---------------------------------------------------------------------------------------------------
Bond Fund $254,678 $51,817* $10,602 $0* $244,076 $51,817*
- ---------------------------------------------------------------------------------------------------
Large Cap Equity Index Fund $351,017 $46,527* $0 $0* $351,017 $46,527*
- ---------------------------------------------------------------------------------------------------
Small Cap Equity Index Fund $258,832 $118,508+ $77,089 $16,690+ $181,743 $101,818+
- ---------------------------------------------------------------------------------------------------
International Equity Index Fund $590,404 $325,393* $202,180 $107,042* $388,224 $218,351*
- ---------------------------------------------------------------------------------------------------
Stock and Bond Balanced Fund $0 $0+ $30,583 $13,909+ $0 $0+
- ---------------------------------------------------------------------------------------------------
</TABLE>

* Commenced operations on January 22, 1998
+ Commenced operations on January 29, 1998

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.

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 (including
the daily calculation of net asset value), interest on borrowings by the Trust,
charges of the custodian and transfer agent, if any, cost of auditing services,
non-interested Trustees' fees, legal expenses, all taxes and fees, investment
advisory fees, certain insurance

-23-
<PAGE>

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, costs of
preparing, printing, and mailing proxy statements and shareholder reports to
shareholders and contractholders, the cost of paying dividends, 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.

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

-24-
<PAGE>

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 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 subsequently were
approved by the sole shareholder of each Fund. 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, 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.

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, cash flows 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. Pursuant to procedures adopted by the Board of Trustees, SFIM or BGFA
may cause a Fund to buy or sell a security from another Fund or another account.
Any such transaction would be executed at a price determined in accordance with
those procedures and without sales commissions. Transactions executed pursuant
to such procedures are reviewed by the Board of Trustees quarterly.

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

-25-
<PAGE>

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.

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. During the fiscal
year ended December 31, 1998, and during calendar year 1999 the Funds paid
brokerage commissions of:

<TABLE>
1999 1998
<S> <C> <C>
Money Market Fund 0 $ 0
------------- -------------
Bond Fund 0 0
------------- -------------
Large Cap Equity Index Fund 4,443 5,230
------------- -------------
Small Cap Equity Index Fund 70,362 46,755
------------- -------------
International Equity Index Fund 120,679 137,075
------------- -------------
Stock and Bond Balanced Fund 0 0
------------- -------------
</TABLE>

No Fund has paid any brokerage commissions to: (i) any broker that is an
affiliated person of the Trust or an affiliated person of that person; or (ii)
any broker an affiliated person of which is an affiliated person of the Trust or
State Farm.

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.

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

-26-
<PAGE>

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 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
p.m., E.S.T.) on each day when the New York Stock Exchange is open for
business. The New York Stock Exchange is scheduled to be open Monday through
Friday throughout the year, except for certain federal and other holidays.
Shares will not be priced on days when the NYSE is closed. 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.

-27-
<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. The effect of this will be that NAV will not
be based on the last quoted price on the security, but on a price which the
Board of Trustees or its delegate believes reflects the current and true
price of the security.

-28-
<PAGE>

Exchange listed options that are written or purchased by a Fund 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 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. These equations do not reflect charges
associated with the Contracts. The changes associated with the Contracts are
described fully in the Contract prospectus.

Average annual total return for a specified period is derived by calculating the
actual dollar amount of the investment return on a $10,000 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

-29-
<PAGE>

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 $10,000 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.

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.

The Funds' total returns for the period from the commencement of their
operations through December 31, 1998, and for calendar year 1999 and yield for
the 30 days ended December 31, 1999, were:

30 DAY YIELD
TOTAL RETURN PERIOD ENDED
- -----------------------------------------------------------------------------------------
FUND 12/31/99 INCEPTION TO 12/31/98 12/31/99
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund 4.77 4.97%+ 5.50
- -----------------------------------------------------------------------------------------
Bond Fund -0.57 6.49%* 5.80
- -----------------------------------------------------------------------------------------
Large Cap Equity Index Fund 20.36 29.26%* 1.24
- -----------------------------------------------------------------------------------------
Small Cap Equity Index Fund 20.24 -1.89%+ 1.47
- -----------------------------------------------------------------------------------------
International Equity Index Fund 26.21 17.90%* 0.73
- -----------------------------------------------------------------------------------------
Stock and Bond Balanced Fund 11.88 14.66+ 3.39
- -----------------------------------------------------------------------------------------
</TABLE>

* From January 22, 1998.
+ From January 29, 1998.

The Money Market Fund may also quote its current yield and effective yield.
Current yield is an annualized yield based on the actual total return for a
seven-day period. Effective yield is an annualized yield based on a daily
compounding of the current yield. The Money Market Fund's current yield and
effective yield for the seven-days ended December 31, 1999 was 5.46%.

-30-
<PAGE>

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.

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, U.S.
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.

-31-
<PAGE>

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.

TAXES

GENERAL TAX INFORMATION

The Trust intends that each of the Funds will continue to qualify as a regulated
investment company under the Subchapter M of Chapter 1 of the Internal Revenue
Code, as amended (the "Code"). If each Fund continues to qualify as a regulated
investment company and distributes substantially all of its net income and gains
to its shareholders (which the Trust intends to do), then under the provisions
of Subchapter M, each Fund 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 loans 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, and no more that 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 such
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 invest in certain financial instruments. For the same reason, the
Trust may, in its business judgment, require a Fund to maintain or dispose of an
investment in certain types of financial instruments 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

-32-
<PAGE>

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, for example, 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.

FOREIGN INVESTMENTS

Funds investing in foreign securities or currencies (including the Money Market
Fund, Large Cap Equity Index Fund, and International Equity Index Fund) may be
required to pay withholding or other taxes to foreign governments. Foreign tax
withholding on dividends and interest, if any, is generally at rates between 10%
and 35%. The investment yield of any Fund that invests in foreign securities or
currencies will be reduced by these foreign taxes. Owners of variable life
insurance and variable annuity contracts investing in such Fund will bear the
costs of any foreign tax, but will 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. Owners of variable life
insurance policies and variable annuity contracts investing in such Funds will
bear the cost of these taxes and interest charges.

ADDITIONAL TAX CONSIDERATIONS

If a Fund fails to qualify as a regulated investment company, the Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains (without any deduction for its distributions to its shareholders) and
distributions to its shareholders will constitute ordinary income to the extent
of such Fund's current or accumulated earnings and profits. Owners of variable
life insurance and annuity contracts which have invested in such a Fund might be
taxed currently on the investment earnings under their contracts and thereby
lose the benefit of tax deferral. 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
which have invested in 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 achieved by
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.

A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. Generally, the
required distribution is the sum of 98% of a Fund's net investment income for
the calendar year plus 98% of its capital gain net income for the one-year
period ending October 31. Each Fund, other than the Stock and Bond Balanced
Fund, intends to declare or distribute dividends during the calendar year
in an amount sufficient to prevent imposition of the 4% excise tax. The
Stock and Bond Balanced Fund is not subject to the 4% excise tax.

-33-
<PAGE>

The discussion of "Taxes" in the Prospectus and the foregoing discussion of
federal income tax consequences is a general and abbreviated summary based on
tax laws and regulations in effect on the date of the Prospectus. Tax law is
subject to change by legislative, administrative or judicial action. Each
prospective investor should consult his or her own tax adviser as to the tax
consequences of investments in the Funds. For information concerning the
federal income tax consequences to the owners of variable life insurance and
annuity contracts, see the prospectuses for the contracts.

OFFERING AND PURCHASE OF SHARES

SFIM acts as the Trust's underwriter in the distribution of the shares of each
Fund. See "Investment Adviser" and "Service Providers" in this SAI for more
information regarding the activities of SFIM.

Shares of the Funds are sold in a continuous offering and are authorized to
be offered to certain registered separate accounts (the "Accounts") of State
Farm Life Insurance Company and State Farm Life and Accident Assurance
Company ("State Farm") to support certain variable annuity contracts and
variable life insurance contracts offered by State Farm (together, 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

-34-
<PAGE>

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.

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.

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 annually and distributions from net realized capital gains
will be paid at least annually; all dividends and distributions will 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.

ADDITIONAL INFORMATION

SERVICE PROVIDERS

PRINCIPAL UNDERWRITER

Pursuant to an underwriting agreement and in addition to its duties as
investment adviser, SFIM also acts as the principal underwriter for the Trust.
For its services as principal underwriter, SFIM receives no additional
compensation. As described more fully above, shares of each Fund are sold in a
continuous offering and are authorized to be offered to the Accounts to support
the Contracts.

-35-
<PAGE>

CUSTODIANS

Chase Manhattan Trust Company of Illinois, c/o 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 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 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.

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

-36-
<PAGE>

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. Subscribers to the Code of Ethics
and to the Barclays Code of Ethics may invest in securities, including
securities that may be purchased or held by a Fund.

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 and
reviews the federal and state tax returns and performs other services as
requested by management of the Trust.

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.

As of February 1, 2000, State Farm owned the following percentages of the Funds'
outstanding shares:

<TABLE>
<CAPTION>
--------------------------------------------
FUND %
--------------------------------------------
<S> <C>
Money Market Fund 29.2%
--------------------------------------------
Bond Fund 14.6%
--------------------------------------------
Large Cap Equity Index Fund 9.8%
--------------------------------------------

-37-
<PAGE>

--------------------------------------------
Small Cap Equity Index Fund 35.5%
--------------------------------------------
International Equity Index Fund 50.9%
--------------------------------------------
Stock and Bond Balanced Fund 0%
--------------------------------------------
</TABLE>

All shares of the Funds other than those owned by State Farm are owned of record
by the separate accounts underlying the Contracts. No person other than State
Farm was known to own beneficially 5% or more of the outstanding shares of any
Fund.

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 this SAI 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.

-38-
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Trustees and Shareowners
State Farm Variable Product Trust --
Large Cap Equity Index Fund
Small Cap Equity Index Fund
International Equity Index Fund
Stock and Bond Balanced Fund
Bond Fund
Money Market Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolios of investments, of the Large Cap Equity Index Fund, Small Cap
Equity Index Fund, International Equity Index Fund, Stock and Bond Balanced
Fund, Bond Fund and Money Market Fund, comprising the State Farm Variable
Product Trust as of December 31, 1999, and the related statements of operations
and changes in net assets and the financial highlights for the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of December 31, 1999, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds of the State Farm Variable Product Trust at December 31, 1999, the
results of their operations, the changes in their net assets and the financial
highlights for the periods indicated therein in conformity with accounting
principles generally accepted in the United States.

/s/ Ernst & Young LLP

Chicago, Illinois
January 28, 2000

-39-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1999

<TABLE>
<CAPTION>
Large Cap
Equity Index
Fund
------------
<S> <C>
Assets
Investments in
securities:
At identified cost $195,549,962
============
At value $225,248,712
Cash 158,858
Foreign currencies at
value (cost $282,705) --
Receivable for:
Dividends and
interest 184,268
Shares of the Fund
sold 179,203
Securities sold 7,501
Expense cap
reimbursement --
Variation margin 28,225
Prepaid expenses 672
------------
Total assets 225,807,439
------------
Liabilities and Net
Assets
Payable for:
Securities purchased 4,809
Manager 158,373
Other 59,055
------------
Total liabilities 222,237
------------
Net assets applicable
to shares outstanding
of common stock 225,585,202
------------
Fund shares outstanding 14,964,856
Net asset value,
offering price and
redemption price per
share $ 15.07
============
Analysis of Net Assets
Excess of amounts
received from sales
of shares over
amounts paid on
redemptions of shares
on account of capital $195,659,431
Accumulated net
realized gain (loss) (107,029)
Net unrealized
appreciation
(depreciation) 30,012,975
Undistributed
(distributions in
excess of) net
investment income 19,825
------------
Net assets applicable
to shares
outstanding $225,585,202
============
</TABLE>

See accompanying notes to financial statements.

