RUSSELL FRANK INVESTMENT CO, 497, 1996-07-08

RUSSELL FRANK INVESTMENT CO
497, 1996-07-08

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<PAGE> 1

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (206) 627-7001

Frank Russell Investment Company (the "Investment Company") is a "series
mutual fund" with 23 different investment portfolios referred to as the "Funds."
This Prospectus describes and offers shares of beneficial interest in the Class
S Shares of the nine Funds listed below, except for the Money Market Fund, which
is not currently offered for direct investment.

Frank Russell Investment Management Company (the "Management Company")
operates and administers all of the Funds which comprise the Investment Company,
and manages the portfolio of the Money Market Fund. The Management Company is a
wholly owned subsidiary of Frank Russell Company, which researches and
recommends to the Management Company, and to the Investment Company, one or more
investment management organizations to manage the portfolio of each of the
individual Funds. There is no sales charge for investing in the Class S Shares
of the Funds.

<TABLE>
<S> <C>
Equity I Fund Fixed Income I Fund
Equity II Fund Fixed Income II Fund
Equity III Fund Fixed Income III Fund
Equity Q Fund Money Market Fund
International Fund
</TABLE>

SHARES OF THE FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC") OR BY ANY OTHER GOVERNMENT AGENCY; ARE NOT OBLIGATIONS
OF THE FDIC OR ANY OTHER GOVERNMENT AGENCY; ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK; ARE NOT ENDORSED OR GUARANTEED BY ANY BANK; ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED; AND MAY
FLUCTUATE IN VALUE, SO THAT WHEN THEY ARE SOLD, THEY MAY BE WORTH MORE OR LESS
THAN WHEN THEY WERE PURCHASED.

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

INVESTMENTS IN MONEY MARKET FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE
US GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET FUND WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.

Frank Russell Investment Company is organized as a Massachusetts business
trust under an amended Master Trust Agreement dated July 26, 1984. The
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment Funds, which interests
may be offered in one or more classes. The Investment Company is a diversified
open-end management investment company, commonly known as a "mutual fund."

This Prospectus sets forth concisely information about the Investment
Company and the Class S Shares of nine of its Funds that a prospective investor
ought to know before investing. The Investment Company has filed a Statement of
Additional Information dated July 8, 1996, with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated herein by
reference and may be obtained without charge by writing to the Secretary, Frank
Russell Investment Company, at the address shown above or by telephoning (800)
972-0700. This Prospectus should be read carefully and retained for future
reference.

This Prospectus relates only to the Class S Shares of the nine Funds. The
Funds listed above currently do not offer shares of beneficial interest in any
other classes.
PROSPECTUS DATED JULY 8, 1996
<PAGE> 2

Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:

EQUITY I FUND -- Income and capital growth by investing principally in equity
securities.

EQUITY II FUND -- Maximum total return, primarily through capital appreciation
and by assuming a higher level of volatility than is ordinarily expected from
Equity I Fund, by investing in equity securities.

EQUITY III FUND -- A high level of current income, while maintaining the
potential for capital appreciation by investing in income-producing equity
securities.

EQUITY Q FUND -- Total return greater than the total return of the US stock
market as measured by the Russell 1000(R) Index over a market cycle of four to
six years, while maintaining volatility and diversification similar to the Index
by investing in equity securities.

INTERNATIONAL FUND -- Favorable total return and additional diversification for
US investors by investing primarily in equity and fixed-income securities of
non-US companies, and securities issued by non-US governments.

FIXED INCOME I FUND -- Effective diversification against equities and a stable
level of cash flow by investing in fixed-income securities.

FIXED INCOME II FUND -- Preservation of capital and generation of current income
consistent with the preservation of capital by investing primarily in
fixed-income securities with low-volatility characteristics.

FIXED INCOME III FUND -- Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from broad fixed-income market portfolios, by investing in fixed-income
securities.

MONEY MARKET FUND -- Maximum current income to the extent consistent with the
preservation of capital and liquidity, and the maintenance of a stable $1.00 per
share net asset value by investing exclusively in short-term money market
instruments.

This Prospectus describes and offers Class S Shares of nine External Fee Funds,
except the Money Market Fund, which is not currently offered for direct
investment. Another prospectus describes and offers Class S Shares of eight
Internal Fee Funds, while a third prospectus describes and offers Class S Shares
in four Internal Fee Funds and two External Fee Funds. The principal distinction
between the External and the Internal Fee Funds is that a shareholder of an
External Fee Fund may pay a quarterly shareholder investment services fee
directly to the Management Company. The fee is computed on the amount the
shareholder has invested in an External Fee Fund. Each shareholder of the
Internal Fee Funds pays no such fees. The Investment Company's Funds had
aggregate net assets of $8.9 billion on April 30, 1996. The net assets of these
nine Funds on April 30, 1996, were:

<TABLE>
<S> <C>
Equity I $862,140,124
Equity II $330,556,572
Equity III $231,174,117
Equity Q $712,358,569
International $883,784,283
Fixed Income I $675,942,818
Fixed Income II $196,502,539
Fixed Income III $254,264,611
Money Market $643,877,000
</TABLE>

2
<PAGE> 3

HIGHLIGHTS AND TABLE OF CONTENTS

ANNUAL FUND OPERATING EXPENSES summarizes the fees paid by shareholders and
provides an example showing the effect of these fees on a $1,000 investment over
time. PAGE 5.

FINANCIAL HIGHLIGHTS summarizes significant financial information concerning the
Funds for the period stated herein. PAGE 14.

THE PURPOSE OF THE FUNDS is to provide a means for Eligible Investors to use
Frank Russell Company's "multi-style, multi-manager diversification" techniques
and money manager evaluation services on an economical and efficient basis. PAGE
23.

FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS has been primarily engaged
since 1969 in providing asset management consulting services to large corporate
employee benefit funds. Major components of its consulting services are: (i)
quantitative and qualitative research and evaluation aimed at identifying the
most appropriate investment management firms to invest large pools of assets in
accord with specific investment objectives and styles; and (ii) the development
of strategies for investing assets using "multi-style, multi-manager
diversification." PAGE 23.

MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION is a method for investing large pools
of assets by dividing the assets into segments to be invested using different
investment styles, and selecting money managers for each segment based upon
their expertise in that style of investment. PAGE 23.

ELIGIBLE INVESTORS are principally those institutional investors which invest
for their own account or in a fiduciary or agency capacity and which have
entered into an Asset Management Services Agreement with the Management Company;
and institutions or individuals who have acquired shares through such
institutions. PAGE 24.

GENERAL MANAGEMENT OF THE FUNDS is provided by the Management Company, which
employs the officers and staff required to manage and administer the Funds on a
day-to-day basis. Frank Russell Company provides to the Funds and the Management
Company comprehensive consulting and money manager evaluation services. PAGE 25.

EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management fee to
the Management Company, its expenses and its portion of the general expenses of
the Investment Company. The Management Company, as agent for the Fund, pays from
its fees, the investment advisory fees of the money managers of the Fund. The
remainder of the fee is retained by the Management Company, for conducting the
Fund's general operations and for providing investment supervision for the Fund.
Each Eligible Investor may pay to the Management Company directly a fee for
other services provided to that Eligible Investor. PAGE 27.

THE MONEY MANAGERS are evaluated and recommended by Frank Russell Company. The
money managers have complete discretion to purchase and sell portfolio
securities for their segment of a Fund consistent with the Fund's investment
objectives, policies and restrictions, and the specific strategies developed by
Frank Russell Company and the Management Company. PAGE 28.

INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES, AND RISKS apply to each Fund.
Those objectives, restrictions and policies designated "fundamental" may not be
changed without the approval of a majority of the Fund's shareholders. Risks
associated with certain Fund investment policies, such as market volatility
risk, political risk, and credit risk, are discussed in the context of policies
giving rise to such risks. PAGE 28.

3
<PAGE> 4

PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains. PAGE 43.

DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or received
in cash. Dividends from net investment income are declared Daily, by the Money
Market Fund; Annually, by the International Fund; and Quarterly by all other
Funds. All Funds declare distributions from net realized capital gains, if any,
at least annually. PAGE 44.

INCOME TAXES PAID BY THE FUNDS should be nominal. Taxable shareholders of the
Funds will be subject to federal tax on dividends and capital gains
distributions and may also be subject to state or local taxes. PAGE 45.

FUND PERFORMANCE, including yields and total return information, is calculated
in accordance with formulas prescribed by the Securities and Exchange
Commission. PAGE 46.

VALUATION OF FUND SHARES occurs each business day (twice a day for the Money
Market Fund). The value of a Class S share purchased or redeemed is based upon
the next computed current market value of the assets, less liabilities, of each
Class S Fund. The Money Market Fund utilizes amortized cost pricing procedures
to attempt to maintain a stable $1.00 per share net asset value. Unless
otherwise indicated, "shares" in this Prospectus refers to the Class S Shares of
the Funds. PAGE 48.

PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and orders
to purchase are accepted on each business day. PAGE 49.

REDEMPTION OF FUND SHARES may be requested on any business day that shares are
offered. There is no redemption charge. The redemption price is determined by
the net asset value next computed after receipt of the redemption request. The
Funds reserve the right to redeem in kind that portion of a redemption request
which is in excess of $250,000. PAGE 51.

ADDITIONAL INFORMATION is also included in this Prospectus concerning the:
Distributor, Custodian, Independent Accountants and Reports; Organization,
Capitalization and Voting; and Money Manager Profiles. PAGE 53.

4
<PAGE> 5

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE EQUITY I FUND*

The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of the Fund will bear directly or indirectly. The example provided in the
table should not be considered a representation of past or future expenses.
Actual expenses may be greater or less than those shown.

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .60%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .07%
Transfer Agent Fees................................................... .03
Other Fees............................................................ .02
---
Total Other Expenses.................................................. .12
----
Total Class S Shares Operating Expenses**................................ .72%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $7 $23 $40 $89
--
--- --- ---
--
--- --- ---
</TABLE>

- ------------------------------
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
This annual shareholder investment services fee may range from .00% to .30%
under the asset management services agreements entered into by shareholders
of the Class S Shares of the Equity I Fund. In addition, a shareholder may
pay additional fees, expressed as fixed dollar amounts for the other services
or reports provided by the Management Company to the shareholder.
Accordingly, the expense information does not reflect an amount for fees paid
directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

5
<PAGE> 6

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE EQUITY II FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .75%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .14%
Transfer Agent Fees................................................... .06
Other Fees............................................................ .04
---
Total Other Expenses.................................................. .24
----
Total Class S Shares Operating Expenses**................................ .99%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $10 $32 $55 $121
--- --- --- -----
--- --- --- -----
</TABLE>

- ------------------------------
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
This annual shareholder investment services fee may range from .00% to .25%
under the asset management services agreements entered into by shareholders
of the Class S Shares of the Equity II Fund. In addition, a shareholder may
pay additional fees, expressed as fixed dollar amounts for the other services
or reports provided by the Management Company to the shareholder.
Accordingly, the expense information does not reflect an amount for fees paid
directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

6
<PAGE> 7

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE EQUITY III FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .60%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .06
Other Fees............................................................ .03
---
Total Other Expenses.................................................. .18
----
Total Class S Shares Operating Expenses**................................ .78%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $8 $25 $43 $97
--
--- --- ---
--
--- --- ---
</TABLE>

- ------------------------------
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
This annual shareholder investment services fee may range from .00% to .30%
under the asset management services agreements entered into by shareholders
of the Class S Shares of the Equity III Fund. In addition, a shareholder may
pay additional fees, expressed as fixed dollar amounts for the other services
or reports provided by the Management Company to the shareholder.
Accordingly, the expense information does not reflect an amount for fees paid
directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

7
<PAGE> 8

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE EQUITY Q FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .60%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .06%
Transfer Agent Fees................................................... .03
Other Fees............................................................ .02
---
Total Other Expenses.................................................. .11
----
Total Class S Shares Operating Expenses**................................ .71%
----
----
</TABLE>

- ------------------------------
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
This annual shareholder investment services fee may range from .00% to .30%
under the asset management services agreements entered into by shareholders
of the Class S Shares of the Equity Q Fund. In addition, a shareholder may
pay additional fees, expressed as fixed dollar amounts for the other services
or reports provided by the Management Company to the shareholder.
Accordingly, the expense information does not reflect an amount for fees paid
directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

8
<PAGE> 9

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE INTERNATIONAL FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .75%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .24%
Transfer Agent Fees................................................... .02
Other Fees............................................................ .05
---
Total Other Expenses.................................................. .31
----
Total Class S Shares Operating Expenses**................................ 1.06%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $11 $34 $58 $129
--- --- --- -----
--- --- --- -----
</TABLE>

- ------------------------------
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Funds.
This annual shareholder investment services fee may range from .00% to .40%
under the asset management services agreements entered into by shareholders
of the Class S Shares of the International Fund. In addition, a shareholder
may pay additional fees, expressed as fixed dollar amounts for the other
services or reports provided by the Management Company to the shareholder.
Accordingly, the expense information does not reflect an amount for fees paid
directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

9
<PAGE> 10

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE FIXED INCOME I FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .30%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .05%
Transfer Agent Fees................................................... .03
Other Fees............................................................ .03
---
Total Other Expenses.................................................. .11
----
Total Class S Shares Operating Expenses**................................ .41%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $4 $13 $23 $52
--
--- --- ---
--
--- --- ---
</TABLE>

- ------------------------------
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Funds.
This annual shareholder investment services fee may range from .00% to .40%
under the asset management services agreements entered into by shareholders
of the Class S Shares of the Fixed Income I Fund. In addition, a shareholder
may pay additional fees, expressed as fixed dollar amounts for the other
services or reports provided by the Management Company to the shareholder.
Accordingly, the expense information does not reflect an amount for fees paid
directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

10
<PAGE> 11

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE FIXED INCOME II FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .50%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .06
Other Fees............................................................ .05
---
Total Other Expenses.................................................. .20
----
Total Class S Shares Operating Expenses**................................ .70%
----
----
</TABLE>

- ------------------------------
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
This annual shareholder investment services fee may range from .00% to .40%
under the asset management services agreement entered into by shareholders of
the Class S Shares of the Fixed Income II Fund. In addition, a shareholder
may pay additional fees, expressed as fixed dollar amounts for the other
services or reports provided by the Management Company to the shareholder.
Accordingly, the expense information does not reflect an amount for fees paid
directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

11
<PAGE> 12

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE FIXED INCOME III FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (1)....................................................... .55%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .07%
Transfer Agent Fees................................................... .05
Other Fees............................................................ .05
---
Total Other Expenses.................................................. .17
----
Total Class S Shares Operating Expenses (1)**............................ .72%
----
----
</TABLE>

- ------------------------------
(1) The Manager has voluntarily agreed to waive a portion of its 0.55%
management fee, up to the full amount of that fee, equal to the amount by
which the Class S Shares total operating expenses exceed 0.75% of the Class
S Shares average net assets on an annual basis. This waiver is intended to
be in effect for the current year, but may be revised or eliminated at any
time without notice to shareholders.
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
This annual shareholder investment services fee may range from .00% to .15%
under the asset management services agreements entered into by shareholders
of the Class S Shares of the Fixed Income III Fund. In addition, a
shareholder may pay additional fees, expressed as fixed dollar amounts for
the other services or reports provided by the Management Company to the
shareholder. Accordingly, the expense information does not reflect an amount
for fees paid directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

12
<PAGE> 13

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE MONEY MARKET FUND*

The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
shares of the Fund will bear directly or indirectly. The example provided in the
table should not be considered a representation of past or future expenses.
Actual expenses may be greater or less than those shown.

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1).................................... .00%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .04%
Transfer Agent Fees................................................... .01
Other Fees............................................................ .01
---
Total Other Expenses.................................................. .06
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)**......... .06%
----
----
</TABLE>

- ------------------------------
(1) The Manager has voluntarily agreed to waive its .25% management fee for the
Money Market Fund. The total operating expenses of the Class S Shares absent
the fee waiver would be .31% of average net assets on an annual basis. This
waiver is intended to be in effect for the current year, but may be revised
or eliminated at any time without notice to shareholders.
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
Currently, the Manager does not intend to impose a shareholder investment
services fee with respect to the Class S Shares of the Money Market Fund. In
addition, a shareholder may pay additional fees, expressed as fixed dollar
amounts for the other services or reports provided by the Management Company
to the shareholder. Accordingly, the expense information does not reflect an
amount for fees paid directly by an investor to the Management Company.
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

13
<PAGE> 14

FINANCIAL HIGHLIGHTS OF THE EQUITY I FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year ended December 31, and other performance
information derived from the financial statements. The information in the table
represents the Financial Highlights for the Fund's Class S Shares for the
periods shown. The table appears in the Fund's financial statements and related
notes, which are incorporated by reference into the Statement of Additional
Information and which appear, along with the report of Coopers & Lybrand L.L.P.
in the Fund's Annual Report to Shareholders. More detailed information
concerning the Fund's performance, including a complete portfolio listing and
audited financial statements, is available in the Fund's Annual Report, which
may be obtained without charge by writing or calling the Investment Company.

EQUITY I FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR..... $23.32 $24.91 $25.00 $25.17 $21.13 $25.39 $22.20 $20.18 $28.53 $28.19
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................ .52 .62 .60 .61 .75 .91 .88 .81 1.12 .99
Net realized and unrealized gain
(loss)
on investments..................... 7.71 (.41) 2.18 1.54 5.61 (2.37) 5.79 2.46 1.50 3.25
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations... 8.23 .21 2.78 2.15 6.36 (1.46) 6.67 3.27 2.62 4.24
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................ (.52) (.62) (.60) (.62) (.75) (.90) (1.01) (.77) (1.26) (1.14)
Net realized gain on investments..... (3.03) (.94) (2.11) (1.70) (1.57) (1.90) (2.47) (.48) (9.71) (2.76)
In excess of net realized gain
on investments..................... -- (.24) (.16) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................ (3.55) (1.80) (2.87) (2.32) (2.32) (2.80) (3.48) (1.25) (10.97) (3.90)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR........... $28.00 $23.32 $24.91 $25.00 $25.17 $21.13 $25.39 $22.20 $20.18 $28.53
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A).................... 35.94 .79 11.61 9.02 31.22 (5.64) 30.79 16.42 5.97 16.23
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a)..................... .59 .12 .14 .15 .19 .23 .18 .17 .14 .12
Net investment income to average
net assets (a)..................... 1.91 2.52 2.36 2.53 3.14 3.66 3.41 3.68 3.11 3.49
Portfolio turnover................... 92.04 75.02 91.87 71.14 119.55 101.30 61.27 67.59 86.22 70.22
Net assets, end of year ($000
omitted)........................... 751,497 547,242 514,356 410,170 330,507 221,543 300,814 243,691 266,371 282,890
</TABLE>

- ------------------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.

14
<PAGE> 15

FINANCIAL HIGHLIGHTS OF THE EQUITY II FUND*

EQUITY II FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR....... $25.00 $26.58 $27.71 $26.32 $19.24 $23.32 $22.50 $19.99 $23.54 $25.01
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. .27 .36 .32 .30 .41 .51 .61 .52 .50 .52
Net realized and unrealized gain (loss)
on investments....................... 6.80 (.86) 3.97 3.13 7.65 (3.91) 4.74 2.51 2.17 1.78
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total From Investment Operations..... 7.07 (.50) 4.29 3.43 8.06 (3.40) 5.35 3.03 2.67 2.30
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.................. (.29) (.31) (.31) (.30) (.41) (.50) (.71) (.52) (.61) (.53)
Net realized gain on investments....... (2.90) (.21) (4.72) (1.74) (.57) (.18) (3.82) -- (5.61) (3.24)
In excess of net realized gain on
investments.......................... -- (.56) (.39) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total Distributions.................. (3.19) (1.08) (5.42) (2.04) (.98) (.68) (4.53) (.52) (6.22) (3.77)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE, END OF YEAR............. $28.88 $25.00 $26.58 $27.71 $26.32 $19.24 $23.32 $22.50 $19.99 $23.54
======= ======= ======= ======= ======= ======= ======= ====== ====== ======
TOTAL RETURN (%)(A)...................... 28.67 (2.60) 16.70 13.31 42.40 (14.76) 24.63 15.22 10.32 10.17
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets (a)........................... .83 .23 .34 .32 .37 .48 .41 .35 .29 .35
Net investment income to average
net assets (a)....................... .97 1.46 1.14 1.10 1.79 2.40 2.45 2.40 1.94 2.23
Portfolio turnover..................... 89.31 58.04 87.25 43.33 42.16 80.27 77.55 56.38 130.36 113.46
Net assets, end of year ($000
omitted)............................. 279,566 202,977 171,421 120,789 101,206 60,668 70,588 63,903 68,968 63,972
</TABLE>

15
<PAGE> 16

FINANCIAL HIGHLIGHTS OF THE EQUITY III FUND*

EQUITY III FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR...... $24.18 $27.05 $26.75 $27.08 $23.30 $26.49 $24.03 $20.74 $31.27 $32.36
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. .82 .93 .89 .98 1.08 1.33 1.26 1.15 1.21 1.45
Net realized and unrealized gain
(loss)
on investments...................... 7.73 (.85) 2.99 2.24 5.21 (2.85) 5.35 3.40 (.74) 2.90
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total From Investment Operations.... 8.55 .08 3.88 3.22 6.29 (1.52) 6.61 4.55 .47 4.35
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income................. (.83) (.91) (.90) (.99) (1.07) (1.30) (1.40) (1.14) (1.61) (1.65)
In excess of net investment income.... -- -- (.00) -- -- -- -- -- -- --
Net realized gain on investments...... (2.79) (1.94) (2.68) (2.56) (1.44) (.37) (2.75) (.12) (9.39) (3.79)
In excess of net realized gain on
investments......................... -- (.10) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total Distributions................. (3.62) (2.95) (3.58) (3.55) (2.51) (1.67) (4.15) (1.26) (11.00) (5.44)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE, END OF YEAR............ $29.11 $24.18 $27.05 $26.75 $27.08 $23.30 $26.49 $24.03 $20.74 $31.27
======= ======= ======= ======= ======= ======= ======= ====== ====== ======
TOTAL RETURN (%)(A)..................... 35.96 1.16 14.95 12.30 27.86 (5.73) 28.07 22.19 (1.48) 14.74
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a)...................... .65 .17 .16 .20 .25 .27 .23 .20 .17 .16
Net investment income to average
net assets (a)...................... 2.90 3.39 3.09 3.57 4.05 4.91 4.58 4.96 4.11 4.55
Portfolio turnover.................... 103.40 85.92 76.77 84.56 56.99 65.74 83.13 57.28 97.54 70.73
Net assets, end of year ($000
omitted)............................ 222,541 177,807 181,630 166,782 138,076 94,087 135,245 106,695 102,716 126,206
</TABLE>

16
<PAGE> 17

FINANCIAL HIGHLIGHTS OF THE EQUITY Q FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Investment Company.

EQUITY Q FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR............... $24.43 $26.03 $25.23 $24.90 $20.20 $22.45 $18.85 $16.67 $20.00
------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................... .59 .69 .66 .67 .75 .81 .78 .69 .39
Net realized and unrealized gain (loss)
on investments............................... 8.52 (.41) 2.71 1.73 5.58 (1.89) 4.26 2.15 (3.39)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment Operations............. 9.11 .28 3.37 2.40 6.33 (1.08) 5.04 2.84 (3.00)
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.......................... (.61) (.69) (.66) (.68) (.75) (.79) (.86) (.66) (.28)
Net realized gain on investments............... (2.53) (.97) (1.85) (1.39) (.88) (.38) (.58) -- (.05)
In excess of net realized gain on
investments.................................. -- (.22) (.06) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions.......................... (3.14) (1.88) (2.57) (2.07) (1.63) (1.17) (1.44) (.66) (.33)
------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF YEAR..................... $30.40 $24.43 $26.03 $25.23 $24.90 $20.20 $22.45 $18.85 $16.67
======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(A)(B)........................... 37.91 .99 13.80 9.97 32.14 (4.81) 27.10 17.16 (15.14)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets
(b)(c)....................................... .58 .11 .15 .18 .23 .31 .33 .33 .24
Net investment income to average net assets
(b)(c)....................................... 2.07 2.74 2.50 2.80 3.23 3.70 3.68 3.82 3.56
Portfolio turnover (c)......................... 74.00 45.87 54.69 58.35 51.37 66.51 88.03 52.21 46.10
Net assets, end of year ($000 omitted)......... 620,259 430,661 382,939 290,357 215,779 133,869 129,680 89,320 66,618
</TABLE>

- ------------------------------
++ For the period May 29, 1987 (commencement of operations) to December 31,
1987.
(a) Periods less than one year are not annualized.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
(c) The ratios for the period ended December 31, 1987 are annualized.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.