-40-
<PAGE>

<TABLE>
<CAPTION>
Small Cap International Stock & Bond Money
Equity Index Equity Index Balanced Bond Market
Fund Fund Fund Fund Fund
------------ ------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Investments in
securities:
At identified cost 86,162,618 115,598,221 36,009,688 72,228,859 38,471,891
=========== ============ =========== ============ ===========
At value 95,225,184 152,733,931 38,158,798 69,617,257 38,471,891
Cash 102,683 225 1 -- --
Foreign currencies at
value (cost $282,705) -- 282,555 -- -- --
Receivable for:
Dividends and
interest 94,076 146,065 -- 1,286,618 136,335
Shares of the Fund
sold 53,717 56,826 18,618 76,591 66,946
Securities sold -- 17,798 -- -- --
Expense cap
reimbursement 76,029 52,349 19,086 -- --
Variation margin 48,100 -- -- -- --
Prepaid expenses 499 -- -- 467 393
----------- ------------ ----------- ------------ -----------
Total assets 95,600,288 153,289,749 38,196,503 70,980,933 38,675,565
----------- ------------ ----------- ------------ -----------
Liabilities and Net
Assets
Payable for:
Securities purchased -- 290,966 -- -- --
Manager 116,914 212,041 18,618 -- --
Other 80,074 125,730 19,086 34,787 24,084
----------- ------------ ----------- ------------ -----------
Total liabilities 196,988 628,737 37,704 34,787 24,084
----------- ------------ ----------- ------------ -----------
Net assets applicable
to shares outstanding
of common stock 95,403,300 152,661,012 38,158,799 70,946,146 38,651,481
----------- ------------ ----------- ------------ -----------
Fund shares outstanding 8,754,477 10,498,882 2,992,974 7,416,942 38,651,481
Net asset value,
offering price and
redemption price per
share 10.90 14.54 12.75 9.57 1.00
=========== ============ =========== ============ ===========
Analysis of Net Assets
Excess of amounts
received from sales
of shares over
amounts paid on
redemptions of shares
on account of capital 85,688,203 115,016,183 35,066,966 73,601,370 38,651,481
Accumulated net
realized gain (loss) 535,784 822,453 (16,583) (43,622) --
Net unrealized
appreciation
(depreciation) 9,177,316 37,133,107 2,149,110 (2,611,602) --
Undistributed
(distributions in
excess of) net
investment income 1,997 (310,731) 959,306 -- --
----------- ------------ ----------- ------------ -----------
Net assets applicable
to shares
outstanding 95,403,300 152,661,012 38,158,799 70,946,146 38,651,481
=========== ============ =========== ============ ===========
</TABLE>

See accompanying notes to financial statements.

-41-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
STATEMENTS OF OPERATIONS

<TABLE>

Year ended December 31, Large Cap Small Cap
1999 and Equity Index Equity Index
For the period from the Fund Fund
date of inception to ----------------------- ------------------------
December 31, 1998 1999 1998 1999 1998
- ------------------------- ----------- ---------- ----------- -----------
Date of Inception 1/22/1998 1/29/1998
<S> <C> <C> <C> <C>
Investment income:
Dividends $ 1,611,522 328,684 888,749 443,671
Interest 556,792 130,191 152,538 41,268
----------- ---------- ----------- -----------
2,168,314 458,875 1,041,287 484,939
Less: foreign
withholding taxes 15,727 1,833 276 108
----------- ---------- ----------- -----------
Total investment
income 2,152,587 457,042 1,041,011 484,831
Expenses:
Investment advisory and
management fees 351,017 46,527 258,832 118,508
Professional fees 28,211 11,083 28,965 10,834
Fidelity bond expense 2,284 1,114 2,018 1,253
Trustees' fees 4,800 4,500 4,800 4,500
Reports to shareowners 59,632 1,499 69,481 1,499
Security valuation fees 9,049 8,866 27,901 24,587
Custodian fees -- -- -- --
Index license fees 5,000 5,000 8,632 5,119
Fund accounting expense -- -- -- --
Other -- 440 -- 436
----------- ---------- ----------- -----------
Total expenses 459,993 79,029 400,629 166,736
Less: expense
reimbursement from
Manager -- -- 77,089 16,690
----------- ---------- ----------- -----------
Net expenses 459,993 79,029 323,540 150,046
----------- ---------- ----------- -----------
Net investment income 1,692,594 378,013 717,471 334,785
Realized and unrealized
gain (loss) :
Net realized gain
(loss) on sales of
investments (133,909) 22,524 3,960,061 860,154
Net realized gain
(loss) on forward
foreign currency
contracts -- -- -- --
Net realized gain
(loss) on foreign
currency
transactions -- -- -- --
Net realized gain
(loss) on futures
contracts 2,960,885 246,549 439,233 (38,747)
Net unrealized gain
(loss) on open
futures contracts (111,375) 425,600 56,200 58,550
Change in net
unrealized
appreciation or
depreciation on
investments and
foreign currency
transactions 22,889,729 6,809,021 10,106,108 (1,043,542)
----------- ---------- ----------- -----------
Net realized and
unrealized gain
(loss) on investments 25,605,330 7,503,694 14,561,602 (163,585)
----------- ---------- ----------- -----------
Net change in net
assets resulting from
operations $27,297,924 7,881,707 15,279,073 171,200
=========== ========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

-42-
<PAGE>

<TABLE>

International Stock & Bond Money
Equity Index Balanced Bond Market
Fund Fund Fund Fund
------------------------ --------------------- ---------------------- ---------------------
1999 1998 1999 1998 1999 1998 1999 1998
----------- ----------- ---------- --------- ----------- --------- ---------- ---------
1/22/1998 1/29/1998 1/22/1998 1/29/1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends 1,937,734 1,210,085 962,438 47,205 -- -- -- --
Interest 136,729 87,600 -- -- 3,046,583 750,590 1,537,676 638,747
----------- ----------- ---------- -------- ----------- --------- ---------- --------
2,074,463 1,297,685 962,438 47,205 3,046,583 750,590 1,537,676 638,747
Less: foreign
withholding taxes 168,799 104,517 -- -- -- -- -- --
----------- ----------- ---------- -------- ----------- --------- ---------- --------
Total investment
income 1,905,664 1,193,168 962,438 47,205 3,046,583 750,590 1,537,676 638,747
Expenses:
Investment advisory and
management fees 590,404 325,393 -- -- 254,678 51,817 117,199 39,751
Professional fees 30,069 18,200 8,535 5,245 19,027 10,807 16,173 10,562
Fidelity bond expense 2,197 2,070 1,131 575 1,424 821 1,275 702
Trustees' fees 4,800 4,500 4,800 4,500 4,800 4,500 4,800 4,500
Reports to shareowners 52,023 1,414 13,483 1,002 31,651 1,499 12,488 1,503
Security valuation fees 33,885 44,336 -- -- 3,841 1,859 228 237
Custodian fees 229,981 91,529 2,634 2,178 795 3,139 1,666 3,541
Index license fees 10,612 10,001 -- -- -- -- -- --
Fund accounting expense 54,571 51,372 -- -- -- -- -- --
Other 294 -- -- 409 -- 424 -- 421
----------- ----------- ---------- -------- ----------- --------- ---------- --------
Total expenses 1,008,836 548,815 30,583 13,909 316,216 74,866 153,829 61,217
Less: expense
reimbursement from
Manager 202,180 107,042 30,583 13,909 10,602 -- 7,330 10,516
----------- ----------- ---------- -------- ----------- --------- ---------- --------
Net expenses 806,656 441,773 -- -- 305,614 74,866 146,499 50,701
----------- ----------- ---------- -------- ----------- --------- ---------- --------
Net investment income 1,099,008 751,395 962,438 47,205 2,740,969 675,724 1,391,177 588,046
Realized and unrealized
gain (loss) :
Net realized gain
(loss) on sales of
investments 951,382 117,394 (10,394) (6,189) (26,498) (17,124) -- --
Net realized gain
(loss) on forward
foreign currency
contracts (57,922) 105,894 -- -- -- -- -- --
Net realized gain
(loss) on foreign
currency
transactions 58,992 (187,378) -- -- -- -- -- --
Net realized gain
(loss) on futures
contracts -- -- -- -- -- -- -- --
Net unrealized gain
(loss) on open
futures contracts -- -- -- -- -- -- -- --
Change in net
unrealized
appreciation or
depreciation on
investments and
foreign currency
transactions 27,317,744 9,815,363 1,801,510 347,600 (2,817,207) 205,605 -- --
----------- ----------- ---------- -------- ----------- --------- ---------- --------
Net realized and
unrealized gain
(loss) on investments 28,270,196 9,851,273 1,791,116 341,411 (2,843,705) 188,481 -- --
----------- ----------- ---------- -------- ----------- --------- ---------- --------
Net change in net
assets resulting from
operations 29,369,204 10,602,668 2,753,554 388,616 (102,736) 864,205 1,391,177 588,046
=========== =========== ========== ======== =========== ========= ========== ========
</TABLE>

See accompanying notes to financial statements.

-43-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>

Year ended December 31, Large Cap Small Cap
1999 and Equity Index Equity Index
For the period from the Fund Fund
date of inception to -------------------------- ------------------------
December 31, 1998 1999 1998 1999 1998
- ------------------------- ------------- ----------- ----------- -----------
Date of Inception 1/22/1998 1/29/1998
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 1,692,594 378,013 717,471 334,785
Net realized gain
(loss) 2,826,976 269,073 4,399,294 821,407
Change in net
unrealized
appreciation or
depreciation 22,778,354 7,234,621 10,162,308 (984,992)
------------- ----------- ----------- -----------
Net change in net assets
resulting from
operations 27,297,924 7,881,707 15,279,073 171,200
Distributions to
shareowners from and in
excess of:
Net investment income (1,676,954) (373,828) (719,491) (330,768)
Net realized gain (3,203,078) -- (3,929,564) (755,353)
------------- ----------- ----------- -----------
Total distributions to
shareowners (4,880,032) (373,828) (4,649,055) (1,086,121)
From Fund share
transactions:
Proceeds from shares
sold 146,055,719 30,942,223 38,826,501 11,591,139
Reinvestment of
distributions 4,880,032 373,828 4,649,055 1,086,121
------------- ----------- ----------- -----------
150,935,751 31,316,051 43,475,556 12,677,260
Less payments for
shares redeemed 1,073,163 519,208 327,710 136,903
------------- ----------- ----------- -----------
Net increase in net
assets from Fund share
transactions 149,862,588 30,796,843 43,147,846 12,540,357
------------- ----------- ----------- -----------
Total increase in net
assets 172,280,480 38,304,722 53,777,864 11,625,436
------------- ----------- ----------- -----------
Net assets:
Beginning of period 53,304,722 15,000,000 41,625,436 30,000,000
------------- ----------- ----------- -----------
End of period+ $ 225,585,202 53,304,722 95,403,300 41,625,436
============= =========== =========== ===========
+Including undistributed
(distribution in excess
of) net investment
income $19,825 4,185 1,997 4,017
============= =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

-44-
<PAGE>

<TABLE>

International Stock & Bond Money
Equity Index Balanced Bond Market
Fund Fund Fund Fund
------------------------- ----------------------- ------------------------ ------------------------
1999 1998 1999 1998 1999 1998 1999 1998
------------ ----------- ----------- ---------- ----------- ----------- ----------- -----------
1/22/1998 1/29/1998 1/22/1998 1/29/1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income 1,099,008 751,395 962,438 47,205 2,740,969 675,724 1,391,177 588,046
Net realized gain
(loss) 952,452 35,910 (10,394) (6,189) (26,498) (17,124) -- --
Change in net
unrealized
appreciation or
depreciation 27,317,744 9,815,363 1,801,510 347,600 (2,817,207) 205,605 -- --
------------ ----------- ----------- ---------- ----------- ----------- ----------- -----------
Net change in net assets
resulting from
operations 29,369,204 10,602,668 2,753,554 388,616 (102,736) 864,205 1,391,177 588,046
Distributions to
shareowners from and in
excess of:
Net investment income (1,184,732) (895,988) (47,589) (2,748) (2,740,969) (675,724) (1,391,177) (588,046)
Net realized gain (246,323) -- -- -- -- -- -- --
------------ ----------- ----------- ---------- ----------- ----------- ----------- -----------
Total distributions to
shareowners (1,431,055) (895,988) (47,589) (2,748) (2,740,969) (675,724) (1,391,177) (588,046)
From Fund share
transactions:
Proceeds from shares
sold 46,732,878 12,288,814 30,594,022 5,522,631 48,987,283 14,570,954 23,783,771 8,868,290
Reinvestment of
distributions 1,431,055 895,988 47,589 2,748 2,740,969 675,724 1,391,177 588,046
------------ ----------- ----------- ---------- ----------- ----------- ----------- -----------
48,163,933 13,184,802 30,641,611 5,525,379 51,728,252 15,246,678 25,174,948 9,456,336
Less payments for
shares redeemed 138,202 194,350 763,589 336,535 2,605,787 767,773 5,204,884 774,919
------------ ----------- ----------- ---------- ----------- ----------- ----------- -----------
Net increase in net
assets from Fund share
transactions 48,025,731 12,990,452 29,878,022 5,188,844 49,122,465 14,478,905 19,970,064 8,681,417
------------ ----------- ----------- ---------- ----------- ----------- ----------- -----------
Total increase in net
assets 75,963,880 22,697,132 32,583,987 5,574,712 46,278,760 14,667,386 19,970,064 8,681,417
------------ ----------- ----------- ---------- ----------- ----------- ----------- -----------
Net assets:
Beginning of period 76,697,132 54,000,000 5,574,812 100 24,667,386 10,000,000 18,681,417 10,000,000
------------ ----------- ----------- ---------- ----------- ----------- ----------- -----------
End of period+ 152,661,012 76,697,132 38,158,799 5,574,812 70,946,146 24,667,386 38,651,481 18,681,417
============ =========== =========== ========== =========== =========== =========== ===========
+Including undistributed
(distribution in excess
of) net investment
income (310,731) (226,077) 959,306 44,457 -- -- -- --
============ =========== =========== ========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

-45-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST LARGE CAP EQUITY INDEX FUND
FINANCIAL HIGHLIGHTS

For a share outstanding throughout each period

<TABLE>
<CAPTION>
Year ended From inception date of
December 31, January 22, 1998 to
1999 December 31, 1998
------------ ----------------------
<S> <C> <C>
Net asset value, beginning of period $12.80 10.00
Income from Investment Operations
Net investment income 0.20 0.12
Net gain on investments (both realized
and unrealized) 2.40 2.80
------ ------
Total from investment operations 2.60 2.92
------ ------
Less Distributions
Net investment income (0.20) (0.12)
Net realized gain (0.13) --
------ ------
Total distributions (0.33) (0.12)
------ ------
Net asset value, end of period $15.07 12.80
====== ======
Total Return 20.36% 29.26%(a)
Ratios/Supplemental Data
Net assets, end of period (millions) $225.6 53.3
Ratio of expenses to average net assets 0.34% 0.32%(b)
Ratio of net investment income to
average net assets 1.25% 1.55%(b)
Portfolio turnover rate 4% 7%
</TABLE>

- ----------

(a) Not annualized.
(b) Determined on an annualized basis.