17
<PAGE> 18

FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL FUND*

INTERNATIONAL FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR..... $34.28 $37.34 $28.92 $31.96 $29.18 $38.52 $35.44 $35.50 $50.23 $35.53
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................ .48 .61 .58 .67 .73 1.23 .85 .95 .93 .77
Net realized and unrealized gain
(loss)
on investments (a)................. 3.16 .65 9.63 (2.62) 3.16 (7.27) 7.46 5.77 5.49 18.34
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations... 3.64 1.26 10.21 (1.95) 3.89 (6.04) 8.31 6.72 6.42 19.11
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................ (.64) (.36) (.57) (.67) (.80) (1.19) (1.02) (1.11) (1.39) (.25)
In excess of net investment income... (.08) -- (.16) -- -- -- -- -- -- --
Net realized gain on investments..... (.94) (3.73) (1.06) (.42) (.31) (2.11) (4.21) (5.67) (19.76) (4.16)
In excess of net realized gain
on investments..................... -- (.23) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................ (1.66) (4.32) (1.79) (1.09) (1.11) (3.30) (5.23) (6.78) (21.15) (4.41)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR........... $36.26 $34.28 $37.34 $28.92 $31.96 $29.18 $38.52 $35.44 $35.50 $50.23
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(B).................... 10.71 5.38 35.56 (6.11) 13.47 (15.94) 24.06 20.13 14.42 60.05
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
net assets (b)..................... .88 .32 .39 .45 .48 .50 .44 .45 .43 .46
Operating expenses, gross, to average
net assets (b)..................... .89 .34 .41 .46 .48 .50 .44 .45 .43 .46
Net investment income to average
net assets (b)..................... 1.41 1.63 1.83 2.46 2.61 3.14 2.38 2.52 1.83 1.79
Portfolio turnover................... 36.78 71.09 62.04 48.99 53.13 78.30 53.49 51.17 96.31 42.71
Net assets, end of year ($000
omitted)........................... 796,777 674,180 562,497 348,869 252,828 171,613 186,742 149,064 160,975 169,227
Per share amount of fees waived
($ omitted)........................ .0041 .0093 .0091 .0030 -- -- -- -- -- --
</TABLE>

- ------------------------------
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.024 per share.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.

18
<PAGE> 19

FINANCIAL HIGHLIGHTS OF THE FIXED INCOME I FUND*

FIXED INCOME I FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR..... $19.59 $21.74 $21.61 $22.29 $20.86 $20.91 $20.50 $20.48 $24.26 $23.82
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................ 1.42 1.46 1.50 1.63 1.71 1.77 1.93 1.73 1.71 2.01
Net realized and unrealized gain
(loss)
on investments..................... 2.02 (2.06) .72 (.07) 1.49 (.05) .71 .01 (1.40) 1.65
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations... 3.44 (.60) 2.22 1.56 3.20 1.72 2.64 1.74 .31 3.66
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................ (1.44) (1.44) (1.50) (1.62) (1.69) (1.77) (1.92) (1.72) (2.08) (2.03)
In excess of net investment income... -- -- (.01) -- -- -- -- -- -- --
Net realized gain on investments..... -- -- (.58) (.62) (.08) -- (.31) -- (2.01) (1.19)
In excess of net realized gain
on investments..................... -- (.11) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................ (1.44) (1.55) (2.09) (2.24) (1.77) (1.77) (2.23) (1.72) (4.09) (3.22)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR........... $21.59 $19.59 $21.74 $21.61 $22.29 $20.86 $20.91 $20.50 $20.48 $24.26
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%) (A)................... 18.03 (2.97) 10.46 7.26 16.01 8.60 13.35 8.76 1.49 16.94
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets (a)..................... .35 .10 .09 .10 .10 .11 .12 .13 .11 .13
Net investment income to average
net assets (a)..................... 6.82 7.06 6.71 7.45 8.08 8.70 8.96 8.28 8.00 8.41
Portfolio turnover................... 138.05 173.97 173.27 211.26 121.91 114.15 196.18 186.54 211.26 221.11
Net assets, end of year ($000
omitted)........................... 638,317 496,038 533,696 530,857 458,201 329,091 297,721 223,216 250,606 220,089
</TABLE>

19
<PAGE> 20

FINANCIAL HIGHLIGHTS OF THE FIXED INCOME II FUND*

FIXED INCOME II FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR......... $17.98 $18.99 $18.56 $19.68 $18.94 $18.69 $18.51 $18.63 $19.80 $20.38
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 1.16 1.21 .84 1.35 1.52 1.53 1.69 1.61 1.57 1.71
Net realized and unrealized gain (loss)
on investments......................... .59 (1.07) .44 (.83) .72 .23 .27 (.12) (.60) .04
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations....... 1.75 .14 1.28 .52 2.24 1.76 1.96 1.49 .97 1.75
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.................... (1.18) (1.15) (.71) (1.36) (1.50) (1.51) (1.78) (1.61) (1.91) (1.68)
Net realized gain on investments......... -- -- -- (.28) -- -- -- -- (.23) (.65)
Tax return of capital.................... -- -- (.14) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.................... (1.18) (1.15) (.85) (1.64) (1.50) (1.51) (1.78) (1.61) (2.14) (2.33)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............... $18.55 $17.98 $18.99 $18.56 $19.68 $18.94 $18.69 $18.51 $18.63 $19.80
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)........................ 9.95 .82 6.98 2.74 12.31 9.71 10.99 8.20 5.21 9.34
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets
(a).................................... .58 .19 .16 .19 .13 .15 .17 .13 .12 .14
Net investment income to average
net assets (a)......................... 6.41 6.52 6.16 7.21 8.06 8.45 8.97 8.56 8.22 8.55
Portfolio turnover....................... 269.31 233.75 229.07 330.58 188.30 184.38 320.16 217.58 197.77 173.51
Net assets, end of year ($000 omitted)... 183,577 144,030 138,619 182,735 156,685 119,853 83,313 86,052 93,896 91,887
</TABLE>

20
<PAGE> 21

FINANCIAL HIGHLIGHTS OF THE FIXED INCOME III FUND*

FIXED INCOME III FUND

<TABLE>
<CAPTION>
1995 1994 1993++
<S> <C> <C> <C>
----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR.......................................................... $9.37 $10.44 $10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................................................... .67 .66 .49
Net realized and unrealized gain (loss) on investments.................................... .97 (1.07) .52
------- ------- -------
Total From Investment Operations........................................................ 1.64 (.41) 1.01
------- ------- -------
LESS DISTRIBUTIONS:
Net investment income..................................................................... (.67) (.66) (.48)
Net realized gain on investments.......................................................... -- -- (.08)
In excess of net realized gain on investments............................................. -- (.00) (.01)
------- ------- -------
Total Distributions..................................................................... (.67) (.66) (.57)
------- ------- -------
NET ASSET VALUE, END OF YEAR................................................................ $10.34 $9.37 $10.44
======= ======= =======
TOTAL RETURN (%)(A)(C)...................................................................... 17.99 (3.89) 10.22
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)(c)..................................... .61 .20 .20
Operating expenses, gross, to average net assets (b)(c)................................... .61 .20 .40
Net investment income to average net assets (b)........................................... 6.83 7.02 6.30
Portfolio turnover (b).................................................................... 141.37 134.11 181.86
Net assets, end of year ($000 omitted).................................................... 252,465 166,620 124,234
Per share amount of fees waived ($ omitted)............................................... -- -- .0003
Per share amount of fees reimbursed ($ omitted)........................................... -- -- .0154
</TABLE>

- ------------------------------
++ For the period January 29, 1993 (commencement of operations) to December 31,
1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
(c) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.

21
<PAGE> 22

FINANCIAL HIGHLIGHTS OF THE MONEY MARKET FUND*

MONEY MARKET FUND

22
<PAGE> 23

THE PURPOSE OF THE FUNDS

The Funds have been organized to provide a means for Eligible Investors to
access and use Frank Russell Company's "multi-style, multi-manager
diversification" method of investment, and to obtain Frank Russell Company's
money manager evaluation services, on a pooled and cost-effective basis.

FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS

Frank Russell Company, founded in 1936, has been providing comprehensive
asset management consulting services since 1969 for institutional pools of
investment assets, principally those of large corporate employee benefit plans.
The Company and its affiliates have offices in Tacoma, New York, Toronto,
London, Zurich, Paris, Sydney, Auckland and Tokyo, and have approximately 1,100
associates.

Three functions are at the core of Frank Russell Company's consulting
service:

Objective Setting: Defining appropriate investment objectives and desired
investment returns based upon the client's unique situation and tolerance for
risk.

Asset Allocation: Allocating a client's assets among different asset
classes -- such as common stocks, fixed-income securities, international
securities, temporary cash investments and real estate -- in the manner most
likely to achieve the client's objectives.

Money Manager Research: Evaluating and recommending professional
investment advisory and management organizations to make specific portfolio
investments for each asset class in accord with the specified objectives,
investment styles and strategies.

When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique with the objectives of
reducing risk and increasing returns.

MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION

Frank Russell Company believes capital market history shows that no one
particular asset class provides consistent and/or above-average total return
results, either on an absolute or relative basis, over extended periods of time.
For example, there are periods of time when equity securities outperform
fixed-income securities, and vice versa. Similarly, there are periods when
securities selected for particular characteristics, or using particular
investment styles, outperform other types of securities. For example, there are
periods of time when equity securities with growth characteristics outperform
equities with income characteristics, and vice versa. While these performance
cycles tend to repeat themselves, they do so with no regularity. The blending of
asset classes and investment styles on a complementary basis can obtain more
consistent returns over longer time periods with a reduction of risk
(volatility), although a particular asset class or investment style -- or a
particular Fund investing in one asset class or using a particular style -- may
not achieve above-average performance at any given point in the market.

Similarly, Frank Russell Company believes financial markets generally are
efficient, and few money managers have shown the ability to time the major highs
and lows in the securities markets with any high degree of consistency. However,
some money managers have shown a consistent ability to achieve superior results
within selected asset classes and styles and have demonstrated expertise in
particular areas. Thus, by combining a mix of investment styles within each
asset class and then selecting money managers for their ability to invest in a
particular style, the investor may seek to achieve increased returns.

23
<PAGE> 24

Substantial pools of investment assets are required to achieve the cost
effective and efficient allocation of assets among various asset classes and
investment styles, to use multiple money managers, and to support the research
and evaluation efforts required to select appropriate money managers. By pooling
the assets of institutions and individuals with smaller to medium-sized accounts
in a series of Funds with different objectives and policies, Frank Russell
Company believes that it is able to provide its multi-style, multi-manager
diversification techniques and money manager evaluation services to Eligible
Investors on a basis which is efficient and cost effective for the investor and
Frank Russell Company.

ELIGIBLE INVESTORS

Shares of the Funds are currently offered only to Eligible Investors. These
investors are principally institutional investors which invest for their own
account or in a fiduciary or agency capacity and which have entered into Asset
Management Services Agreements (collectively, the "Agreements," and each, an
"Agreement") with the Management Company, and institutions or individuals who
have acquired shares through such institutions. There is no specified minimum
amount which must be invested. Institutions which may have a particular interest
in the Funds include:

- Bank trust departments managing discretionary institutional or personal
trust accounts

- Banks, other than through their trust departments

- Registered investment advisers

- Endowment funds and charitable foundations

- Broker Dealers

- Employee welfare plans

- Pension or profit sharing plans

- Insurance companies

The Agreement provides, in general, for the officers and staff of the
Management Company, using the facilities and resources of Frank Russell Company,
to assist the client to define its investment objectives, desired returns and
tolerance for risk, and to develop a plan for the allocation of assets among
different asset classes. Once these decisions have been made by a client, the
client's assets are then invested in one or more of the Funds. A client may
change the allocation of its assets among the Funds, or withdraw some or all of
its assets from the Funds at any time by redeeming Fund shares.

Shares of the Funds generally are not offered or "retailed" to individual
investors, although the Management Company may enter into Agreements with
individual investors. Bank trust departments, registered investment advisors,
broker-dealers and other eligible investors ("Financial Intermediaries") which
have entered into Agreements with the Management Company may acquire shares of
the Funds for the benefit of individual customers for which they exercise
discretionary investment authority. The Management Company provides
objective-setting and asset-allocation assistance to such Financial
Intermediaries, which in turn provide the objective-setting and asset-allocation
services to their customers. These Financial Intermediaries receive no
compensation from the Management Company or the Funds; they may charge their
customers a fee for providing these and possibly other trust or
investment-related services. A shareholder may pay a fixed dollar fee to the
Management Company for other services or reports provided by the Management
Company to the shareholder.

24
<PAGE> 25

The Agreement sets forth the shareholder investment services fees to be
paid to the Management Company and is ordinarily expressed as a percentage of
assets invested in the Funds. The shareholder investment services fee may
include a fixed-dollar fee for certain specified services. The shareholder
investment services fee is agreed upon by the client and the Management Company
and is at a rate which reflects the amount of assets expected to be invested in
the Funds, the nature and extent of individualized services to be provided by
the Management Company to the client with respect to the assets, and other
factors.

Either the client or the Management Company may terminate the Agreement
upon written notice as provided in the Agreement. The Management Company does
not expect to exercise its right to terminate the Agreement unless a client does
not (i) promptly pay fees due to the Management Company; or (ii) invest
sufficient assets in the Funds to compensate the Management Company for
providing services to the client with respect to assets invested in the Funds.
Upon termination of an Agreement by the client or the Management Company, the
Management Company will no longer provide asset-allocation, objective-setting or
other services.

GENERAL MANAGEMENT OF THE FUNDS

The Investment Company's Board of Trustees is responsible for overseeing
generally the operation of the Funds, including reviewing and approving the
Funds' contracts with the Management Company, Frank Russell Company and the
money managers. The Investment Company's officers, all of whom are employed by
and are officers of the Management Company or its affiliates, are responsible
for the day-to-day management and administration of the Funds' operations. The
money managers are responsible for selection of individual portfolio securities
for the assets assigned to them.

The Management Company: (i) provides or oversees the provision of all
general management and administration, investment advisory and portfolio
management, and distribution services for the Funds; (ii) provides the Funds
with office space, equipment and personnel necessary to operate and administer
the Funds' business, and to supervise the provision of services by third parties
such as the money managers and Custodian; (iii) develops the investment
programs, selects money managers, allocates assets among money managers and
monitors the money managers' investment programs and results; (iv) is authorized
to select or hire money managers to select individual portfolio securities held
in the Funds' Liquidity Portfolios (see, "Investment Policies -- Liquidity
Portfolios"); and (v) provides the Funds with transfer agent, dividend
disbursing and shareholder recordkeeping services. The Management Company bears
the expenses it incurs in providing these services (other than transfer agent,
dividend disbursing and shareholder recordkeeping) as well as the costs of
preparing and distributing explanatory materials concerning the Funds.

The responsibility of overseeing the money managers rests upon the officers
and employees of the Management Company. These officers and employees, including
their business experience for the past five years, are identified below:

- Randall P. Lert, who has been Chief Investment Officer, Frank Russell
Investment Management Company since 1989.

- Loran M. Kaufman, who has been Director -- Fund Development, Frank
Russell Investment Management Company since 1990. From 1986 to 1990, Ms.
Kaufman was employed as a Senior Research Analyst with the Frank Russell
Company.

25
<PAGE> 26

- Jean E. Carter, who has been a Senior Investment Officer of Frank Russell
Investment Management Company since 1994. From 1990 to 1994, Ms. Carter
was a Client Executive in the Investment Group of the Frank Russell
Company.

- James M. Imhof, Investment Officer, Frank Russell Investment Management
Company, who has managed the day to day management of the Frank Russell
Investment Management Company Funds and ongoing analysis and monitoring
of Fund money managers since 1989.

- Peter F. Apanovitch, who has been the Manager of Short-Term Investment
Funds for Frank Russell Investment Management Company and Frank Russell
Trust Company since 1991.

- James A. Jornlin, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since April 1995. From 1991 to
March 1995, Mr. Jornlin was employed as a Senior Research Analyst with
Frank Russell Company.

- Randal C. Burge, who has been a Senior Investment Officer of Frank
Russell Investment Management Company, since June 1995. From 1990 to
1995, Mr. Burge was a Client Executive for Frank Russell Australia.

- Madelyn Smith, who has been a Senior Investment Strategist for the Frank
Russell Investment Management Company since January 1996. From 1993 to
1995, Ms. Smith was a member of a research investment strategist for
Frank Russell Company. From 1987 to 1993, Ms. Smith was director of
Investment Equity Manager Research of Frank Russell Company.

- Dennis J. Trittin, who has been a Senior Portfolio Manager of Frank
Russell Investment Management Company since January 1996. From 1988 to
1996, Mr. Trittin was director of US Equity Manager Research Department
with Frank Russell Company.

- C. Nola Williams, who has been a Senior Investment Strategist of Frank
Russell Investment Management Company since January 1996. From 1994 to
1995, Ms. Williams was a member of the Alpha Strategy Group. From 1988 to
1994, Ms. Williams was Senior Research Analyst with Frank Russell
Company.

Frank Russell Company provides to the Funds and the Management Company the
asset management consulting services -- including the objective-setting and
asset-allocation technology, and the money manager research and evaluation
assistance -- which Frank Russell Company provides to its other consulting
clients. Frank Russell Company receives no compensation from the Funds or the
Management Company for its consulting services. Frank Russell Company and the
Management Company as affiliated companies may establish certain intercompany
cost allocations for budgeting and product profitability purposes which may
reflect Frank Russell Company's consulting services supplied to the Management
Company.

George F. Russell, Jr., Chairman of the Board of the Trustees of the
Investment Company, is the Chairman of the Board and controlling shareholder of
Frank Russell Company. The Management Company is a wholly owned subsidiary of
Frank Russell Company.

The Investment Company has received an exemptive order from the U.S.
Securities and Exchange Commission (the "SEC") which permits the Investment
Company, with the approval of its Board of Trustees, to engage and terminate
money managers without a shareholder vote and to disclose, on an aggregate
basis, the fees paid to the money managers of each Investment Company Fund. The
Investment Company received shareholder approval to operate under the order at a
special meeting of the shareholders held on January 22, 1996.

26
<PAGE> 27

For its services, the Management Company receives a management fee from
each Fund. From this fee, the Management Company, acting as agent for the
Investment Company, is responsible for paying the money managers for their
investment selection services. The remainder is retained by the Management
Company as compensation for the services described above and to pay expenses.
The annual rate of the management fees, payable to the Management Company
monthly on a pro rata basis, are the following percentages of the average daily
net assets of each Fund: Equity I Fund, .60%; Equity II Fund, .75%; Equity III
Fund, .60%; Equity Q Fund, .60%; International Fund, .75%; Fixed Income I Fund,
.30%; Fixed Income II Fund, .50%; Fixed Income III Fund, .55%; and Money Market
Fund, .25%. The Management Company is currently voluntarily waiving its fee with
respect to the Money Market Fund. This waiver will continue until further
notice. The fees of some of the Funds may be higher than the fees charged by
some mutual funds with similar objectives which use only a single money manager.

The Management Company has voluntarily agreed to waive all or a portion of
its management fee with respect to certain Funds. In addition to these
"voluntary limits," the Management Company has agreed to reimburse each Fund the
amount, if any, by which a Fund's expenses exceed state law expense limitations.
Currently, California has an expense limitation of 2.5% of a Fund's first $30
million in average net assets, 2.0% of the next $70 million in average net
assets, and 1.5% of the remaining average net assets for any fiscal year as
determined under the state's regulation. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or rescinded
at any time.

Frank Russell Company provides its Portfolio Verification System ("PVS") to
all the Funds, except the Money Market Fund, pursuant to a written Service
Agreement. The PVS computerized data base system records detailed transaction
data for each of the Funds necessary to prepare various financial and Internal
Revenue Service accounting reports. For these services, the Funds pay the
following annual fees:

<TABLE>
<CAPTION>
ANALYSIS OF
TRANSACTION INTERNATIONAL
BASE FEE CHARGE HOLDING CHARGE MANAGEMENT REPORT
-------- ----------- -------------- -----------------
<S> <C> <C> <C> <C>
Equity Manager Portfolios $ 1,500 $ 0.10 $ 1.80 --
Fixed Income Manager Portfolios 2,500 2.00 12.00 --
Master Holding Portfolios 500 0.10-3.00 1.80-24.00 --
Multi-Currency Portfolios 14,000 3.00 24.00 $ 2,500
</TABLE>

Annual minimum charges are: Equity I -- $25,000; Equity II -- $15,000;
Equity III -- $12,000; Equity Q -- $23,000; Fixed Income I -- $31,000; Fixed
Income II -- $22,000; Fixed Income III -- $25,000; and $290,000 in the aggregate
for all international portfolios. Any additional domestic equity or fixed-income
funds will be billed using the same fee schedule, with an annual minimum fee of
$20,000 and $25,000, respectively.

EXPENSES OF THE FUNDS

The Funds, and when appropriate each class, will pay all their expenses
other than those expressly assumed by the Management Company. The Funds' Class S
Shares' expenses for the year ended December 31, 1995, as a percentage of
average net assets, are shown in the Financial Highlights tables. Principal
expenses are: the management, transfer agency and recordkeeping fees payable to
the Management Company; fees for custodial and portfolio accounting services
payable to State Street Bank and Trust Company; bookkeeping service fees for
preparing tax records payable to Frank Russell Company; fees for independent
auditing and legal services; and fees for filing reports and registering shares
with regulatory bodies.

27
<PAGE> 28

THE MONEY MANAGERS

The assets of each Fund are allocated currently among the money managers
listed in the section "Money Manager Profiles." THE ALLOCATION OF A FUND'S
ASSETS AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY THE MANAGEMENT
COMPANY. THE MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED
AT ANY TIME BY THE MANAGEMENT COMPANY, SUBJECT TO APPROVAL BY THE BOARD OF
TRUSTEES OF THE INVESTMENT COMPANY. The Funds will notify shareholders of the
Fund concerned within 60 days of when a money manager begins or stops providing
services.

From its management fees, the Management Company, as agent for the
Investment Company, pays all fees to the money managers for their investment
selection services. Quarterly, each money manager is paid the pro rata portion
of an annual fee, based on the quarterly average of all the assets allocated to
the money manager. For the period, management fees paid to the money managers
were equivalent to the following annual rates expressed as a percentage of the
average daily net assets of each Fund: Equity I Fund, .24%; Equity II Fund,
.41%; Equity III Fund, .20%; Equity Q Fund, .21%; International Fund, .44%;
Fixed Income I Fund, .09%; Fixed Income II Fund, .19%; Fixed Income III Fund,
.22%; and Money Market Fund, .02%. Fees paid to the money managers are not
affected by any voluntary or statutory expense limitations. Some money managers
may receive investment research prepared by Frank Russell Company as additional
compensation, or may receive brokerage commissions for executing portfolio
transactions for the Funds through broker-dealer affiliates.

Each money manager has agreed that once the Investment Company has advanced
fees to the Management Company as agent to make payment of the money manager's
fee, that money manager will look only to the Management Company as agent to
make the payment of its fee.

The money managers are selected for the Funds based primarily upon the
research and recommendations of Frank Russell Company, which evaluates
quantitatively and qualitatively the money manager's skills and results in
managing assets for specific asset classes, investment styles and strategies.
Short-term investment performance, by itself, is not a controlling factor in
selecting or terminating a money manager.

The Money Market Fund is managed by Frank Russell Investment Management
Company. The individual responsible for the management of the Fund, including
his occupation for the past five years, is as follows: Peter F. Apanovitch, who
has been Manager of Short-Term Investment Funds for the Frank Russell Investment
Management Company and Frank Russell Trust Company since 1991.

Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund within the Fund's investment objectives,
restrictions and policies, and the more specific strategies developed by Frank
Russell Company and the Management Company. Although the money managers'
activities are subject to general oversight by the Board of Trustees and
officers of the Investment Company, NEITHER THE BOARD, THE OFFICERS, THE
MANAGEMENT COMPANY (EXCEPT WITH RESPECT TO THE MONEY MARKET FUND) NOR FRANK
RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF THE MONEY MANAGERS' INDIVIDUAL
SECURITY SELECTIONS.

INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES, AND RISKS

28
<PAGE> 29

and may be changed by the Funds without the approval of shareholders. This
section of the Prospectus describes the Funds' principal objectives,
restrictions, policies, and risks. A more detailed discussion appears in the
Statement of Additional Information.