-46-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST SMALL CAP EQUITY INDEX FUND
FINANCIAL HIGHLIGHTS

For a share outstanding throughout each period

<TABLE>
<CAPTION>
Year ended From inception date of
December 31, January 29, 1998 to
1999 December 31, 1998
------------ ----------------------
<S> <C> <C>
Net asset value, beginning of period $ 9.54 10.00
Income from Investment Operations
Net investment income 0.41 0.27
Net gain or loss on investments (both
realized and unrealized) 1.51 (0.46)
------ ------
Total from investment operations 1.92 (0.19)
------ ------
Less Distributions
Net investment income (0.41) (0.09)
Net realized gain (0.15) (0.18)
------ ------
Total distributions (0.56) (0.27)
------ ------
Net asset value, end of period $10.90 9.54
====== ======
Total Return 20.24% (1.89)%(a)
Ratios/Supplemental Data
Net assets, end of period (millions) $ 95.4 41.6
Ratio of expenses to average net assets 0.50% 0.50%(b)
Ratio of expenses to average net assets,
absent of expense limitation 0.62% 0.55%(b)
Ratio of net investment income to
average net assets 1.11% 1.11%(b)
Portfolio turnover rate 46% 38%
</TABLE>

- ----------

(a) Not annualized.
(b) Determined on an annualized basis.

-47-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST INTERNATIONAL EQUITY INDEX FUND
FINANCIAL HIGHLIGHTS

For a share outstanding throughout each period

<TABLE>
<CAPTION>
Year ended From inception date of
December 31, January 22, 1998 to
1999 December 31, 1998
------------ ----------------------
<S> <C> <C>
Net asset value, beginning of period $11.63 10.00
Income from Investment Operations
Net investment income 0.13 0.13
Net gain on investments (both realized
and unrealized) 2.92 1.65
------ ------
Total from investment operations 3.05 1.78
------ ------
Less Distributions
Net investment income (0.12) (0.15)
Net realized gain (0.02) --
------ ------
Total distributions (0.14) (0.15)
------ ------
Net asset value, end of period $14.54 11.63
====== ======
Total Return 26.21% 17.90%(a)
Ratios/Supplemental Data
Net assets, end of period (millions) $152.7 76.7
Ratio of expenses to average net assets 0.75% 0.75%(b)
Ratio of expenses to average net assets,
absent of expense limitation 0.94% 0.93%(b)
Ratio of net investment income to
average net assets 1.02% 1.27%(b)
Portfolio turnover rate 12% 6%
</TABLE>

- ----------

(a) Not annualized.
(b) Determined on an annualized basis.

-48-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST STOCK AND BOND BALANCED FUND
FINANCIAL HIGHLIGHTS

For a share outstanding throughout each period

<TABLE>
<CAPTION>
Year ended From inception date of
December 31, January 29, 1998 to
1999 December 31, 1998
------------ ----------------------
<S> <C> <C>
Net asset value, beginning of period $11.41 10.00
Income from Investment Operations
Net investment income 0.25 0.14
Net gain on investments (both realized
and unrealized) 1.11 1.32
------ ------
Total from investment operations 1.36 1.46
------ ------
Less Distributions
Net investment income (.02) (0.05)
------ ------
Total distributions (.02) (0.05)
------ ------
Net asset value, end of period $12.75 11.41
====== ======
Total Return 11.88% 14.66%(a)
Ratios/Supplemental Data
Net assets, end of period (millions) $ 38.2 5.6
Ratio of expenses to average net assets 0.00% 0.00%(b)
Ratio of expenses to average net assets,
absent of expense limitation 0.14% 1.01%(b)
Ratio of net investment income to
average net assets 4.50% 3.43%(b)
Portfolio turnover rate 2% 18%
</TABLE>

- ----------

(a) Not annualized.
(b) Determined on an annualized basis.

-49-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST BOND FUND
FINANCIAL HIGHLIGHTS

For a share outstanding throughout each period

<TABLE>
<CAPTION>
Year ended From inception date of
December 31, January 22, 1998 to
1999 December 31, 1998
------------ ----------------------
<S> <C> <C>
Net asset value, beginning of period $10.15 10.00
Income from Investment Operations
Net investment income 0.52 0.49
Net gain or loss on investments (both
realized and unrealized) (0.58) 0.15
------ ------
Total from investment operations (0.06) 0.64
------ ------
Less Distributions
Net investment income (0.52) (0.49)
------ ------
Total distributions (0.52) (0.49)
------ ------
Net asset value, end of period $ 9.57 10.15
====== ======
Total Return (0.57)% 6.49%(a)
Ratios/Supplemental Data
Net assets, end of period (millions) $ 70.9 24.7
Ratio of expenses to average net assets 0.60% 0.57%(b)
Ratio of expenses to average net assets,
absent of expense limitation 0.62% 0.00%(b)
Ratio of net investment income to
average net assets 5.38% 5.14%(b)
Portfolio turnover rate 7% 26%
</TABLE>

- ----------

(a) Not annualized.
(b) Determined on an annualized basis.

-50-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST MONEY MARKET FUND
FINANCIAL HIGHLIGHTS

For a share outstanding throughout each period

<TABLE>
<CAPTION>
Year ended From inception date of
December 31, January 29, 1998 to
1999 December 31, 1998
------------ ----------------------
<S> <C> <C>
Net asset value, beginning ofperiod $ 1.00 1.00
Income from Investment Operations
Net investment income 0.05 0.05
------ ------
Total from investment operations 0.05 0.05
------ ------
Less Distributions
Net investment income (0.05) (0.05)
------ ------
Total distributions (0.05) (0.05)
------ ------
Net asset value, end of period $ 1.00 1.00
====== ======
Total Return 4.77% 4.76%(a)
Ratios/Supplemental Data
Net assets, end of period (millions) $ 38.7 18.7
Ratio of expenses to average net assets 0.50% 0.43%(b)
Ratio of expenses to average net assets,
absent of expense limitation 0.53% 0.52%(b)
Ratio of net investment income to
average net assets 4.75% 5.04%(b)
</TABLE>

- ----------

(a) Not annualized.
(b) Determined on an annualized basis.

-51-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
NOTES TO FINANCIAL STATEMENTS

1. Objective

State Farm Variable Product Trust (the "Trust") has six separate investment
portfolios (the "Funds"). Shares of each Fund are offered exclusively in
connection with variable annuity and variable life insurance policies issued by
State Farm Life Insurance Company and State Farm Life and Accident Assurance
Company. Each Fund is a separate investment portfolio with its own investment
objective, investment policies, restrictions, and attendant risks.

The Large Cap Equity Index Fund (Large Cap Fund) seeks to match the performance
of the Standard and Poor's Composite Index of 500 Stocks-Registered Trademark-
(the "S&P 500") by investing in the securities that make up the S&P 500. The S&P
500 tracks the common stock performance of 500 large U.S. companies in the
manufacturing, utility, transportation, and financial industries.

The Small Cap Equity Index Fund (Small Cap Fund) seeks to match the performance
of the Russell 2000 Small Stock Index-Registered Trademark- (the "Russell
2000"). This Fund invests primarily in some of the stocks found in the Russell
2000. The Russell 2000 tracks the common stock performance of about 2,000 small
U.S. companies.

The International Equity Index Fund (International Fund) seeks to match the
performance of the Morgan Stanley Capital International Europe, Australia and
Far East Free Index-Registered Trademark- (the "EAFE Free"). This Fund invests
primarily in some of the stocks found in the EAFE Free. The EAFE Free tracks the
common stock (or equivalent) performance of companies in which U.S. investors
can invest in Europe, Australia, New Zealand and the Far East.

The Stock and Bond Balanced Fund (Balanced Fund) seeks long-term growth of
capital, balanced with current income. This Fund invests in the Large Cap and
Bond Funds.

The Bond Fund (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 invests primarily in bonds issued by domestic
companies.

The Money Market Fund (Money Market Fund) seeks to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity.

2. Significant accounting policies

SECURITY VALUATION

Investments are stated at value. Stocks traded on securities exchanges, or in
the over-the-counter market in which transaction prices are reported, are valued
at the last sales prices on the day of valuation or, if there are no reported
sales on that day, at the last reported bid price for the day. Portfolio
securities that are primarily traded on foreign securities exchanges are
generally valued at the closing values of such securities on their respective
exchanges where primarily traded. Long-term debt securities and U.S. Treasury
bills are valued using quotations provided by an independent pricing service.
All of 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) held by any of the other Funds are valued on an amortized cost
basis, which approximates market value. Investments in open-end investment
companies are valued each day based on the closing net asset value of the
respective fund. Futures contracts are valued at the settlement price
established each day on the exchange on which they are traded. Forward foreign
currency contracts are valued daily using quoted forward exchange rates. Any
securities not valued as described above are valued at a fair value as
determined in good faith by the Board of Trustees or its delegate.

SECURITIES TRANSACTIONS AND INVESTMENT INCOME

Security transactions are accounted for on trade date (date the order to buy or
sell is executed) and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the information is available to the Funds. Interest income is recorded on the
accrual basis and includes amortization of discounts on money market instruments
and long term debt instruments when required for federal income tax purposes.
Realized gains and losses from security transactions are reported on an
identified cost basis.

FUND SHARE VALUATION

Fund shares are sold and redeemed on a continuous basis at net asset value. Net
asset value per share is determined daily on each day the New York Stock
Exchange is open, except that a Fund need not compute a net asset value on any
day when no purchase or redemption order has been received by the Fund. The net
asset values are determined as of the close of regular session trading on the
New York Stock Exchange (usually 3:00 p.m. Bloomington, Illinois time). The net
asset value per share is computed by dividing the total value of the Funds
investments and other assets, less liabilities, by the respective number of Fund
shares outstanding.

FEDERAL INCOME TAXES, DIVIDENDS AND DISTRIBUTIONS TO SHAREOWNERS

It is the Funds' policy to comply with the special provisions of the Internal
Revenue Code available to investment companies and, in the manner provided
therein, to distribute all of their taxable income, as well as any net realized
gain on sales of investments reportable for federal income tax purposes. The
Funds' intend to comply with this policy and, accordingly, no provision for
federal income taxes has been made.

Dividends and distributions payable to shareowners are recorded by the Large
Cap, Small Cap, International, and Balanced Funds on the ex-dividend date. The
Bond and Money Market Funds declare daily dividends equal to each Fund's
respective net investment income, and distributions of such amounts are made at
the end of each calendar quarter.

-52-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)

Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
The differences are primarily due to differing treatments for futures contracts
(Large Cap and Small Cap Funds), the recognition of net realized losses (Large
Cap, Small Cap and Balanced Funds), and foreign currency transactions
(International Fund).

The International Fund has elected to mark-to-market its investments in Passive
Foreign Investment Companies ("PFICs") for federal income tax purposes. In
accordance with this election, the International Fund recognized unrealized
appreciation relating to PFIC transactions of $188,324 and $278,952 during 1999
and 1998, respectively, which is treated as ordinary income for federal income
taxes.

The accumulated net realized loss on sales of investments in the Bond Fund at
December 31, 1999, amounting to $43,622 is available to offset future taxable
gains. If not applied, the capital loss carryover expires as follows: $26,498 in
2007 and $17,124 in 2006.

FOREIGN CURRENCY TRANSLATIONS

Values of investments denominated in foreign currencies are converted into U.S.
dollars using the spot market rate of exchange at the time of valuation.
Purchases and sales of investments and dividend and interest income are
translated into U.S. dollars using the spot market rate of exchange prevailing
on the respective dates of such transactions. The gain or loss resulting from
changes in foreign exchange rates is included with net realized and unrealized
gain or loss from investments, as appropriate.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

FINANCIAL INSTRUMENTS

The Large Cap, Small Cap, and International Funds may enter into stock index
futures contracts to hedge a portion of their portfolios. These contracts
obligate a Fund to make or take delivery of a financial instrument or the cash
value of a securities index at a specified future date at a specified price.
Gains and losses are reflected as net realized gain (loss) on futures contracts
in the statement of operations. Additionally, the International Fund may engage
in portfolio hedging with respect to changes in currency exchange rates by
entering into forward foreign currency contracts to purchase or sell foreign
currencies. The Fund bears the market risk that arises from changes in the value
of financial instruments and securities indices (futures contracts) or from
changes in foreign currency rates (forward foreign currency contracts) and the
credit risk should a counterparty fail to perform under such contracts.

3. Transactions with affiliates

The Trust has an investment advisory and management services agreement with
State Farm Investment Management Corp. (Manager) who serves as the Trust's
investment adviser and conducts the business and affairs of the Trust. Each Fund
pays the Manager an investment advisory fee (computed on a daily basis and paid
quarterly) at the following annual rates:

<TABLE>
<S> <C>
Large Cap Equity Index Fund .26% of average daily net assets
Small Cap Equity Index Fund .40% of average daily net assets
International Equity Index Fund .55% of average daily net assets
Stock and Bond Balanced Fund None
Bond Fund .50% of average daily net assets
Money Market Fund .40% of average daily net assets
</TABLE>

The Manager has agreed not to be paid an investment advisory fee for performing
its services for the Balanced Fund and has agreed to reimburse any other
expenses incurred by the Balanced Fund. This expense limitation arrangement is
voluntary and may be eliminated by the Manager at any time. However, the Manager
receives investment advisory fees from managing the underlying Funds in which
the Balanced Fund invests.

With respect to each of the Funds other than the Balanced and International
Funds, the Manager has agreed to reimburse 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 Fund, the Manager has agreed
to reimburse 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 the
Manager at any time.

-53-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)

Investment advisory and management fees and expenses reimbursed were as follows:

<TABLE>
<CAPTION>
Year ended Period ended
December 31, 1999 December 31, 1998
-------------------------- --------------------------
Investment Investment
Advisory and Fees Advisory and Fees
Fund Management Fee Reimbursed Management Fee Reimbursed
- ---- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Large Cap Equity Index Fund $351,017 $ -- $ 46,527 $ --
Small Cap Equity Index Fund 258,832 77,089 118,508 16,690
International Equity Index
Fund 590,404 202,180 325,393 107,042
Stock and Bond Balanced Fund -- 30,583 -- 13,909
Bond Fund 254,678 10,602 51,817 --
Money Market Fund 117,199 7,330 39,751 10,516
</TABLE>

The Funds do not pay any discount, commission or other compensation for transfer
agent or underwriting services provided by the Manager.

The Manager has engaged Barclays Global Fund Advisors (Barclay's) as the
investment sub-advisor to provide day-to-day portfolio management for the Large
Cap, Small Cap, and International Funds. In accordance with the overall
investment objectives of each respective Fund, Barclay's determines which
securities to buy and sell for each of these Funds, selects the brokers and
dealers to effect the transactions, and negotiates commissions.

Certain officers and/or trustees of the Trust are also officers and/or directors
of the Manager. The Funds made no payments to their officers or trustees except
for the following trustees fees paid to the Trusts independent trustees:

<TABLE>
<CAPTION>
Year ended Period ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Large Cap Equity Index Fund $4,800 $4,500
Small Cap Equity Index Fund 4,800 4,500
International Equity Index Fund 4,800 4,500
Stock and Bond Balanced Fund 4,800 4,500
Bond Fund 4,800 4,500
Money Market Fund 4,800 4,500
</TABLE>

4. Investment transactions

Investment transactions (exclusive of short-term instruments) were as follows:

<TABLE>
<CAPTION>
Year ended Period ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Large Cap Equity Index Fund
Purchases $153,980,183 $36,104,771
Proceeds from sales 5,344,729 1,671,512
Small Cap Equity Index Fund
Purchases 67,198,860 52,304,379
Proceeds from sales 28,192,770 12,266,263
International Equity Index Fund
Purchases 60,313,756 68,386,025
Proceeds from sales 12,886,705 3,948,180
Stock and Bond Balanced Fund:
Large Cap Equity Index Fund
Purchases 18,636,811 3,275,491
Proceeds from sales 228,816 177,057
Bond Fund
Purchases 12,358,427 2,239,590
Proceeds from sales 152,543 122,744
Bond Fund
Purchases 52,008,440 24,106,604
Proceeds from sales 3,090,673 3,284,209
</TABLE>

-54-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)

5. Futures and foreign currency contracts

The Large Cap and Small Cap Funds had the following open futures contracts at
December 31, 1999:

<TABLE>
<CAPTION>
Unrealized
Number of Contract Expiration Gain at
Fund Type Contracts amount Position month 12/31/99
- ---- ------------------------- --------- ------------- -------- ------------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Equity Index
Fund S&P 500 Index 34 $12,615,700 Long March '00 $314,225
Small Cap Equity Index
Fund Russell 2000 Index 10 2,549,750 Long March '00 114,750
</TABLE>

The aggregate market value of investments pledged to cover margin requirements
for the open positions at December 31, 1999 were $12,592,868 and $2,300,217 in
the Large Cap and Small Cap Funds, respectively.

The International Fund had the following open forward foreign currency contracts
at December 31, 1999:

<TABLE>
<CAPTION>
Foreign U.S. Dollar Unrealized
Amount Currency Proceeds Gain/Loss
- ------ ----------------------------------- ----------- ----------
<C> <S> <C> <C>
537 Euro $545 $(14)
</TABLE>

6. Fund share transactions

Proceeds and payments on Fund shares as shown in the statements of changes in
net assets are in respect of the following number of shares:

<TABLE>
<CAPTION>
International Equity
Large Cap Equity Index Fund Small Cap Equity Index Fund Index Fund
---------------------------- ---------------------------- --------------------------
Year ended Period ended Year ended Period ended Year ended Period ended
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 10,553,923 2,676,195 3,990,707 1,262,394 3,818,817 1,129,477
Shares issued in
reinvestment of
ordinary income
dividends and capital
gain distributions 324,686 30,183 433,681 115,711 98,625 80,998
----------- ----------- ----------- ----------- ----------- -----------
10,878,609 2,706,378 4,424,388 1,378,105 3,917,442 1,210,475
Less shares redeemed 76,687 43,444 33,155 14,861 11,008 18,027
----------- ----------- ----------- ----------- ----------- -----------
Net increase in shares
outstanding 10,801,922 2,662,934 4,391,233 1,363,244 3,906,434 1,192,448
=========== =========== =========== =========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
Stock & Bond Balanced Fund Bond Fund Money Market Fund
-------------------------- -------------------------- --------------------------
Year ended Period ended Year ended Period ended Year ended Period ended
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,564,307 519,686 4,970,698 1,439,766 23,783,771 8,868,290
Shares issued in
reinvestment of
ordinary income
dividends and capital
gain distributions 3,735 268 282,287 66,860 1,391,177 588,046
----------- ---------- ----------- ----------- ----------- -----------
2,568,042 519,954 5,252,985 1,506,626 25,174,948 9,456,336
Less shares redeemed 63,779 31,253 266,906 75,763 5,204,884 774,919
----------- ---------- ----------- ----------- ----------- -----------
Net increase in shares
outstanding 2,504,263 488,701 4,986,079 1,430,863 19,970,064 8,681,417
=========== ========== =========== =========== =========== ===========
</TABLE>

-55-
<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 of
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

-1-
<PAGE>

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.

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.

-2-
<PAGE>

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 not 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 aare 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.

-1-
<PAGE>

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.

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

-2-
<PAGE>

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.

-3-
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
PART C OF THE REGISTRATION STATEMENT

ITEM 23. EXHIBITS

(a) Declaration of Trust*

(b) Bylaws*

(d)(1) Investment Advisory and Management Services Contract between
Registrant and State Farm Management Investment Corp.**

(d)(2) Investment Sub-Advisory Agreement among Registrant, State
Farm Investment Management Corp., and Barclays Global Fund
Advisors**

(e) Underwriting Agreement between Registrant and State Farm
Investment Management Corp.**

(f) N/A

(g)(1) Custodial Agreement between Registrant and The Chase
Manhattan Bank***

(g)(2) Custodial Agreement between Registrant and Barclays Global
Investors, N.A.****

(g)(3) Custodial Agreement between Registrant and Investors Bank
and Trust Company****

(g)(4) Delegation Agreement between Investors Bank and Trust
Company and Registrant****

(h)(1) Participation Agreement between Registrant and State Farm
Life Insurance Company Separate Accounts****

(h)(2) Participation Agreement between Registrant and State Farm
Life and Accident Assurance Company Separate Accounts****

(h)(3) Service Agreement among Registrant, State Farm Investment
Management Corp., and State Farm Mutual Automobile Insurance
Company**

(i) Consent of Sutherland, Asbill & Brennan, L.L.P.

(j) Consent of Ernst & Young LLP

(k) N/A

(l) N/A

(m) N/A

<PAGE>

(n) None

(p)(1) Code of Ethics of State Farm Growth Fund, Inc., State Farm
Interim Fund, Inc., State Farm Balanced Fund, Inc., State
Farm Municipal Bond Fund, Inc., State Farm Investment
Management Corp. and State Farm Variable Product Trust.

(p)(2) Code of Ethics of Barclays Global Investors, N.A. and its
subsidiaries: Barclays Global Funds Advisors and Barclays
Global Investors Services.

- ------------
* Incorporated by reference to the initial Registration Statement on Form
N-1A filed on behalf of the Registrant on February 27, 1997 (File Nos.
333-22467, 811-08073).

** Incorporated by reference to Pre-Effective Amendment No. 1 on Form N-1A
filed on behalf of the Registrant on November 25, 1997 (File Nos.
333-22467, 811-08073).

*** Incorporated by reference to Post-Effective Amendment No. 1 on Form N-1A
filed on behalf of Registrant on May 1, 1998 (File Nos. 333-22467,
811-08073)

**** Incorporated by reference to Post-Effective Amendment No. 2 on Form N-1A
filed on behalf of Registrant on February 26, 1999 (File Nos. 333-22467,
811-08073)

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

The Registrant does not consider that there are any persons directly or
indirectly controlling, controlled by, or under common control with, the
registrant within the meaning of this item. The information in the Statement of
Additional Information under the caption "Management of the Trust - Trustees
and Officers" and Additional Information - Shares is incorporated herein by
reference.

ITEM 25. INDEMNIFICATION

As a Delaware business trust, Registrant's operations are governed by its
Declaration of Trust dated February 21, 1997 (the Declaration of Trust).
Generally, Delaware business trust shareholders are not personally liable for
obligations of the Delaware business trust under Delaware law. The Delaware
Business Trust Act (the DBTA) provides that a shareholder of a trust shall be
entitled to the same limitation of liability extended to shareholders of private
for-profit Delaware corporations. Registrant's Declaration of Trust expressly
provides that it has been organized under the DBTA and that the Declaration of
Trust is to be governed by Delaware law. It is nevertheless possible that a
Delaware business trust, such as Registrant, might become a party to an action
in another state whose courts refuse to apply Delaware law, in which case
Registrant's shareholders could be subject to personal liability.

To protect Registrant's shareholders against the risk of personal
liability, the Declaration of Trust: (i) contains an express disclaimer of
shareholder liability for acts or obligations of Registrant and provides that
notice of such disclaimer may be given in each agreement, obligation and
instrument entered into or executed by Registrant or its Trustees; (ii) provides
for the indemnification out of Trust property of any shareholders held
personally liable for any obligations of Registrant or any series of Registrant;
and (iii) provides that Registrant shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of Registrant
and satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss beyond his or her investment because of shareholder liability is
limited to circumstances in which all of the following factors are present: (i)
a court refuses to apply Delaware law; (ii) the liability arose under tort law
or, if not, no contractual limitation of liability

<PAGE>

was in effect; and (iii) Registrant itself would be unable to meet its
obligations. In the light of Delaware law, the nature of Registrant's business
and the nature of its assets, the risk of personal liability to a shareholder is
remote.

The Declaration of Trust further provides that Registrant shall indemnify
each of its Trustees and officers against liabilities and expenses reasonably
incurred by them, in connection with, or arising out of, any action, suit or
proceeding, threatened against or otherwise involving such Trustee or officer,
directly or indirectly, by reason of being or having been a Trustee or officer
of Registrant. The Declaration of Trust does not authorize Registrant to
indemnify any Trustee or officer against any liability to which he or she would
otherwise be subject by reason of or for willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.

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

ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

The information in the statement of additional information under the
caption "Management of the Trust" is incorporated herein by reference. Other
than its status as investment adviser and principal underwriter to four other
State Farm mutual funds (see item 27 below), neither State Farm Investment
Management Corp., nor any of its directors or officers, has at any time during
the past two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature either for their own account or in the
capacity of director, officer, employee, partner or trustee.