INVESTMENT OBJECTIVES.

Each Fund's objective is "fundamental," as are the types of securities in
which it will invest. Ordinarily, each Fund will invest more than 65% of its
total assets in the types of securities identified in its statement of
objectives. However, the Funds may hold assets as cash reserves for temporary
defensive purposes when their money managers deem that a more conservative
approach is desirable or when suitable purchase opportunities do not exist.
(See, "Investment Policies -- Cash Reserves.")

EQUITY I FUND

The Equity I Fund's objective is to provide income and capital growth by
investing principally in equity securities.

The Fund may invest in common and preferred stocks, securities convertible
into common stocks, rights and warrants.

EQUITY II FUND

The Equity II Fund's objective is to maximize total return primarily
through capital appreciation and by assuming a higher level of volatility than
is ordinarily expected from Equity I Fund, by investing in equity securities.

Current income is a secondary consideration in selecting securities. The
Fund may invest in common and preferred stock, convertible securities, rights
and warrants. The Fund's investments may include companies whose securities are
publicly traded for less than five years and smaller companies, such as
companies not listed in the Russell 1000(R) Index. A substantial portion of the
Fund's portfolio will generally consist of equity securities of "emerging
growth-type" companies which tend to reinvest most of their earnings, rather
than pay significant cash dividends, or companies characterized as "special
situations," where the money manager believes that cyclical developments in the
securities markets, the industry or the issuer itself present opportunities for
capital growth.

EQUITY III FUND

The Equity III Fund's objective is to achieve a high level of current
income, while maintaining the potential for capital appreciation by investing
primarily in income-producing equity securities.

The income objective of the Fund is to exceed the yield on the S&P 500
Index. The Index yield will change from year to year due to changes in prices
and dividends of stocks in the Index. Income streams will be considered in light
of their current level and the opportunity for future growth. Capital
appreciation may not be comparable to that achieved by Funds such as Equity II
Fund whose major objective is appreciation, although the Management Company
believes that a high and growing stream of income is conducive to higher capital
values. The Fund may also invest in preferred stocks, convertible securities,
rights and warrants.

29
<PAGE> 30

EQUITY Q FUND

The Equity Q Fund's objective is to provide a total return greater than the
total return of the US stock market as measured by the Russell 1000(R) Index
over a market cycle of four to six years, while maintaining volatility and
diversification similar to the Index by investing in equity securities.

The Fund will maintain industry weights and economic sector weights near
those of the Index. Over time, the Fund's average price/earnings ratio, yield,
and other fundamental characteristics are expected to be near the averages for
the Index. However, the money managers may tactically, temporarily deviate from
Index characteristics based upon the managers' investment judgment that this
will increase the Fund's total return. The money managers of the Fund generally
make stock selections from the set of stocks comprising the Russell 1000(R)
Index.

The Fund's portfolio characteristics and holdings are expected to be
similar to the Russell 1000(R) Index. However, a money manager may purchase
securities that are not included in the Index or sell securities still included
in the Index in order for the Fund to meet its investment objective.

The Fund will seek to achieve its investment objective by using various
quantitative management techniques. The Management Company believes quantitative
management over a market cycle should provide a portfolio with consistent
performance, diversification, market-like volatility, and limited market
underperformance. However, there is no guarantee the Fund will have such
characteristics at any one time.

A quantitative manager bases its investment decisions primarily on
quantitative investment models. These models are used by the money manager to
determine the investment potential of a stock within a particular portfolio and
to rank securities most favorable to having a total return surpassing the total
return of the Russell 1000(R) Index. Once the money manager has ranked the
securities, it then selects the securities most likely to have the
characteristics needed to construct a portfolio that has superior return
prospects with risks similar to the Russell 1000(R) Index.

The Fund will attempt to be fully invested in common stock at all times.
However, the Fund reserves the right to hold up to 20% of Fund assets in liquid
reserve for redemption needs.

INTERNATIONAL FUND

The International Fund's objectives are to provide favorable total return
and additional diversification for US investors by investing primarily in equity
and fixed-income securities of non-US companies, and securities issued by non-US
governments.

The Fund invests primarily in equity securities issued by companies
domiciled outside of the United States. The Fund may also invest in fixed-income
securities, including instruments issued by non-US governments and their
agencies, and in US companies which derive, or are expected to derive, a
substantial portion of their revenues from operations outside the United States.

The Fund may invest in equity and debt securities denominated in other than
US dollars and gold-related equity investments, including gold mining stocks and
gold-backed debt instruments. However, as a matter of fundamental policy, the
Fund will not invest more than 20% of its net assets in gold-related
investments.

30
<PAGE> 31

FIXED INCOME I FUND

The Fixed Income I Fund's objectives are to provide effective
diversification against equities and a stable level of cash flow by investing in
fixed-income securities.

The Fund's portfolio will consist primarily of conventional debt
instruments, including bonds, debentures, US government and US government agency
securities, preferred and convertible preferred stocks and variable amount
demand master notes. (These notes represent a borrowing arrangement under a
letter agreement between a commercial paper issuer and an institutional lender,
such as the Fund.) Investment selections will be based on fundamental economic,
market and other factors leading to valuation by sector, maturity, quality and
such other criteria as are appropriate to meet the stated objectives. The Fund
will ordinarily invest at least 65% of its net assets in securities rated no
less than A or A-2 by Standard & Poor's Ratings Group ("S&P") or A or Prime-2 by
Moody's Investors Service, Inc. ("Moody's"), or judged by the money manager to
be of at least equal credit quality to those designations.

FIXED INCOME II FUND

The Fixed Income II Fund's objectives are the preservation of capital and
the generation of current income consistent with the preservation of capital by
investing in fixed-income securities with low-volatility characteristics.

The Fund will invest primarily in fixed-income securities, emphasizing
those which mature in two years or less from the date of acquisition or which
have similar volatility characteristics. To minimize credit risk and
fluctuations in net asset value per share, the Fund intends to maintain an
average portfolio maturity of less than five years. The Fund's money managers
will seek to identify and invest in a managed portfolio of high-quality debt
securities denominated in the US dollar and a range of foreign currencies. Under
normal circumstances, the Fund will invest in securities of issuers domiciled in
at least three different countries.

Although the Fund will invest primarily in debt securities denominated in
the US dollar, the money managers will actively manage the Fund's portfolio in
accordance with a multi-market investment strategy, allocating investments among
securities denominated in the US dollar and the currencies of a number of
foreign countries and, where consistent with its policy of investing only in
high-quality securities within each such country, among different types of debt
securities. The money managers which invest in foreign denominated securities
will maintain a substantially neutral currency exposure relative to the US
dollar, and will establish and adjust cross currency hedges based on their
perception of the most favorable markets and issuers. In this regard, the
percentage of assets invested in securities of a particular country or
denominated in a particular currency will vary in accordance with a money
manager's assessment of the relative yield of such securities and the
relationship of a country's currency to the US dollar. Fundamental economic
strength, credit quality and interest rate trends will be the principal factors
considered by the money managers in determining whether to increase or decrease
the emphasis placed upon a particular type of security or industry sector within
the Fund's investment portfolio. The Fund will not invest more than 10% of its
total assets in debt securities denominated in a single currency other than the
US dollar. At this time, the Management Company intends to limit total non-US
dollar investments to no more than 25% of total Fund assets.

The Fund may invest in debt securities denominated in currencies of
countries whose governments are considered by it to be stable (or, when the Fund
invests in countries considered unstable or undeveloped, it will only do so when
it believes to be able to hedge substantially the risk of a decline in the
currency in which the Fund's portfolio securities are denominated). In addition
to the US dollar, such currencies include, among

31
<PAGE> 32

others, the Australian Dollar, Austrian Schilling, Belgian Franc, British Pound
Sterling, Canadian Dollar, Danish Krone, Dutch Guilder, European Currency Unit
("ECU"), French Franc, Irish Punt, Italian Lira, Japanese Yen, New Zealand
Dollar, Norwegian Krone, Spanish Peseta, Swedish Krona, Swiss Franc and German
Mark. An issuer of debt securities purchased by the Fund may be domiciled in a
country other than a country in whose currency the instrument is denominated.

In selecting particular investments for the Fund, the money managers will
seek to minimize investment risk by limiting their portfolio investments to debt
securities of high-quality issuers. Accordingly, the Fund's portfolio will
consist only of: (a) debt securities issued or guaranteed by the US government,
its agencies or instrumentalities ("US Government Securities"); (b) obligations
issued or guaranteed by a foreign government or any of its political
subdivisions, authorities, agencies, or instrumentalities, or by supranational
entities, all of which are rated AAA or AA by S&P or Aaa or Aa by Moody's or, if
unrated, determined by the money managers to be of equivalent quality; (c)
investment grade corporate debt securities or, if unrated, determined by the
money managers to be of equivalent quality; (d) certificates of deposit and
bankers' acceptances issued or guaranteed by, or time deposits maintained at,
banks (including foreign branches of US banks or US or foreign branches of
foreign banks) having total assets of more than $500 million and determined by
the money managers to be of high-quality; and (e) commercial paper rated A-1 or
A-2 by S&P, Prime-1 or Prime-2 by Moody's, Fitch-1 or Fitch-2 by Fitch Investors
Service, Inc., Duff 1 or Duff 2 by Duff & Phelps, Inc., TBW-1 or TBW-2 by
Thomson BankWatch, Inc., or, if not rated, issued by US or foreign companies
having outstanding debt securities rated AAA, AA or A by S&P, or Aaa, Aa or A by
Moody's and determined by the money managers to be of high-quality.

As described above, the Fund may invest in debt securities issued by
supranational organizations such as: the World Bank, which was chartered to
finance development projects in developing member countries; the European
Community, which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; and the Asian Development
Bank, which is an international development bank established to lend funds,
promote investment and provide technical assistance to member nations in the
Asian and Pacific regions.

The Fund may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specific amounts of currency of member states of the
European Community. These specific amounts of currency comprising the ECU may be
adjusted by the Counsel of Ministers of the European Community to reflect
changes in the relative values of the underlying currencies. The money managers
investing in such securities do not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranationals, in particular, issue ECU-denominated
obligations.

The Fund may enter into interest rate swaps, which involve the exchange by
the Fund with another party of its respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The Fund expects to enter into these transactions primarily to preserve a return
or spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities it anticipates purchasing at a
later date. The Fund intends to use these transactions as a hedge and not as a
speculative investment.

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FIXED INCOME III FUND

The Fixed Income III Fund's objective is to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from broad fixed-income market
portfolios, by investing in fixed-income securities.

The Fund will invest primarily in fixed-income securities. The Fund's
investments will include: US Government Securities; obligations of foreign
governments or their subdivisions, agencies and instrumentalities; securities of
international agencies or supranational agencies; corporate debt securities;
loan participations; corporate commercial paper; indexed commercial paper;
variable, floating and zero coupon rate securities; mortgage and other
asset-backed securities; municipal obligations; variable amount demand master
notes (these notes represent a borrowing arrangement between a commercial paper
issuer and an institutional lender, such as the Fund); bank certificates of
deposit, fixed time deposits and bankers' acceptances; repurchase agreements and
reverse repurchase agreements; and foreign currency exchange related securities.

The Fund may also invest in convertible securities and derivatives,
including warrants and interest rate swaps. Interest rate swaps are described
under "Fixed Income II Fund." The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.

As described above, the Fund may invest in debt securities issued by
supranational organizations. Supranational organizations are described under
"Fixed Income II Fund."

Investments in bank certificates of deposit, time deposits and bankers'
acceptances include Eurodollar Certificates of Deposit ("ECD"), which are issued
by foreign branches of US or foreign banks; Eurodollar Time Deposits ("ETD"),
which are issued by foreign branches of US or foreign banks; and Yankee
Certificates of Deposit ("Yankee CDs"), which are issued by US branches of
foreign banks. These instruments may be US dollar or foreign currency
denominated and are subject to the risks of non-US issuers described under
"Investment Policies -- Investment in Foreign Securities."

The variable and floating rate securities the Fund may invest in provide
for a periodic adjustment in the interest rate paid on the obligations. The
terms of such obligations must provide that interest rates are adjusted
periodically based upon some appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be regular,
and range from daily up to annually, or may be event based, such as on a change
in the prime rate. The Fund may also invest in zero coupon US Treasury, foreign
government and US and foreign corporate debt securities, which are bills, notes
and bonds that have been stripped of their unmatured interest coupons and
receipts or certificates representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its holder
prior to maturity. Accordingly, such securities usually trade at a deep discount
from their face or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest.