Directors and Officers of State Farm Investment Management Corp.:

Edward B. Rust, Jr., Director and President*

Roger S. Joslin, Director, Vice President and Treasurer*

John J. Killian, Director. Financial Vice President - State Farm
Mutual Automobile Insurance Company, State Farm Fire and Casualty Company,
and State Farm General Insurance Company; Underwriter - State Farm Lloyds;
Controller - State Farm Lloyds, Inc.; Vice President and Assistant
Treasurer - State Farm County Mutual Insurance Company of Texas; Assistant
Treasurer - State Farm Indemnity Company; Secretary and

<PAGE>

Assistant Treasurer - State Farm International Services, Inc.; Director -
Insurance Placement Services, Inc. (since 1996).

Kurt G. Moser, Director and Senior Vice President*

Vincent J. Trosino, Director. Director, Vice Chairman of the Board,
Executive Vice President and Chief Operating Officer - State Farm Mutual
Automobile Insurance Company; Director and Vice President - State Farm Fire
and Casualty Company and State Farm General Insurance Company; Director -
State Farm Lloyds, Inc., State Farm International Services, Inc., State
Farm Life Insurance Company, State Farm Annuity and Life Insurance Company,
and State Farm Life and Accident Assurance Company; Assistant Secretary -
State Farm Companies Foundation.

Paul N. Eckley, Senior Vice President*

David R. Grimes, Assistant Vice President and Secretary *

Michael L. Tipsord, Assistant Secretary *

Jerel S. Chevalier, Assistant Secretary-Treasurer *

John S. Concklin, Vice President*

Howard Thomas, Assistant Secretary - Treasurer*

Donald O. Jaynes, Assistant Secretary*

Stephen L. Horton, Assistant Secretary*

David M. Moore, Assistant Secretary*

* See the information contained in the statement of additional information
under the caption "Management of the Trust," incorporated herein by reference.

ITEM 27. PRINCIPAL UNDERWRITERS

State Farm Investment Management Corp. serves as the principal underwriter to
the Registrant. Other than the Registrant, State Farm Investment Management
Corp. serves as investment adviser and principal underwriter to the following
investment companies: State Farm Growth Fund, Inc.; State Farm Balanced Fund,
Inc.; State Farm Interim Fund, Inc.; and State Farm Municipal Bond Fund, Inc.
The following table contains information concerning each director and officer of
State Farm Investment Management Corp. (unless otherwise indicated, the
principal business address for each person shown is One State Farm Plaza,
Bloomington, IL 61710-0001):

<PAGE>

Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ------------------------------------------------------------------------------
Edward B. Rust Jr. Director and President Trustee and President

Roger S. Joslin Director, Vice President and Trustee, Vice President
Treasurer and Treasurer

John J. Killian Director None

Kurt G. Moser Director and Senior Vice Vice President
President

Vincent J. Trosino Director None

Paul N. Eckley Senior Vice President Vice President

David R. Grimes Assistant Vice President and Assistant Vice President
Secretary and Secretary

Michael L. Tipsord Assistant Secretary Assistant Secretary

Jerel S. Chevalier Assistant Secretary- Assistant Secretary-
Treasurer Treasurer

Donald O. Jaynes Assistant Secretary Assistant Secretary

Stephen L. Horton Assistant Secretary Assistant Secretary

David M. Moore Assistant Secretary Assistant Secretary

Net
Name of Underwriting Compensation
Principal Discounts and on Redemption Brokerage Other
Underwriter Commissions and Repurchase Commissions Compensation
- -------------------------------------------------------------------------------
State Farm N/A N/A N/A N/A
Investment
Management
Corp.

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

(a) Registrant

(b) State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001

<PAGE>

(d) Investors Bank and Trust Company
200 Clarendon Street
Boston, Massachusetts 02116

(e) Chase Manhattan Trust Company of Illinois
c/o Chase Manhattan Bank
North American Insurance Securities Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245

ITEM 29. MANAGEMENT SERVICES

All the management-related service contracts under which services are provided
to the Registrant are discussed in Parts A and B of this Registration Statement.

ITEM 30. UNDERTAKINGS

The Registrant hereby undertakes to furnish, upon request and without
charge, to each person to whom a prospectus for any Fund (other than the Money
Market Fund) is delivered a copy of the Registrant's latest annual report to
shareholders.

The Registrant hereby undertakes, if requested to do so by the holders of
at least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon any question of removal of a trustee
or trustees, and to assist in communications with other shareholders as required
by Section 16(c) of the Investment Company Act of 1940, as amended.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, State Farm Variable Product
Trust, certifies that it meets all of the requirements for effectiveness of this
post-effective amendment pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this post-effective amendment to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Bloomington,
and state of Illinois on the 17th day of March 2000.

STATE FARM VARIABLE PRODUCT TRUST

By: /s/ Edward B. Rust, Jr.
------------------------------------
Edward B. Rust, Jr.
President

Pursuant to the Securities Act of 1933, this post-effective amendment has
been signed below by the following persons in the capacities and on the dates
indicated.

Signature Title Date
--------- ----- ----

/s/ Edward B. Rust , Jr. Trustee, President and Chief
- ------------------------- Executive Officer (principal
Edward B. Rust, Jr. executive officer)

/s/ Roger S. Joslin Trustee, Vice President, and
- ------------------------- Treasurer (principal financial
Roger S. Joslin and accounting officer)

/s/ Davis U. Merwin Trustee March 17, 2000
- ------------------------- --------------
Davis U. Merwin

/s/ James A. Shirk Trustee
- -------------------------
James A. Shirk
Trustee

/s/ Albert H. Hoopes Trustee
- -------------------------
Albert H. Hoopes

/s/ Thomas M. Mengler Trustee
- -------------------------
Thomas M. Mengler

<PAGE>

EXHIBIT INDEX
-------------

<TABLE>
<CAPTION>
N-1A ITEM 23 EXHIBIT LETTER DESCRIPTION
<S> <C>
(i) Consent of Sutherland, Asbill & Brennan, L.L.P.

(j) Consent of Ernst & Young LLP

(p)(1) Code of Ethics of State Farm Growth Fund, Inc.,
State Farm Interim Fund, Inc., State Farm
Balanced Fund, Inc., State Farm Municipal Bond
Fund, Inc., State Farm Investment Management
Corp. and State Farm Variable Product Trust.

(p)(2) Code of Ethics of Barclays Global Investors, N.A.
and its subsidiaries: Barclays Global Funds
Advisors and Barclays Global Investors Services.

</TABLE>

<PAGE>

April 24, 2000

Board of Trustees
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001

Trustees:

We hereby consent to the incorporation by reference of our opinion, filed
as an exhibit with State Farm Variable Product Trust's (the "Trust") Form N-1A
registration statement on November 25, 1997 (File No. 33-22467), as an exhibit
in post-effective amendment number 3 to such registration statement. In giving
this consent, we do not admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933.

Sincerely,

SUTHERLAND ASBILL & BRENNAN LLP

/s/ David S. Goldstein
By:______________________________
David S. Goldstein

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights," "Independent Auditors" and "Audited Financial Statements," and to
the use of our report dated January 28, 2000 in the Registration Statement
(Form N-1A) and its incorporation by reference in the related Prospectus and
Statement of Additional Information of the State Farm Variable Product Trust
filed with the Securities and Exchange Commission in this Post-Effective
Amendment No. 3 to the Registration Statement under the Securities Act of 1933
(File No. 333-22467) and in this Amendment No. 4 to the Registration Statement
under the Investment Company Act of 1940 (File No. 811-08073).

ERNST & YOUNG LLP

Chicago, Illinois
April 27, 2000

<PAGE>

CODE OF ETHICS
STATE FARM GROWTH FUND, INC.
STATE FARM INTERIM FUND, INC.
STATE FARM BALANCED FUND, INC.
STATE FARM MUNICIPAL BOND FUND, INC.
STATE FARM INVESTMENT MANAGEMENT CORP.
STATE FARM VARIABLE PRODUCT TRUST

ARTICLE I. INTRODUCTION

The general principles and other rules set forth in this Code of Ethics
are based upon the fundamental objectives that invested assets should be managed
exclusively for the benefit of their owners and that knowledge about any current
or prospective transactions in invested assets should be utilized exclusively
for the benefit of their owners. The people making investment related decisions
or having knowledge about current or prospective transactions should conduct
themselves in a way that no actual or apparent conflicts arise between the
shareowners' interest and their own personal interest.

Although we have attempted to draft this Code of Ethics in a manner
that is easily understood, there are some technical terms and phrases used which
have special meanings. In order to help you understand these terms and phrases,
Article VIII contains several definitions. We have also attempted to draft this
Code of Ethics in a manner that is easily administered. However, not all
possible situations can be covered by specific provisions. As a result, the
people responsible for enforcement must exercise their judgment when
interpreting the Code of Ethics and applying it to the particular facts and
circumstances. This judgment will be exercised in a manner that is consistent
not only with the specific provisions, but also with the underlying intent as
described in the fundamental objectives and general principles.

ARTICLE II. GENERAL PRINCIPLES

A. The principle governing all activities of the Manager is that the
Manager functions exclusively for the benefit of the owners or beneficiaries of
the assets it manages.

B. Assets under management or knowledge as to current or prospective
transactions in managed assets shall not be utilized for personal advantage or
for the advantage of anyone other than the owners or beneficiaries of those
assets.

C. It is extremely important in performing their duties that persons
associated with the Manager and Funds avoid situations involving actual or
potential conflicts of interest with the owners or beneficiaries of managed
assets.

D. Situations appearing to involve actual or potential conflicts of
interest or impairment of objectivity shall be avoided whenever doing so does
not run counter to the interests of the owners or beneficiaries of the managed
assets.

<PAGE>

E. The following specific rules and reporting procedures are
promulgated to assure that Personal Securities Transactions of the Subscribers
are conducted in accordance with the principles set forth above. There is no
intention to limit arbitrarily or unreasonably anyone's personal investment
flexibility. Quite the contrary, our experience has been that investment lessons
are learned much more quickly and more thoroughly by personal investment than by
giving poor advice to third parties. We also believe strongly investment
advisers should "take their own medicine" whenever it can be done within a
framework that avoids conflicts of interest with their clients.

ARTICLE III. SCOPE

Not all prohibitions, monitoring and reporting rules contained in
Articles IV, V and VI apply to each person required to subscribe to this Code of
Ethics. The scope varies depending upon the responsibilities and positions of
the Subscriber. This Code of Ethics specifically identifies the group of
Subscribers subject to each prohibition, monitoring and reporting rule contained
in Articles IV, V and VI.

The application of the prohibitions, monitoring and reporting rules
contained in Articles IV, V and VI may extend beyond transactions in Securities
in which the Subscriber has a direct interest to include transactions in
Securities in which the Subscriber has an indirect interest. However, the
prohibitions, monitoring and reporting rules contained in Articles IV, V and VI
shall not apply to transactions effected for any account over which the
Subscriber does not have any direct or indirect influence or control.

The definitions of Securities, Personal Securities Transactions and
Beneficial Ownership should be consulted to determine the scope of the
prohibitions, monitoring and reporting rules contained in Articles IV, V and VI.

With regard to State Farm Variable Product Trust (the "Trust"), each
investment sub-adviser's code of ethics (e.g., the code of ethics of Barclays
Global Investors, N.A. (the "sub-adviser"), which is attached as Appendix A), is
incorporated herein by reference as the Trust's Code of Ethics applicable to
persons described below. Those provisions of an investment sub-adviser's code of
ethics applicable to persons who, in connection with their regular functions or
duties, make, participate in, or obtain information regarding the purchase or
sale of a security, or whose functions relate to the making of any
recommendation with respect to such purchase or sale by registered investment
companies sponsored, managed or advised by such investment sub-adviser are
hereby incorporated herein by reference as additional provisions of this Code of
Ethics applicable to those Subscribers who are partners, directors, or employees
of such sub-adviser and who have direct responsibility for investments of any of
the Funds of the Trust.

A violation of an investment sub-adviser's code of ethics by
Subscribers who are partners, directors, or employees of such investment
sub-adviser shall constitute a violation of this Code of Ethics.

2
<PAGE>

In connection with Article VI below, provided that an investment
sub-adviser reports any violations of the Code of Ethics that it uncovers from
its review of personal securities transaction reports made to it by those
Subscribers who are partners, directors, or employees of such sub-adviser and
who have direct responsibility for investments of any of the Funds of the Trust,
and certifies in writing at the end of each calendar quarter of the Trust to the
compliance officer of the Trust that no violation of the Code of Ethics occurred
during that quarter other than those violations reported, then reporting of such
security transactions by partners, directors, or employees of an investment
sub-adviser in compliance with procedures established pursuant to the investment
sub-adviser's code of ethics shall constitute the reporting required under this
Code of Ethics.

ARTICLE IV. PROHIBITIONS

PROHIBITIONS APPLICABLE TO ALL SUBSCRIBERS

A. TRANSACTIONS WITH MANAGER. Subscribers shall not knowingly sell to
or purchase from the Manager any Securities or other property except shares
issued by the Funds.

B. TRANSACTIONS WITH FUNDS. Subscribers shall not knowingly sell to or
purchase from any Fund any Securities or other property except shares issued by
the Funds.

C. SECURITIES UNDER CONSIDERATION. Subscribers who know, or have reason
to know, that a Security is being actively considered for purchase or sale by
the Manager or the Funds (other than any Funds managed by an unaffiliated
sub-adviser), shall not enter into Personal Securities Transactions involving
that Same Security. This prohibition shall not apply to the acquisition of
Securities by a Subscriber through a dividend reinvestment plan or through a
regular automatic purchase feature of a Direct Purchase Plan, if the Subscriber
was a participant in the dividend reinvestment plan or in the Direct Purchase
Plan more than 15 days prior to the time at which the Manager began to actively
consider purchasing or selling the Security.

D. CONFIDENTIALITY OF INFORMATION. Subscribers shall not (a) disclose
any of the Funds' current or the Manager's contemplated transactions except as
may be necessary to fulfill his or her job-related responsibilities or (b)
utilize any information concerning the Funds' current or the Manager's
contemplated transactions except for the benefit of the owners or beneficiaries
of assets managed by the Manager or owned by the Funds and in no event for
personal gain.

E. PREFERENTIAL TREATMENT. Subscribers shall not seek or accept favors,
preferential treatment, any special benefit or other consideration (of more than
a de minimis value) from broker-dealers or other providers of goods or services
to the Funds, the Manager or their affiliates.

3
<PAGE>

PROHIBITION APPLICABLE TO ALL SUBSCRIBERS
OTHER THAN MUTUAL FUND DISINTERESTED DIRECTORS/TRUSTEES

F. INSIDER INFORMATION. Subscribers, other than the Mutual Fund
Disinterested Directors/Trustees, who obtain material non-public information
regarding a company (a) shall not disclose that information to anyone but a
designated Investment Professional and (b) shall not engage in any transactions
involving securities of that company for portfolios under management or for a
personal account until the information is publicly disseminated or becomes
obsolete. Whenever information is suspected of being material and non-public, a
designated Investment Professional should be advised of the circumstances
immediately. The Mutual Fund Disinterested Directors/Trustees shall be subject
to the legal obligations generally associated with insider information. (See
Appendix I for discussion of Insider Trading.)

PROHIBITION APPLICABLE TO ALL INVESTMENT PROFESSIONALS, FUND
OFFICERS AND MUTUAL FUND INTERESTED DIRECTORS/TRUSTEES

G. PROHIBITION ON SHORT-TERM PERSONAL SECURITIES TRANSACTIONS. No
Investment Professional, Fund officer or Mutual Fund Interested Director/Trustee
shall profit from the purchase and sale, or the sale and purchase, of the Same
Security within 30 calendar days; provided, however, that the Compliance Officer
may, upon request, exempt a Personal Securities Transaction from this
prohibition, in whole or in part, upon such conditions as the Compliance Officer
may impose, if the Compliance Officer concludes that no harm to a Fund would
result and that the application of the prohibition would be inequitable or
result in undue hardship to the individual who entered into the transaction. Any
profit realized on a transaction that the Compliance Officer had not exempted
from this prohibition shall be disgorged to the McLean County chapter of the
American Red Cross by check from the Subscriber, payable to the McLean County
chapter of the American Red Cross and delivered to the Compliance Officer for
delivery to such charity.

H. UNDERWRITTEN PUBLIC OFFERINGS AND INITIAL PUBLIC OFFERINGS.
Investment Professionals, the Funds' officers and Mutual Fund Interested
Directors/Trustees shall not purchase any Securities in an underwritten public
offering or Initial Public Offering. (It is important to avoid any actual or
perceived obligation to brokers as a result of being provided hot offering
allocations.) Taxable and tax-exempt debt securities that are not convertible
into equity Securities and are not being considered for purchase or sale by the
Manager or the Funds may be purchased in underwritten offerings for long term
investment, but only when (i) the transaction does not conflict with the
activity of the Manager or the Funds in those issues, and (ii) the person seeks
approval from a designated Investment Professional, as that procedure is
described in I below.

I. LIMITED OFFERINGS. Investment Professionals, the Funds' officers and
Mutual Fund Interested Directors/Trustees may not purchase Securities in a
Limited Offering without the prior approval of a designated Investment
Professional. The designated Investment Professional who approves purchases of
Securities in Limited Offerings may not purchase Securities in a Limited
Offering without the prior approval of the Funds' executive committee. Any
Investment

4
<PAGE>

Professional who has acquired a Security in a Limited Offering must
disclose the interest in the Security to the other Investment Professionals
participating in the investment decision process whenever an investment in a
Security of the same issuer is being considered for purchase or sale. Any
Investment Professional who has acquired a Security in a Limited Offering will
be disqualified from participating in any subsequent decisions by the Manager
relating to the Security acquired in the Limited Offering.

PROHIBITIONS APPLICABLE TO ALL INVESTMENT PROFESSIONALS

J. CERTAIN SHORT TERM AND SPECULATIVE TRADING. As a general rule,
Investment Professionals should not engage in highly speculative short term
trading practices or purchase securities with borrowed funds. Moreover,
Investment Professionals shall avoid the possibility of becoming so indebted as
a consequence of a poor investment that there might be temptation to utilize
assets under management to retrieve the personal investment or to repay the
broker involved. As a result, the following three prohibitions have been
included to address these types of situations. However, it is recognized that
certain cases may arise in which these types of activities could be used as a
part of a legitimate long term investment strategy. Therefore, exceptions to
these three rules may be permitted on a case-by-case basis in advance by a
designated Investment Professional who himself or herself must obtain advance
approval for an exception to these rules from the Compliance Officer.

1. PLEDGES AND MARGIN PURCHASES. Investment
Professionals shall not purchase any type of
financial instrument (including securities, options
and debt instruments) with borrowed money or in a
margin account or trade futures contracts on margin,
and shall not use Securities as collateral for a
loan.

2. SHORT SALES. Investment Professionals shall not
engage in short sales of any type of financial
instrument (including securities, options and debt
instruments).

3. OPTIONS AND FUTURES CONTRACTS. Investment
Professionals shall not engage in any transaction in
options or futures contracts on (a) any Securities
owned in the portfolios managed by the Manager or (b)
Securities in the business area for which the
Investment Professional has responsibility for
analysis, decision-making or transactions, whether or
not owned in a portfolio under management. Options
and futures contracts on Securities that are not
owned in the portfolios under management and that are
not within the area for which the Investment
Professional has responsibility for analysis,
decision-making or transactions may be purchased
after obtaining prior approval of a designated
Investment Professional to assure that the underlying
issue is not being considered for purchase or sale.

K. DISCLOSURE OF PERSONAL HOLDINGS. Investment Professionals who are in
a position to influence any decision by the Manager or the Funds to purchase,
hold or sell Securities must disclose their Beneficial Ownership interest in
such Security being considered for purchase or

5
<PAGE>

sale by the Manager or the Funds to the other Investment Professionals
participating in the investment decision process. Investment Professionals are
not required to disclose their Beneficial Ownership interest in Securities held
in an account over which the Investment Professional does not have any direct or
indirect influence or control.

L. SERVICE AS A DIRECTOR. Investment Professionals shall not serve as
directors of publicly traded companies unless prior authorization is granted by
a designated Investment Professional who himself or herself shall not serve as a
director of a publicly traded company unless prior authorization is granted by
the Funds' executive committee. Authorization to serve as a director of a
publicly traded company should be granted only if it is determined that such
service as a director would be consistent with the interests of the Funds and
the Funds' shareowners. Any Investment Professional who serves as a director of
a publicly traded company shall be appropriately isolated from Investment
Professionals making any investment decisions relating to the publicly traded
company.

ARTICLE V. MONITORING

All Personal Securities Transactions in a Security by Investment
Professionals, the Funds' officers and Mutual Fund Interested Directors/Trustees
shall be reviewed by the Compliance Officer to identify those transactions, if
any, executed during the period that begins seven calendar days before a Fund
(other than a Fund managed by an unaffiliated sub-adviser) trades in the Same
Security and ends seven calendar days after a Fund (other than a Fund managed by
an unaffiliated sub-adviser), trades in the Same Security.

The Compliance Officer, in his discretion, may require the person to
reverse any Personal Securities Transaction that occurs during the period that
begins seven calendar days before a Fund (other than a Fund managed by an
unaffiliated sub-adviser) trades in the Same Security and ends seven calendar
days after a Fund (other than a Fund managed by an unaffiliated sub-adviser),
trades in the Same Security, and disgorge the profits in accordance with the
requirements described below.

Any profits from a transaction that is reversed shall be disgorged to
the McLean County chapter of the American Red Cross by check from the
Subscriber, payable to the McLean County chapter of the American Red Cross and
delivered to the Compliance Officer for delivery to such charity. A Subscriber
may appeal any determination by the Compliance Officer with regard to this
Section V to the Financial Vice President of State Farm Mutual Automobile
Insurance Company, whose decision shall be final.

Notwithstanding the requirements stated above, no Personal Securities
Transaction that occurs during the period that begins seven calendar days before
a Fund (other than a Fund managed by an unaffiliated sub-adviser) trades in the
Same Security and ends seven calendar days after a fund (other than a Fund
managed by an unaffiliated sub-adviser), trades in the Same Security, shall be
reversed if the Fund trade in the Security was effected to rebalance a Fund in
accordance with such Fund's index investment mandate, was the result of an
investment program

6
<PAGE>

of dollar-cost averaging or was effected by the Manager for reasons other than
pursuant to the exercise of the Manager's investment discretion.

Personal Securities Transactions of Subscribers reportable under
Article VI shall be reviewed by the Compliance Officer to identify whether the
transaction is consistent with the requirements of this Code of Ethics. If, in
his discretion, the Compliance Officer determines that a Personal Securities
Transaction of a Subscriber violates this Code of Ethics, the Compliance Officer
may require the Subscriber to reverse the transaction and disgorge any profits
as set forth above.

For purposes of this Article V, the acquisition of a Security through a
Direct Purchase Plan or reinvestment of dividends or distributions through a
pre-established dividend reinvestment plan is not a Personal Securities
Transaction, and no profits realized from the acquisition of a Security through
a Direct Purchase Plan or dividend reinvestment plan shall be required to be
disgorged pursuant to this paragraph.

ARTICLE VI. REPORTING

Subject to the exclusions set forth in Sections F below, every
Subscriber must report to the Compliance Officer the following:

A. INITIAL HOLDINGS REPORT. No later than 10 days after a person
becomes a Subscriber, he or she shall complete an Initial Holdings Report in the
form attached hereto as Appendix II if he or she has a Beneficial Ownership
interest in Securities. This report shall be made as of the date the person
became a Subscriber.

B. TRANSACTION REPORT. Subscribers shall report Personal Securities
Transactions on the form attached hereto as Appendix III. The report shall be
filed with the Compliance Officer as soon as practicable after the execution of
the transaction, but in no event later than 5 business days after the
transaction. A Subscriber need not make a transaction report:

1. With respect to regular purchases through dividend
reinvestment plans.

2. With respect to purchases of Securities through a Direct
Purchase Plan.

C. REPORT ON NEW SECURITIES ACCOUNTS: Subscribers shall report the
establishment of new Securities accounts on the form attached hereto as Appendix
III. The report shall be filed with the Compliance Officer as soon as
practicable after the establishment of the account, but in no event later than 5
business days after the establishment of the account.

D. ANNUAL HOLDINGS REPORT. No later than 30 days after the end of the
calendar year, a Subscriber who has a Beneficial Ownership interest in
Securities shall complete an Annual Holdings Report in the form attached hereto
as Appendix II. This report shall be completed with

7
<PAGE>

information as of December 31. The first Annual Holdings Report shall
be due January 30, 2001, and shall report holdings as of December 31, 2000.

E. BROKER CONFIRMATIONS. Investment Professionals, the Funds' Officers
and Mutual Fund Interested Directors shall require their broker/dealers to
supply the Compliance Officer with duplicate copies of confirmations of all
Personal Securities Transactions.

F. EXCLUSIONS FROM ALL REPORTING UNDER THIS ARTICLE. A Subscriber need
not make a report under this Article:

1. With respect to transactions effected for, and Securities
held in, any account over which the person has no direct or indirect influence
or control.

2. With respect to securities excluded from the definition of
Security under the list of General Exclusions. Accordingly, a Subscriber need
not include such securities in a Transaction Report, a Report on New Securities
Accounts, an Initial Holdings Report, or an Annual Holdings Report.

3. Any Mutual Fund Disinterested Director/Trustee who is a
Subscriber solely by reason of being a director or trustee of one or more of the
Funds is not required to file either an Initial Holdings Report or an Annual
Holdings Report, and such person only needs to file a Transaction Report with
respect to purchases or sales of a Security if he or she knew, or in the
ordinary course of fulfilling his or her official duties as a director or
trustee should have known, that during the 15-day period immediately preceding
or after a Personal Securities Transaction the Same Security was purchased or
sold by the Fund (other than an index Fund) of which the person is a director or
trustee or that such purchase or sale was considered during that period by the
Fund (other than an index Fund) or the Manager.