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emerging market debt. The risks associated with investment in securities issued
by foreign governments and companies, and the countries considered to be
emerging markets, are described under "Investment Policies -- Investment in
Foreign Securities." Emerging markets consist of countries determined by the
money managers of the Fund to have developing or emerging economies and markets.
These countries generally include every country in the world except the United
States, Canada, Japan, Australia and most countries located in Western Europe.
The emerging market debt in which the Fund may invest includes bonds, notes and
debentures of emerging market governments and debt and other fixed income
securities issued or guaranteed by such governments' agencies, instrumentalities
or central banks, or by banks or other companies in emerging markets determined
by the money managers to be suitable investments for the Fund. Under current
market conditions, it is expected that emerging market debt will consist
predominantly of Brady Bonds and other sovereign debt. Brady Bonds are products
of the "Brady Plan," under which bonds are issued in exchange for cash and
certain of a country's outstanding commercial bank loans.

The Fund may invest up to 25% of its net assets in debt securities that are
rated below "investment grade" (i.e., rated lower than BBB by S&P or Baa by
Moody's) or in unrated securities judged by the money managers of the Fund to be
of comparable quality. Debt rated BB, B, CCC, CC and C by S&P, and debt rated
Ba, B, Caa, Ca and C by Moody's, is regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest. For Moody's, Ba indicates the lowest
degree of speculation and C the highest. These lower rated debt securities may
include obligations that are in default or that face the risk of default with
respect to principal or interest. Such securities are sometimes referred to as
"junk bonds." For additional information on the ratings used by S&P and Moody's
and a description of lower rated debt securities, please refer to the Funds'
Statement of Additional Information.

MONEY MARKET FUND

The Money Market Fund's objectives are to maximize current income to the
extent consistent with the preservation of capital and liquidity, and the
maintenance of a stable $1.00 per share net asset value, by investing in
short-term, high-grade money market instruments. THE MONEY MARKET FUND IS NOT
AVAILABLE FOR DIRECT SHAREHOLDER INVESTMENT UNTIL FURTHER NOTICE.

The instruments in which the Fund invests include (1) securities issued or
guaranteed by the US government or any of its agencies and instrumentalities,
including securities of the US Treasury, the Federal National Mortgage
Association, the Federal Housing Administration, and the Tennessee Valley
Authority; (2) instruments of US and foreign banks and branches, including
certificates of deposit, bankers' acceptances and time deposits, and may include
ECDs, Yankee CDs and ETDs; (3) commercial paper of US and foreign companies; (4)
corporate obligations; (5) variable amount master demand notes and (6)
securities listed in (1) which are subject to repurchase agreements, provided
that the Fund will not invest in repurchase agreements maturing in more than
seven days if, as a result thereof, such repurchase agreements, together with
all other illiquid securities, equal more than 10% of the Fund's total assets
taken at the current market value.

ECDs, ETDs and Yankee CDs are subject to somewhat different risks from the
obligations of domestic banks. ECDs are dollar denominated certificates of
deposit issued by foreign branches of US and foreign banks; ETDs are US dollar
denominated time deposits in a foreign branch of a US bank or a foreign bank;
and Yankee CDs are certificates of deposit issued by a US branch of a foreign
bank denominated in US dollars and held in the United States. Examples of these
risks are described under "Investment Policies --

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Investment in Foreign Securities." Different risks may also exist for ECDs, ETDs
and Yankee CDs because the banks issuing these instruments, or their domestic or
foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing and recordkeeping, and the
public availability of information. These factors will be carefully considered
by the money manager when evaluating credit risk in the selection of investments
for the Fund.

The Fund expects to maintain, but does not guarantee, a net asset value of
$1 per share by valuing its portfolio securities at amortized cost. In order to
use the amortized cost method, the Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less and invest only in US dollar denominated
securities with remaining maturities of 397 days or less that the money manager
determines are of high-quality with minimal credit risk in accordance with
procedures adopted by the Board of Trustees. The procedures require that the
money manager consider a number of factors in determining whether a security is
of high-quality and of minimal credit risk, including that the security (i) if
rated by more than one nationally recognized statistical rating organization
("NRSRO") is rated in the highest rating category of any two NRSROs, (ii) if
rated by only one NRSRO, is rated in that NRSRO's highest rating category, and
(iii) if unrated is determined by the money manager to be of comparable quality
to a security rated in the highest rating category of an NRSRO. (See, the
Statement of Additional Information for a description of the NRSROs.) These
procedures are reasonably designed to assure that the prices determined by the
amortized cost valuation will approximate the current market value.

INVESTMENT RESTRICTIONS

The Funds have fundamental investment restrictions which cannot be changed
without shareholder approval. The principal restrictions are the following,
which, unless otherwise noted, apply on a Fund-by-Fund basis at the time an
investment is being made. No Fund will:

1. Invest in any security if, as a result of such investment, less than 75%
of its total assets would be represented by cash; cash items; securities
of the US government, its agencies, or instrumentalities; securities of
other investment companies; and other securities limited in respect of
each issuer to an amount not greater in value than 5% of the total
assets of such Fund. A Fund's investment in "cash reserves" (see the
next section) in shares of the Investment Company's Money Market Fund is
not subject to this restriction or to restrictions 2 or 3.

2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other
than the US government, its agencies and instrumentalities).

3. Acquire more than 5% of the outstanding voting securities, or 10% of all
of the securities, of any one issuer.

4. Borrow amounts in excess of 5% of its total assets taken at cost or at
market value, whichever is lower, and then only for temporary purposes;
invest more than 5% of its assets in securities of issuers which,
together with any predecessor, have been in operation for less than
three years; or invest more than 5% of its assets in warrants.
(Currently, no Fund intends to borrow in excess of 5% of its net
assets.)

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INVESTMENT POLICIES

The Funds use certain investment instruments and techniques commonly used
by institutional investors. The principal policies are the following:

Cash Reserves. Each Fund, other than the Money Market Fund, is authorized
to invest its cash reserves (i.e., funds awaiting investment in the specific
types of securities to be acquired by a Fund) in money market instruments and in
debt securities which are at least comparable in quality to the Fund's permitted
investments. In lieu of having each of these Funds make separate, direct
investments in money market instruments, each Fund and its money managers may
elect to invest the Fund's cash reserves in the Money Market Fund. The
Management Company currently does not collect a management or advisory fee from
the Money Market Fund, thereby eliminating any duplication of fees. The Funds
will use this procedure only so long as doing so does not adversely affect the
portfolio management and operations of the Money Market Fund and the Investment
Company's other Funds.

Russell 1000(R) Index. The Russell 1000(R) Index consists of the 1,000
largest US companies by capitalization (i.e., market price per share times the
number of shares outstanding). The smallest company in the Index at the time of
selection has a capitalization of approximately $457 million. The Index does not
include cross-corporate holdings in a company's capitalization. For example,
when IBM owned approximately 20% of Intel, only 80% of the total shares
outstanding of Intel were used to determine Intel's capitalization. Also not
included in the Index are closed-end investment companies, companies that do not
file a Form 10-K report with the SEC, foreign securities and American Depository
Receipts.

The Index's composition is changed annually to reflect changes in market
capitalization and share balances outstanding. These changes are expected to
represent less than 1% of the total market capitalization of the Index. Changes
for mergers and acquisitions are made when trading ceases in the acquiree's
shares. The 1,001st largest US company by capitalization is then added to the
Index to replace the acquired stock.

The Russell 1000(R) Index is used as the basis for the Equity Q Fund's
performance because it, in the Management Company's opinion, represents the
universe of stocks in which most active money managers invest and is
representative of the performance of publicly traded common stocks most
institutional investors purchase.

Frank Russell Company chooses the stocks to be included in the Index solely
on a statistical basis and it is not an indication that Frank Russell Company or
the Management Company believes that the particular security is an attractive
investment.

Repurchase Agreements. Each Fund may enter into repurchase agreements with
a bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day). If
the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at the time of agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Investment Polices -- Illiquid Securities," no Fund
will invest more than 15% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Money Market Fund
will not invest more than 10% of its net assets (taken at current market value)
in repurchase agreements and other illiquid securities maturing in more than
seven days.

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<PAGE> 37

requests. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund of a dollar amount sufficient to make payment for the
portfolio securities to be purchased will be segregated on the Fund's records at
the trade date and maintained until the transaction is settled.

Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements to meet redemption requests where the liquidation of portfolio
securities is deemed by a money manager to be inconvenient or disadvantageous. A
reverse repurchase agreement is a transaction whereby a Fund transfers
possession of a portfolio security to a bank or broker-dealer in return for a
percentage of the portfolio security's market value. The Fund retains record
ownership of the security involved, including the right to receive interest and
principal payments. At an agreed upon future date, the Fund repurchases the
security by paying an agreed upon purchase price plus interest. Cash or liquid
high-grade debt obligations of the Fund equal in value to the repurchase price,
including any accrued interest, will be segregated on the Fund's records while a
reverse repurchase agreement is in effect, subject to the limitations described
in "Investment Policies -- Illiquid Securities."

Lending Portfolio Securities. Each Fund may lend portfolio securities with
a value of up to 50% of its total assets. Such loans may be terminated at any
time. A Fund will receive either cash (and agree to pay a "rebate" interest
rate), US government or US government agency securities as collateral in an
amount equal to at least 100% of the current market value of the loaned
securities plus accrued interest. The collateral is "marked-to-market" on a
daily basis, and the borrower will furnish additional collateral in the event
that the value of the collateral drops below 100% of the market value of the
loaned securities.

Cash collateral is invested in high-quality short-term instruments,
short-term bank collective investment and money market mutual funds (including
funds advised by State Street Bank and Trust Company, the Funds' Custodian, for
which it may receive an asset-based fee) and other investments meeting certain
quality and maturity requirements established by the Funds. Income generated
from the investment of the cash collateral is first used to pay the rebate
interest cost to the borrower of the securities and the remainder is then
divided between the Fund and the Fund's Custodian.

Each Fund will retain most rights of beneficial ownership, including
dividends, interest or other distributions on the loaned securities. Voting
rights may pass with the lending. The Fund will call loans to vote proxies if a
material issue affecting the investment is to be voted upon.

Should the borrower of the securities fail financially, there is a risk of
delay in recovery of the securities or loss of rights in the collateral.
Consequently, loans are made only to borrowers which are deemed to be of good
financial standing. The Investment Company may incur costs or possible losses in
excess of the interest and fees received in connection with securities lending
transactions. Some securities purchased with cash collateral are subject to
market fluctuations while a loan is outstanding. To the extent that the value of
the cash collateral as invested is insufficient to return the full amount of the
collateral plus rebate interest to the borrower upon termination of the loan,
the Fund must immediately pay the amount of the shortfall to the borrower.

Illiquid Securities. The Funds, other than the Money Market Fund, will not
purchase or otherwise acquire any security if, as a result, more than 15% of a
Fund's net assets (taken at current value) would be invested in securities,
including repurchase agreements of more than seven days' duration, that are
illiquid by virtue of the absence of a readily available market or because of
legal or contractual restrictions on resale. In the case of the Money Market
Fund, this restriction is 10% of net assets. In addition, the Funds will not
invest more than 10% of their respective net assets (taken at current value) in
securities of issuers which may not be sold to the public without registration
under the Securities Act of 1933 (the "1933 Act"). These policies do

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<PAGE> 38

not include (1) commercial paper issued under Section 4(2) of the 1933 Act, or
(2) restricted securities eligible for resale to qualified institutional
purchasers pursuant to Rule 144A under the 1933 Act that are determined to be
liquid by the money managers in accordance with Board approved guidelines. Such
guidelines take into account trading activity for such securities and the
availability of reliable pricing information, among other factors. If there is a
lack of trading interest in a particular Rule 144A security, a Fund's holding of
that security may be illiquid. There may be undesirable delays in selling
illiquid securities at prices representing their fair value.

Liquidity Portfolios. The Management Company will exercise investment
discretion or select a money manager to exercise investment discretion, for
approximately 5%-15% of the Equity I, Equity II, Equity III, Equity Q and
International Funds' assets assigned to a "Liquidity Portfolio." The Liquidity
Portfolio will be used to create temporarily an equity exposure for cash
balances until those balances are invested in equities or used for Fund
transactions.

Investment in Foreign Securities. The Funds may invest in foreign
securities traded on US or foreign exchanges or in the over-the-counter market.
Investing in securities issued by foreign governments and corporations involves
considerations and possible risks not typically associated with investing in
obligations issued by the US government and domestic corporations. Less
information may be available about foreign companies than about domestic
companies, and foreign companies generally are not subject to the same uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic companies.
The values of foreign investments are affected by changes in currency rates or
exchange control regulations, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including nationalization,
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods or restrictions affecting the
prompt return of capital to the United States.

The risks associated with investing in foreign securities are often
heightened for investments in developing or emerging markets. For purposes of
the International and Fixed Income III Funds' policy of investing in securities
of issuers located in emerging markets, the Funds will consider emerging markets
to be countries with developing economies and markets. These countries generally
include every country in the world except the United States, Canada, Japan,
Australia and most countries located in Western Europe. Investments in emerging
or developing markets involve exposure to economic structures that are generally
less diverse and mature, and to political systems which can be expected to have
less stability, than those of more developed countries. Moreover, the economies
of individual emerging market countries may differ favorably or unfavorably from
the US economy in such respects as the rate of growth in gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Because the Funds' securities will generally be
denominated in foreign currencies, the value of such securities to the Funds
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the US dollar
will result in a corresponding change in the US dollar value of the Funds'
foreign securities. In addition, some emerging market countries may have fixed
or managed currencies which are not free-floating against the US dollar.
Further, certain emerging market countries' currencies may

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not be internationally traded. Certain of these currencies have experienced a
steady devaluation relative to the US dollar. Many emerging market countries
have experienced substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in inflation rates
have had, and may continue to have, negative effects on the economies and
securities markets of certain emerging market countries.

Forward Foreign Currency Exchange Contracts ("forward currency
contracts"). The International, Fixed Income I, Fixed Income II and Fixed
Income III Funds may enter into forward currency contracts, which are agreements
to exchange one currency for another -- for example, to exchange a certain
amount of US dollars for a certain amount of Japanese yen -- at a future date.
The date (which may be any agreed upon fixed number of days in the future), the
amount of currency to be exchanged and the price at which the exchange will take
place will be negotiated and fixed for the term of the contract at the time that
a Fund enters into a contract. The Funds may engage in forward currency
contracts that involve a currency whose changes in value are considered to be
linked (a proxy) to a currency or currencies in which some or all of the Funds'
portfolio securities are denominated. Forward currency contracts are (a) traded
in an interbank market conducted directly between currency traders (typically,
commercial banks or other financial institutions) and their customers, (b)
generally have no deposit requirements and (c) are consummated without payment
of any commissions. The Funds may, however, enter into forward currency
contracts containing either or both deposit requirements and commissions. In
order to assure that the Funds' forward currency contracts are not used to
achieve investment leverage, the Funds will segregate cash or readily marketable
high-quality securities in an amount at all times equal to or exceeding the
Funds' commitments with respect to these contracts.

Upon maturity of a forward currency contract, the Funds may (a) pay for and
receive, or deliver and be paid for, the underlying currency, (b) negotiate with
the dealer to roll over the contract into a new forward currency contract with a
new future settlement date or (c) negotiate with the dealer to terminate the
forward contract by entering into an offset with the currency trader whereby the
parties agree to pay for and receive the difference between the exchange rate
fixed in the contract and the then current exchange rate. A Fund also may be
able to negotiate such an offset prior to maturity of the original forward
contract. There can be no assurance that new forward contracts or offsets will
always be available to the Funds.

Forward currency contracts will be used only to hedge against anticipated
future changes in exchange rates which otherwise might either adversely affect
the value of a Fund's portfolio securities or adversely affect the price of
securities which the Funds intend to purchase at a later date. The amount the
Funds may invest in forward currency contracts is limited to the amount of the
Funds' aggregate investments in foreign currencies.

The market for forward currency contracts may be limited with respect to
certain currencies. These factors will restrict a Fund's ability to hedge
against the risk of devaluation of currencies in which the Fund holds a
substantial quantity of securities and are unrelated to the qualitative rating
that may be assigned to any particular portfolio security. Where available, the
successful use of forward currency contracts draws upon a money manager's
special skills and experience with respect to such instruments and usually
depends on the money manager's ability to forecast interest rate and currency
exchange rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Fund may not achieve the anticipated benefits of forward
currency contracts or may realize losses and thus be in a worse position than if
such strategies had not been used. Unlike many exchange-traded futures contracts
and options on futures contracts, there are no daily price fluctuation limits
with respect to forward currency contracts, and adverse market movements could
therefore continue to an unlimited extent over a period of time. In addition,
the correlation between movements in the prices of such instruments and
movements in the price of the securities and currencies

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hedged or used for cover will not be perfect. In the case of proxy hedging,
there is also a risk that the perceived linkage between various currencies may
not be present or may not be present during the particular time the Funds are
engaged in that strategy.

A Fund's ability to dispose of its positions in forward currency contracts
will depend on the availability of active markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of forward currency contracts. Forward currency contracts may be closed
out only by the parties entering into an offsetting contract. Therefore, no
assurance can be given that a Fund will be able to utilize these instruments
effectively for the purposes set forth above.

Options. The Funds, other than the Money Market Fund, may purchase and
sell (write) call and put options on securities and securities indexes provided
such options are traded on a national securities exchange or in an
over-the-counter market. The Funds, other than the Money Market Fund, may also
purchase and sell put and call options on foreign currencies.

A Fund may invest up to 5% of its net assets, represented by the premium
paid, in call and put options. A Fund may write a call or put option to the
extent that the aggregate value of all securities or other assets used to cover
all such outstanding options does not exceed 25% of the value of its net assets.

Call and Put Options on Securities. A call option on a specific security
gives the purchaser of the option the right to buy, and obligates the writer to
sell, the underlying security at the exercise price at any time during the
option period. Conversely, a put option on a specific security gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security at the exercise price at any time during the option period.

A Fund may purchase a call option on securities to protect against
substantial increases in prices of securities the Fund intends to purchase
pending its ability or desire to purchase such securities in an orderly manner.
A Fund may purchase a put option on securities to protect holdings in an
underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
to one another.

A Fund may write a call or a put option only if the option is covered by
the Fund holding a position in the underlying securities or by other means which
would permit immediate satisfaction of the Fund's obligations as the writer of
the option.

To close out a position when writing covered options, a Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
security with the same exercise price and expiration date as the option which it
previously wrote on the security. To close out a position as a purchaser of an
option, a Fund may make a "closing sale transaction," which involves liquidating
the Fund's position by selling the option previously purchased. The Fund will
realize a profit or loss from a closing purchase or sale transaction depending
upon the difference between the amount paid to purchase an option and the amount
received from the sale thereof.

The Funds intend to treat options in respect of specific securities that
are not traded on a national securities exchange and the securities underlying
covered call options as not readily marketable and therefore subject to the
limitations on the Funds' ability to hold illiquid securities.

The Funds intend to purchase and write call and put options on specific
securities. The Funds will purchase and write options only to the extent
permitted by the policies of state securities authorities in states where the
shares of the Funds are qualified for offer and sale.

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Securities Index Options. An option on a securities index is a contract
which gives the purchaser of the option, in return for the premium paid, the
right to receive from the writer of the option cash equal to the difference
between the closing price of the index and the exercise price of the option
times a multiplier established by the exchange on which the stock index is
traded. It is similar to an option on a specific security except that settlement
is in cash and gains and losses depend on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
price movements in the specific security. None of the Funds, other than the
Equity I, Equity II, Equity III, Equity Q and International Funds, currently
intends to purchase and write call and put options on securities indexes.

Options on Foreign Currency. The Funds may purchase and write call and put
options on foreign currencies for the purpose of hedging against changes in
future currency exchange rates. Call options convey the right to buy the
underlying currency at a price which is expected to be lower than the spot price
of the currency at the time the option expires. Put options convey the right to
sell the underlying currency at a price which is anticipated to be higher than
the spot price of the currency at the time the option expires. Currency options
traded on US or other exchanges may be subject to position limits which may
limit the ability of a Fund to reduce foreign currency risk using such options.
Over-the-counter options differ from traded options in that they are two-party
contracts with price and other terms negotiated between buyer and seller and
generally do not have as much market liquidity as exchange-traded options. (See
also "Call and Put Options on Securities" above.) None of the Funds, other than
the Fixed Income III Fund, currently intends to write or purchase such options.

Risk Factors. The purchase and writing of options involves certain risks.
If a put or call option purchased by a Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment (i.e., the premium paid) on the option. Also, where a put or call
option on a particular security is purchased to hedge against price movements in
a related security, the price of the put or call option may move more or less
than the price of the related security.

Where a Fund writes a call option, it has, in return for the premium it
receives, given up the opportunity to profit from a price increase in the
underlying security above the exercise price, but, as long as its obligation as
a writer continues, has retained the risk of loss should the price of the
underlying security decline. Where a Fund writes a put option, it is exposed
during the term of the option to a decline in the price of the underlying
security.

There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position.

Futures Contracts and Options on Futures Contracts. The Funds, other than
the Money Market Fund, may invest in interest rate futures contracts, stock
index futures contracts and foreign currency futures contracts and options
thereon that are traded on a United States or foreign exchange or board of
trade.

41
<PAGE> 42

traded on US exchanges, the exchange itself or an affiliated clearing
corporation assumes the opposite side of each transaction (i.e., as buyer or
seller). A futures contract may be satisfied or closed out by delivery or
purchase, as the case may be, of the financial instrument or by payment of the
change in the cash value of the index. Frequently, using futures to effect a
particular strategy instead of using the underlying or related security or index
will result in lower transaction costs being incurred.

Each Fund may also purchase and write call options and put options on
futures contracts. An option on a futures contract gives the holder the right,
in return for the premium paid, to assume a long position (in the case of a
call) or a short position (in the case of a put) in a futures contract at a
specified exercise price prior to the expiration of the option. Upon exercise of
a call option, the holder acquires a long position in the futures contract and
the writer is assigned the opposite short position. In the case of a put option,
the opposite is true. An option on a futures contract may be closed out (before
exercise or expiration) by an offsetting purchase or sale of an option on a
futures contract of the same series.

There are several risks associated with the use of futures and options on
futures contracts for hedging purposes. There can be no guarantee that there
will be a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. An incorrect correlation could result in a
loss on both the hedged securities in a Fund and the hedging vehicle so that the
portfolio return might have been greater had hedging not been attempted.

There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent a Fund from liquidating an unfavorable
position and the Fund would remain obligated to meet margin requirements until
the position is closed.

A Fund will only enter into futures contracts or options on futures
contracts which are standardized and traded on a US or foreign exchange or board
of trade, or similar entity, or quoted on an automated quotation system. A Fund
will enter into a futures contract only if the contract is "covered" or if the
Fund at all times maintains with its Custodian cash or cash equivalents equal to
or greater than the fluctuating value of the contract (less any margin or
deposit). A Fund will write a call or put option on a futures contract only if
the option is "covered." For a discussion of how to cover a written call or put
option, see "Options" above.

A Fund may enter into contracts and options on futures contracts for "bona
fide hedging" purposes, as defined under the rules of the Commodity Futures
Trading Commission. A Fund may also enter into futures contracts and options on
futures contracts for non hedging purposes provided the aggregate initial margin
and premiums required to establish these positions will not exceed 5% of the
Fund's net assets.

High Risk Bonds. The Funds, other than the Fixed Income III Fund, do not
invest assets in securities rated less than BBB by S&P or Baa by Moody's, or in
unrated securities judged by the money managers to be of a lesser credit quality
than those designations. Securities rated BBB by S&P or Baa by Moody's and above
are considered by those rating agencies to be "investment grade" securities,
although Moody's considers securities rated Baa, and S&P considers securities
rated BBB, to have some speculative characteristics. The Funds, other than the
Fixed Income III Fund, will dispose of, in a prudent and orderly fashion,
securities whose ratings drop below these minimum ratings. The market value of
debt securities generally varies inversely in relation to interest rates.