ARTICLE VII. ENFORCEMENT

A. Reports filed pursuant to Article VI of this Code of Ethics will be
maintained in strictest confidence and will be reviewed in accordance with
Article V of this Code of Ethics to detect any violation of this Code of Ethics.
Additional information may be required to clarify the nature of particular
transactions.

B. Subscribers shall conduct themselves at all times in the best
interests of the Funds. Compliance with ALL provisions of the Code of Ethics
shall be a condition of employment or continued affiliation with the Funds and
the Manager and conduct which is not in accordance with these provisions shall
constitute grounds for termination of employment or removal from office.

C. Violations of this Code of Ethics may also constitute violations of
law and may subject the Subscriber, the Funds, or the Manager to civil or
criminal penalties.

8
<PAGE>

D. No less frequently than annually, the Compliance Officer will
furnish the Board of Directors/Trustees a written report that describes any
issues arising under this Code of Ethics since the last report to the Board of
Directors/Trustees, including, but not limited to, information about material
violations of this Code of Ethics and sanctions imposed in response to the
material violations. The report shall also certify that the Funds have adopted
procedures reasonably necessary to prevent access persons from violating the
code.

ARTICLE VIII. DEFINITIONS

A. BENEFICIAL OWNERSHIP: A Subscriber shall be deemed to have
Beneficial Ownership of a Security if the Subscriber, either directly or
indirectly, through any contract, arrangement, understanding, relationship, or
otherwise, has or shares a direct or indirect pecuniary interest in the
Security. This type of pecuniary interest can arise when the Subscriber has an
opportunity to profit directly or indirectly from a transaction in the Security.
Situations where an indirect pecuniary interest in a Security can exist with
respect to Securities include, but are not limited to the following:

1. A Security held by a member of the Subscriber's
immediate family who shares the same household.

2. A general partner's proportionate interest in portfolio
Securities held by the partnership.

3. A shareholder's proportionate interest in portfolio
Securities held by the corporation if the shareholder is
a controlling shareholder of the corporation. A
shareholder will be considered to be a controlling
shareholder if the shareholder has the power to exercise
a controlling influence over the management or policies
of a company. For a more comprehensive definition of
control, please refer to Section 2(a)(9) of the
Investment Company Act of 1940.

4. A performance-related fee, other than an asset-based
fee, received by any broker, dealer, bank, insurance
company, investment company, investment adviser,
investment manager, trustee or person or entity
performing a similar function. However, no pecuniary
interest will be present where (a) the
performance-related fee is calculated based upon net
capital gains and/or net capital appreciation generated
from the portfolio or from the fiduciary's overall
performance over a period of one year or more, and (b)
equity securities of the issuer do not account for more
than ten percent of the market value of the portfolio.

5. A Subscriber's interest in Securities held pursuant to
certain trust arrangements. The types of trust
arrangements where an indirect pecuniary interest could
arise include the following:

9
<PAGE>

(a) the ownership of Securities as a trustee where
either the trustee or members of his or her
immediate family have a vested interest in the
income or corpus of the trust;

(b) the ownership of a vested beneficial interest in
the trust; and

(c) the ownership of Securities as a settlor of a trust
in which the settlor has the power to revoke the
trust without obtaining the consent of all the
beneficiaries.

6. A Subscriber's right to dividends that is separated or
separable from the underlying Securities.

7. A Subscriber's right to acquire equity Securities
through the exercise or conversion of any derivative
Security, whether or not presently exercisable.

B. DIRECT PURCHASE PLAN: A Personal Securities Transaction in which the
Subscriber acquires an interest in a Security directly from the issuer of the
Security through a program that allows program participants to accumulate shares
by making optional cash payments.

C. INITIAL PUBLIC OFFERING: An Initial Public Offering means an
offering of Securities registered under the Securities Act of 1933, the issuer
of which, immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.

D. INVESTMENT PROFESSIONALS: Investment Professionals shall mean the
individuals who work in the Investment Department and inside counsel for the
Investment Department and the State Farm Mutual Funds.

E. INVESTMENT SUB-ADVISER: Investment sub-adviser means any person
named as an investment sub-manager or investment sub-adviser in the Trust's
currently effective registration statement filed with the U.S. Securities and
Exchange Commission.

F. LIMITED OFFERING: A Limited Offering means an offering that is
exempt from registration under the Securities Act of 1933 pursuant to section
4(2) or section 4(6) or pursuant to rule 504, rule 505, or rule 506 under the
Securities Act of 1933.

G. MUTUAL FUND DISINTERESTED DIRECTOR/TRUSTEE: Mutual Fund
Disinterested Director/Trustee means a duly elected director or trustee of a
Fund who is not an "interested person" of the Fund within the meaning of Section
2(a)(19) of the Investment Company Act of 1940.

H. MUTUAL FUND INTERESTED DIRECTOR/TRUSTEE: Mutual Fund Interested
Director/Trustee means a duly elected director or trustee of a Fund who is an
"interested person" of the Fund within the meaning of Section 2(a)(19) of the
Investment Company Act of 1940.

10
<PAGE>

I. PERSONAL SECURITIES TRANSACTIONS: Personal Securities Transactions
shall include not only transactions involving the purchase or sale of Securities
directly owned by the Subscriber, but also the purchase or sale of any
Securities in which the Subscriber has a Beneficial Ownership interest. Personal
Securities Transactions shall not include transactions effected for any account
over which the Subscriber does not have any direct or indirect influence or
control.

J. SECURITY:

1. General Definition: Subject to the exceptions noted
below, Security shall have the meaning set forth in
Section 2(a)(36) of the Investment Company Act of
1940. The definition contained in Section 2(a)(36) of
the Investment Company Act is as follows:

Security means any note, stock, treasury
stock, bond debenture, evidence of
indebtedness certificate of interest or
participation in any profit-sharing
agreement, collateral-trust certificate,
preorganization certificate of subscription,
transferable share, investment contract,
voting-trust certificate, certificate of
deposit for a security, fractional undivided
interest in oil, gas or other mineral
rights, any put, call straddle, option, or
privilege on any security (including a
certificate of deposit) or on any group or
index of securities (including any interest
therein or based on the value thereof, or
any put, call, straddle, option, or
privilege entered into on a national
securities exchange relating to foreign
currency, or, in general, any interest or
instrument commonly know as a "security," or
any certificate of interest or participation
in, temporary or interim certificate for,
receipt for, guarantee of, or warrant or
right to subscribe to or purchase, any of
the foregoing.

2. General Exclusions: As a general rule, Security shall not
include:

(a) shares of registered open-end investment
companies,
(b) direct obligations of the government of
the United States,
(c) bankers' acceptances,
(d) bank certificates of deposit,
(e) commercial paper, and
(f) high quality short-term debt instruments,
including repurchase agreements.

These general exclusions from the definition of Security shall not be
applicable for purposes of the rules concerning pledges and margin
purchases, short sales, and insider information.

I. SAME SECURITY: The Security, any class of that Security, or another
Security which derives its value by that Security.

11
<PAGE>

J. SUBSCRIBER(S): A Subscriber is any person who executes the Code of
Ethics. Subscribers will include at least the following: Investment
Professionals, Mutual Fund Department personnel, Mutual Fund accounting
personnel, Mutual Fund Officers, Mutual Fund Disinterested Directors/Trustees,
Mutual Fund Interested Directors/Trustees, Management Corp. Officers, Management
Corp. Directors and inside counsel for the Funds and Investment Department.

* * * * * * * * *

I acknowledge that I have read and understand the Code of Ethics, and I
agree to comply with its terms and provisions.

Dated:
------------------------ ---------------------------------------
Subscriber's Signature

---------------------------------------
Subscriber's Name (please print)

12
<PAGE>

APPENDIX II

Initial Holdings Report
-----------
Annual Holdings Report
-----------

(check one)

Please report any Security in which you have a direct or indirect Beneficial
Ownership interest. For the definition of Beneficial Ownership and Security,
please see Article VIII of the Code of Ethics. If the Security holdings in which
you have a Beneficial Ownership interest are limited to variable products, U.S.
government securities, and/or shares of open-end mutual funds, you do not have
to complete this report.

Name of Broker Dealer
Number of Shares or or Bank with Whom the
Title of Security Principal Amount of Security Account is Maintained
----------------- ---------------------------- ---------------------

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

If this is an Initial Holdings Report, you must report each Security in
which you have a direct or indirect Beneficial Ownership interest as of the date
you became a Subscriber to the Code of Ethics. The Initial Holdings Report must
be filed with the Compliance Officer by the 10th day following the day you
became a Subscriber. If this is an Annual Holdings Report, you must report each
Security in which you have a direct or indirect Beneficial Ownership interest as
of December 31, and you must file this report with the Compliance Officer by the
following January 30.

- ------------------------------------ -------------------------------
Subscriber's Signature Date
<PAGE>

APPENDIX III

REPORT OF PERSONAL SECURITY TRANSACTIONS
AND REPORT OF ESTABLISHMENT OF NEW SECURITIES ACCOUNTS
BY CODE OF ETHICS SUBSCRIBERS

1. TRANSACTIONS IN SECURITIES DURING THE CALENDAR QUARTER

Buy, Amount Broker,
Sell or Number of Shares and (# of Shares Dealer or
Date Other Description of Security* Price x Price) Bank

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

* If a note, bond, or other fixed or variable rate Security, report the interest
rate and maturity date along with a description of the Security.

2. ESTABLISHMENT OF SECURITIES ACCOUNT DURING THE CALENDAR QUARTER

a. Name of broker, dealer, or bank with whom the account was established:

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

b. Date the account was established:
-----------------------------

* * * * * * * * * * * * * * * * * *

Signature: Date of this report:
------------------------ --------------------

All Subscribers must file this report as soon as practicable after the execution
of the transaction, or establishment of the account, but in no event later than
5 business days after such event.

- ---------------------------------- -------------------------------
Subscriber's Signature Date

<PAGE>

BARCLAYS GLOBAL INVESTORS, N.A.
And its Subsidiaries:
BARCLAYS GLOBAL FUNDS ADVISORS
BARCLAYS GLOBAL INVESTORS SERVICES

CODE OF ETHICS

INTRODUCTION

Barclays Global Investors, N.A. and its subsidiaries Barclays Global Funds
Advisors (BGFA) and Barclays Global Investors Services (BGIS), collectively
referred to as "BGI", have adopted the following Code of Ethics regarding
personal securities transaction policies and procedures intended to prevent
their US officers, directors and employees from engaging in any fraudulent or
manipulative acts with respect to accounts managed or advised by BGI as set
forth in SEC 17 CFR 270 Rule 17j-1, SEC 17 CFR 275 Rule 204-2 and OCC Regulation
12 CFR 12.7. Policies and Procedures on Insider Trading and Chinese Walls are
included in Appendix A.

DEFINITIONS

"Securities" are defined as any SEC registered or privately placed equity and
fixed income security, future or option contract, or other related commodity
derivative investment. This includes closed-end mutual funds, unit investment
trusts, physical-form securities, and exchange traded funds. "Securities" do not
include US Treasuries and other direct obligations of the US Government,
banker's acceptance, commercial paper, and shares of registered open- end
investment companies.

"Employee" include any US directors, officers and employees of BGI and his/her
spouse, domestic partner, minor children, a relative who shares the employee's
home or other persons by reason of any contract, arrangement, understanding or
relationship that provides to the employee with sole or shared voting or
investment powers.

"Personal Account" includes any securities account or portfolio in which
securities are held for the employee in which the employee has a direct or
indirect pecuniary (monetary) interest. The term includes IRA and 401(k)
accounts in which securities can be purchased or sold.

<PAGE>

PROHIBITED TRADING ACTIVITIES

INSIDER TRADING

- - All employees are prohibited from engaging in insider trading or tipping.

Insider trading occurs when a personal securities transaction occurs on the
basis of or while in possession of material, nonpublic information. Information
is considered material if it could reasonably affect the employee's decision to
invest (or not to invest) in a security. Nonpublic information is that which is
generally not available to the ordinary investors in the marketplace. Refer to
Appendix A for further details on insider trading.

PARALLEL TRADING, FRONT RUNNING AND SHADOWING RESTRICTIONS

- - All employees are prohibited from conducting personal securities
transactions that are considered parallel trading, front running and
shadowing.

Shadowing and parallel trading occur when an employee observes a BGI trade or
trading pattern and places the same (or similar) trade in his/her account or
passes the information to others inside or outside of the company. Front running
occurs when an employee uses (or passes to others who use the information)
advance knowledge of a BGI trade to enter into a personal transaction in the
same security ahead of BGI's order and to capitalize on the impact of the BGI
order.

RESTRICTED TRADING ACTIVITIES

TRADING IN BARCLAYS PLC SECURITIES AND SECURITIES UNDERWRITTEN BY BARCLAYS'
AFFILIATES

- - All Members of the Board of Directors of BGI, members of the Management
Committee, employees reporting directly to BGI's Chief Financial Officer
and all employees within the U.S. and Global Finance and Treasury Groups
are prohibited from trading in the securities of Barclays PLC during the
period from the end of the accounting year or half year until the relevant
results are announced, i.e., from January 1 to the preliminary results
announcement in February and from July 1 to the interim results
announcement in August. During other times, these individuals must
pre-clear trades in Barclays PLC securities in accordance with the Barclays
PLC policy.

- - Access Persons are not permitted to purchase securities underwritten by
Barclays' affiliates as manager or co-manager for a period of sixty days
after an offering is commenced.

<PAGE>

REQUIREMENTS FOR ALL EMPLOYEES

REPORTING OF PERSONAL ACCOUNTS AND SECURITIES TRANSACTIONS

- - All employees must disclose all personal accounts to US Compliance and must
authorize US Compliance to receive duplicate trade confirmations and
account statements.

- - Upon employment, new employees must sign a document stating that they
understand and agree to abide by BGI's personal trading requirements,
restrictions and prohibitions.

ANNUAL CERTIFICATION

- - All employees must provide an annual certification of their personal
accounts and securities holdings.

- - All employees must certify at least annually their understanding and
compliance with the Code of Ethics.

60 DAY HOLDING PERIOD

- - Employees are required to hold securities including options and futures for
a minimum of 60 days, and to avoid short-term trading practices. US
Compliance may pre-approve exceptions to the 60 day holding period.

PRE-CLEARANCE PRIOR TO TRANSACTIONS IN IPOS, PRIVATE PLACEMENTS, OPTIONS, AND
FUTURES

- - All employees must obtain pre-clearance for transactions in IPOs, private
placements, options and futures. For options and futures, the employee must
execute the transaction by the end the next business day or request another
pre-clearance.

BLACKOUT PERIODS

- - Employees are restricted from trading securities in selected indexes during
a designated "blackout" period when the specific index is undergoing a
major scheduled reconstitution. US Compliance will notify employees of the
"blackout" periods which will include the period 15 days before and after a
major scheduled index reconstitution.

ADDITIONAL REQUIREMENTS FOR ACCESS PERSONS

Access persons include all employees whose Group 1) participates in making
securities

<PAGE>

purchase and sell recommendations or 2) may have access to timely and material
information concerning BGI's securities transactions. Access Persons also
include the Boards of Directors and officers of BGFA and BGIS.

US Compliance will identify BGI's Access Persons who are required to submit
reports under this Code of Ethics and inform them of their reporting and
securities preclearance obligations.

REPORTING OF SECURITIES TRANSACTIONS AND HOLDINGS

- - All Access Persons must provide a listing of securities holdings to US
Compliance within 10 calendar days from when a personal account is opened
and provide US Compliance with transaction information until such time as
US Compliance receives duplicate confirmations and statements.

- - All newly hired Access Persons must provide a complete listing of
securities holdings on their initial day of employment.

ACCESS PERSONS REQUIRING PRE-CLEARANCE BY MANAGEMENT AND US COMPLIANCE

- - All Access Persons, whose Group directly participates in making
securities purchase or sell recommendations or has timely and material
knowledge of BGI's securities transactions, must pre-clear their
personal securities transactions with their Group manager in addition to
pre-clearance by US Compliance. The manager will verify that there is no
timely or material knowledge of trades pending for specific securities
within the Access Person's Group. These Groups include Portfolio
Management, Trading, Trading Operations, Client Order Management,
Transition Services, Index Research Group, Alpha Strategy Group and
other Groups identified by US Compliance from time to time.

ACCESS PERSONS REQUIRING PRE-CLEARANCE FROM US COMPLIANCE ONLY

- - The following Groups have access to information relating to BGI's
securities transactions. Employees within these Groups must pre-clear their
securities transactions with US Compliance. These Groups include Internal
Audit, US Compliance, US Risk Management, the US Executive Committee, US
members of the Management Committee, BGFA and BGIS Board of Directors and
officers. In addition, all BGI staff who have access to the following
systems must also pre-clear trades with US Compliance: Landmark, Bulk
Console, Beacon, Bidbook, Fifus, TOC, ITOC, TSC, IntelProd, Quantex and any
other systems identified by US Compliance from time to time.

Pre-clearance authorization is valid until the next day's closing of the
relevant market.

<PAGE>

Access Persons are not required to pre-clear transactions in accounts managed by
a registered investment advisor for which full discretion has been granted.
Documentation of such an arrangement must be provided and an exemption must be
obtained from US Compliance who will confirm the discretionary arrangement.

Pre-clearance is not required for transactions in automatic dividend
reinvestment plans, periodic stock purchase plans or in selling or exercising
rights obtained as a shareholder in an issue.

MONITORING OF PERSONAL SECURITIES TRANSACTIONS

POST TRADE REVIEW

- - US Compliance will review personal securities transactions to identify
violations of the Code of Ethics. Violations to this policy will be
reviewed by management and disciplinary action may be taken up to and
including dismissal.

ADOPTION AND APPROVAL OF BGI CODE OF ETHICS

- - US Compliance will present the BGI Code of Ethics for approval by the Board
of Directors or Trustees of all funds for which BGFA or BGIS is the
investment advisor. This will be done at the initiation of investment
advisory services provided by BGFA or BGIS to the fund and no later than
six months after a material change has been adopted. In connection with
each approval, BGFA and BGIS will certify to the board that they have
adopted procedures reasonably necessary to prevent the Access Persons from
materially violating the BGI Code of Ethics.

- - BGFA and BGIS will provide to the fund's board a written report describing
issues, material violations and sanctions, and will certify to the board
that procedures have been adopted which are intended to prevent Access
Persons from violating the BGI Code of Ethics. This report and
certification will be submitted Code of Ethics at least annually.

RECORDKEEPING REQUIREMENTS

BGI will follow the recordkeeping practices outlined below:

- - A copy of the Code of Ethics that is in effect, or at any time within the
past five years was in effect, will be maintained in an easily accessible
place.

- - A record of any violation of the Code of Ethics, and of any action taken as
a result of the violation, will be maintained in an easily accessible place
for at least five years after the end of the fiscal year in which the
violation occurs.

<PAGE>

- - A copy of each personal account statement, trade confirmation and any
information provided in lieu of a report will be retained for five years,
two years in an easily accessible location.

- - A record of all persons, currently or within the past five years, who are
or were required to make reports, and who are or were responsible for
reviewing these reports will be retained in an easily accessible location.

- - A copy of each report submitted to a fund board pursuant to the Code of
Ethics will be maintained for at least five years after the end of the
fiscal year in which it is made, two years in an easily accessible
location.

- - A record of any decision to approve and the reasons supporting the decision
to approve the acquisition by employees of IPOs and private placements will
be maintained for at least five years after the end of the fiscal year in
which the approval is granted.

<PAGE>

APPENDIX A

INSIDER TRADING AND CHINESE WALL POLICY

A. INTRODUCTION

The continued success of Barclays depends on its relationships with its
customers and on its well-deserved reputation as an institution
grounded in a tradition of integrity and ethical conduct in all of its
dealings. To maintain this high standard and, thus, Barclays'
reputation in today's regulatory and business climate, requires strict
observance of ethical behavior as well as of legal obligations created
by the Federal securities laws and specific contractual undertakings of
Barclays such as confidentiality agreements. This Policy emphasizes
generally the importance of adhering to professional and ethical
conduct and provides specific policies and, in certain instances,
procedures, with respect to Personal Securities Transactions and
Chinese Walls. These guidelines will help employees meet Barclays'
contractual, ethical and statutory obligations.

BGI EMPLOYEES WHO VIOLATE THESE POLICIES AND PROCEDURES WILL BE SUBJECT
TO SUCH DISCIPLINARY ACTION AS MANAGEMENT DEEMS APPROPRIATE, INCLUDING
A LETTER OF CENSURE OR SUSPENSION, OR REMOVAL FROM OFFICE, OR SUMMARY
TERMINATION OF EMPLOYMENT.

B. INSIDER TRADING

All employees must strictly comply with Federal, provincial or state
securities laws in transactions on behalf of Barclays and in their own
personal transactions. Such securities laws prohibit trading on
material non-public information ("Insider Trading") or communicating
such information to others who may trade on it ("Tipping").

What constitutes material non-public information ("Inside Information")
must be determined on the basis of all pertinent circumstances. First,
the information must be material. Material information is generally
defined as (i) information for which there is a substantial likelihood
that a reasonable investor would consider it important in making his or
her investment decisions, or (ii) information that is reasonably
certain to have a substantial effect on the price of a company's
securities. Second, the information must be non-public. Information
that has been communicated to the market place is generally public and,
therefore, not Inside Information. For example, information found in a
filing or a report made with the Securities and Exchange Commission or
appearing in newspapers, industry journals, financial newsletters or
other publications would be considered public, although information
obtained by word-of-mouth or through rumors

<PAGE>

would not necessarily be public. Information that is known only inside
a company or to a limited number of outsiders such as accountants,
bankers, financial advisors or attorneys, is not public.

The following information will generally be Inside Information if not
publicly known: (a) information concerning a company, including
information concerning its business, financial matters and management,
such as changes in earnings or dividends, significant technical
achievements, important discoveries of natural resources, the obtaining
or losing of major contracts, or changes in management; and (b)
information concerning a company's securities, including the market for
a security or its terms, such as a prospective tender offer, merger or
acquisition, prospective block trade, prospective private placement or
public offering, impending stock dividend or stock split or proposed
recapitalization. A BGI employee who had any of the types of Inside
Information described above would be guilty of Tipping if he or she (a)
either communicated the Information to another person or (b) simply
told another person, without explanation, to buy or sell the securities
of that company, and the other person did indeed purchase such
securities as a result of such Tipping. Similarly, a staff member,
possessing Inside Information, would be guilty of Insider Trading if he
or she bought or sold securities for his or her personal account, or
for BGI's account, based on that Inside Information.

C. CONFIDENTIALITY AND CHINESE WALL POLICY

Beyond simply complying with the letter of the law, employees are
expected to understand and observe the highest professional and ethical
standards in conducting BGI's business. All BGI employees have a duty
to respect the confidential nature of information received from
customers and to use that information only for the purpose for which it
is provided, whether or not that information is Inside Information and
regardless of the basis on which confidentiality is required - whether
it be statutory requirements, ethical considerations or contractual
obligations. Maintaining strict standards with respect to the
confidentiality of information will accomplish several goals. It will
enable BGI to (a) preserve its reputation for corporate integrity, (b)
maintain compliance with the Federal securities laws, and (c) reduce
the occurrence of conflicts of interest both within divisions (and even
within teams) as well as between separate operating entities of
Barclays. Indeed, maintaining strict standards of confidentiality will
enable BGI to serve the needs of its customers more effectively.

In certain areas Chinese Walls will be, or have been, established to
ensure that employees have adopted procedures to safeguard the
confidentiality of information. The term "Chinese Wall" is a familiar
one to most people. However, what it means or how it actually operates
in the workplace is often misunderstood.

<PAGE>

A Chinese Wall is a barrier that controls or restricts the flow of
confidential information. It is essentially a system or set of
procedures designed to segregate information and prevent the
communication of that information between certain people or operating
areas. The procedures that comprise each Chinese Wall may vary
depending on the location of the particular wall or the times when it
is operative. A Chinese Wall may need to be in place only at certain
times or on a constant basis. A Chinese Wall may need to be located
between various operating areas, between divisions, between teams
within a division and even, temporarily, between staff who are on the
same team but assigned to different accounts. The existence and proper
maintenance of Chinese Walls will allow Barclays to serve
simultaneously the needs of customers who have competing interests. For
the most part, the maintenance of Chinese Walls will reduce the
occurrence of conflicts of interest within Barclays as well as reduce
the possibility of abuse of Inside Information.

Regardless of the existence of specific Chinese Walls, the following
procedures should be observed by all employees at all times:

1. Never communicate confidential information to anyone outside
Barclays except for communications with auditors, approved
counsel or other experts who have been specifically engaged
for certain matters. Communicate confidential information
inside Barclays only on a need-to-know basis.

2. Do not communicate confidential information through a Chinese
Wall unless permission is obtained from the appropriate
designated manager or the Manager of Compliance.

3. Never discuss confidential information in a public place such
as an elevator, a restaurant or a hallway.

4. Always log off your computer before leaving the area for any
length of time and at the end of the day.

5. Use systems and information solely for authorized activities.

6. Notify a supervisor of any unauthorized use or misuse of the
system or information or any activity that appears
questionable.

7. Maintain the secrecy of passwords and other system access
identification.

8. Prevent others from using a terminal to which another employee
has logged on until that employee has logged off.

9. Keep documents and papers containing confidential information
in locked file cabinets or other secured facilities. Do not
leave papers and documents containing confidential information
exposed on desks or credenzas.