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<PAGE> 43

The Fixed Income III Fund will invest in "investment grade" securities and
may invest up to 25% of its total assets in debt securities rated less than BBB
by S&P or Baa by Moody's, or in unrated securities judged by the money managers
of the Fund to be of comparable quality. Lower rated debt securities generally
offer a higher yield than that available from higher grade issues. However,
lower rated debt securities involve higher risks, in that they are especially
subject to adverse changes in general economic conditions and in the industries
in which the issuers are engaged, to changes in the financial condition of the
issuers and to price fluctuation in response to changes in interest rates.
During periods of economic downturn or rising interest rates, highly leveraged
issuers may experience financial stress which could adversely affect their
ability to make payments of principal and interest and increase the possibility
of default. In addition, the market for lower rated debt securities has expanded
rapidly in recent years, and its growth paralleled a long economic expansion.
The market for lower rated debt securities is generally thinner and less active
than that for higher quality securities, which would limit the Fund's ability to
sell such securities at fair value in response to changes in the economy or the
financial markets. While such debt may have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions. The money managers of the Fund will seek to
reduce the risks associated with investing in such securities by limiting the
Fund's holdings in such securities and by the depth of their own credit
analysis. For additional information, please refer to the Statement of
Additional Information.

PORTFOLIO TRANSACTION POLICIES

Decisions to buy and sell securities are made by the money managers for the
assets assigned to them, and by the Management Company or the money manager for
the Liquidity Portfolios. The Funds do not give significant weight to attempting
to realize long-term, rather than short-term, capital gains when making
portfolio investment decisions. The money managers make decisions to buy or sell
securities independently from other money managers. Thus, one money manager
could be selling a security when another money manager for the same Fund (or for
another series of the Investment Company) is purchasing the same security. In
addition, when a money manager's services are terminated and another retained,
the new money manager may significantly restructure the portfolio. These
practices may increase the Funds' portfolio turnover rates, realization of gains
or losses, brokerage commissions and other transaction based costs. The annual
portfolio turnover rates for each of the Funds (other than the Money Market
Fund) are shown in the Financial Highlights tables.

The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc., an affiliate of the Management Company, when the money manager
determines that the Funds will receive competitive execution, price and
commissions. Frank Russell Securities, Inc. refunds to the Fund up to 70% of the
commissions paid by that Fund when it effects such transactions, after
reimbursement for research services provided to the Management Company. This
arrangement is used by the Equity I, Equity II, Equity III, Equity Q and
International Funds. All Funds may also effect portfolio transactions through
and pay brokerage commissions to the money managers (or their affiliates).

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<PAGE> 44

INCOME DIVIDENDS

The Board of Trustees presently intends to declare dividends from net
investment income and (for the Money Market Fund only) net short-term capital
gains, if any, for payment on the following schedule:

<TABLE>
<CAPTION>
DECLARED PAYABLE
- ----------------------------------------------------------
<S> <C> <C>
Daily 1st business day of following month Money Market Fund
Quarterly Mid: April, July, October and December Equity I, Equity II,
Equity III, Equity Q,
Fixed Income I, Fixed
Income II and Fixed
Income III Funds
Annually Mid-December International Fund
</TABLE>

DIVIDENDS AND DISTRIBUTIONS

The Money Market Fund determines net investment income immediately prior to
the determination of the net asset value per share as of the close of the New
York Stock Exchange (currently 4:00 p.m. Eastern time) on each business day. Net
investment income will be credited daily to the accounts of shareholders of
record prior to the net asset value calculation and paid monthly.

CAPITAL GAINS DISTRIBUTIONS

The Board intends to declare distributions from capital gains through
October 31 (excess of capital gains over capital losses) annually, generally in
mid-December. In addition, in order to satisfy certain distribution
requirements, a Fund may declare special year-end dividend and capital gains
distributions during October, November or December to shareholders of record in
such month. Such distributions, if received by shareholders by January 31, are
deemed to have been paid by a Fund and received by shareholders on December 31
of the prior year. Capital gains realized during November and December will be
distributed during the month of February of the following year.

Investors should be aware that by purchasing shares shortly before the
record date of a dividend or capital gains distribution, they will pay the full
price for the shares and then receive some portion of the price back as a
taxable dividend or capital gains distribution. Investors should also be aware
that all shareholders, new and old alike, will share in and be taxed on
distributions of gain realized by a Fund on the sale of securities that have
increased in value.

AUTOMATIC REINVESTMENT

All dividends and distributions will be automatically reinvested, at the
net asset value per share at the close of business on the record date, in
additional shares of the Fund paying the dividend or making the distribution,
unless a shareholder elects to have dividends or distributions paid in cash or
invested in another Fund. Any election may be changed by delivering written
notice no later than ten days prior to the payment date to Frank Russell
Investment Management Company, the Investment Company's transfer and dividend
paying agent (the "Transfer Agent"), at Operations Department, P.O. Box 1591,
Tacoma, WA 98401.

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<PAGE> 45

TAXES

Each Fund intends to qualify for taxation as a "regulated investment
company" under the Internal Revenue Code (the "Code"). By distributing
substantially all of its net investment income and capital gains to shareholders
and meeting certain other requirements, a Fund will generally not be liable for
federal income or excise taxes.

For taxable shareholders: Dividends from net investment income and
short-term capital gains will be taxable as ordinary dividends, whether paid in
cash or reinvested in additional shares. However, depending upon the state tax
rules pertaining to a shareholder, a portion of the dividends paid by the Fixed
Income I, Fixed Income II, Fixed Income III and Money Market Funds attributable
to direct US Treasury and agency obligations may be exempt from state and local
taxes. Long-term capital gains distributions declared by the Investment
Company's Board are taxed as long-term gains regardless of the length of time a
shareholder has held such shares. Distributions paid in excess of a Fund's
earnings will be treated as a non-taxable return of capital. Dividends and
distributions may otherwise also be subject to state or local taxes.

For corporate investors, dividends from net investment income paid by the
Equity I, Equity II, Equity III and Equity Q Funds will generally qualify in
part for the corporate dividends received deduction. However, the portion of the
dividends so qualified depends on the aggregate qualifying dividend income
received by such a Fund from domestic (US) sources. Certain holding period and
debt financing restrictions may apply to corporate investors seeking to claim
the deduction.

The sale of shares of a Fund is a taxable event and may result in capital
gain or loss. A capital gain or loss may be realized from an ordinary redemption
of shares or an exchange of shares between two mutual funds (or two series or
portfolios of a mutual fund). Any loss incurred on sale or exchange of a Fund's
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.

The International, Fixed Income I, Fixed Income II and Fixed Income III
Funds will receive dividends and interest paid by non-US issuers which will
frequently be subject to withholding taxes by non-US governments. The Management
Company expects the International Fund to invest more than 50% of its total
assets in non-US securities and to file specified elections with the Internal
Revenue Service which will permit its shareholders either to deduct (as an
itemized deduction in the case of an individual) such foreign taxes in computing
taxable income, or to use these withheld foreign taxes as credits against US
income taxes. The Fund's taxable shareholders must include their pro rata
portion of the taxes withheld on their gross income for federal income tax
purposes.

The International Fund may invest up to 10% of its total assets in the
stock of foreign investment companies that may be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that the Fund derives may be
subject to a non-deductible federal income tax at the Fund level. In some cases,
the International Fund may be able to avoid this tax by electing to be taxed
currently on its share of PFIC's income, whether or not such income is actually
distributed by the PFIC. The Fund will endeavor to limit its exposure to the
PFIC tax by investing in PFICs only where the election to be taxed currently
will be made. Because it is not always possible to identify a foreign issuer as
a PFIC in advance of making the investment, the Fund may incur the PFIC tax in
some instances.

45
<PAGE> 46

Shareholders of Funds holding non-U.S. holdings should also be aware that
for federal income tax purposes, foreign exchange losses realized by the Funds
are treated as ordinary losses. This treatment may have the effect of reducing
the Fund's income available for distribution to shareholders.

The Fixed Income I, Fixed Income II and Fixed Income III Funds may acquire
zero coupon securities issued with original issue discount. As the holder of
such a security, the Funds will have to include in taxable income a portion of
the original issue discount that accrues on the security for the taxable year,
even if the Funds receive no payment on the security during the year. Because
the Funds annually must distribute substantially all of their net investment
income, the Funds may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash the Funds
actually receive. Those distributions will be made from a Fund's cash assets or
from the proceeds of sales of portfolio securities, if necessary. The Funds may
realize capital gains or losses from those sales, which could further increase
or decrease the Funds' dividends and distributions paid to shareholders.

Shareholders of the appropriate Funds will be notified after each calendar
year of the amounts: of ordinary income dividends and long-term capital gains
distributions, including any amounts which are deemed paid on December 31 of the
prior year; of the dividends which qualify for the 70% dividends-received
deduction available to corporations; of income which is a tax preference item
(if any) for alternative minimum tax purposes; of the International Fund's
foreign taxes withheld; and of the percentages of the Fixed Income I, Fixed
Income II, Fixed Income III and Money Market Funds' income attributable to US
government, Treasury and agency securities.

A Fund is required to withhold 31% of all taxable dividends, distributions
and redemption proceeds payable to any non-corporate shareholder which does not
provide the Fund with the shareholder's certified taxpayer identification number
or required certifications or which is subject to backup withholding.

Shareholders who are not US persons for purposes of federal income taxation
should consult with their financial or tax advisers regarding the applicability
of income, estate or other taxes (including income tax withholding) on their
investment in a Fund or on dividends and distributions received by them from a
Fund and the application of foreign tax laws.

Shareholders should consult their tax advisers with respect to the
applicability of any state and local intangible property or income taxes to
their shares of a Fund and distributions and redemption proceeds received from a
Fund.

Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the
Statement of Additional Information.

CALCULATION OF FUND PERFORMANCE

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<PAGE> 47

recurring fees that are charged to all shareholder accounts. The average annual
total returns for Class S shares of each of the Funds are as follows:

<TABLE>
<CAPTION>
5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
1 YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1995 1995 1995 INCEPTION
1995 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
------------ ------------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Equity I 35.94% 16.94% 14.49% 15.21% 10/15/81
Equity II 28.67 18.73 13.37 13.68 12/28/81
Equity III 35.96 17.81 14.23 16.67 11/27/81
Equity Q 37.91 18.15 -- 12.60 05/29/87
International 10.71 10.99 14.47 16.67 01/31/83
Fixed Income I 18.03 9.49 9.60 12.02 10/15/81
Fixed Income II 9.95 6.47 7.56 9.70 10/30/81
Fixed Income III 17.99 -- -- 7.94 01/29/93
Money Market 6.19 4.93 6.45 7.59 10/15/81
</TABLE>

Fund performance prior to April 1, 1995 is reported gross of investment
advisory fees. For periods thereafter, performance results are reported net of
investment advisory fees, but gross of any investment services fees.
Descriptions of these services can be obtained from the management company upon
request.

The Fixed Income I, Fixed Income II and Fixed Income III Funds also may
from time to time advertise their yields. The yields are based on historical
earnings and are not intended to indicate future performance. Yield is
calculated by dividing the net investment income per share earned during the
most recent 30-day (or one month) period by the maximum offering price per share
on the last day of the month. This income is then annualized. That is, the
amount of income generated by the investment during that 30-day (or one month)
period is assumed to be generated each month over a 12-month period and is shown
as a percentage of the investment. For purposes of the yield calculation,
interest income is computed based on the yield to maturity of each debt
obligation and dividend income is computed based upon the stated dividend rate
of each security in a Fund's portfolio. The calculation includes all recurring
fees that are charged to all shareholder accounts. The 30-day yields for the
year ended December 31, 1995 for shares of the Fixed Income I, Fixed Income II
and Fixed Income III Funds were, respectively, 6.09%, 5.68% and 6.15%.

The Money Market Fund may advertise its yield and effective yield. Both
yield figures are based on historical earnings and are not intended to indicate
future performance. The yield of the Money Market Fund refers to the income
generated by an investment in the Money Market Fund over a seven-day period
(which period will be stated in the advertisement). This yield is calculated by
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base return. This income is then
annualized. That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the current

47
<PAGE> 48

yield because of the compounding effect of this assumed reinvestment. The
following are the current and effective yields for shares of the Money Market
Fund during 1995 for the seven-day periods ended:

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------- ------------------- ------------------- -------------------
CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market Fund 6.19% 6.39% 6.14% 6.33% 5.95% 6.13% 5.83% 6.00%
</TABLE>

Each Fund may also advertise non-standardized performance information which
is for periods in addition to those required to be presented.

VALUATION OF FUND SHARES

NET ASSET VALUE PER SHARE

The net asset value per share is calculated for shares of each class of
each Fund on each business day on which shares are offered or orders to redeem
are tendered. (Unless otherwise indicated, "shares" refers to the Class S Shares
of the Funds.) For all Funds except the Money Market Fund, a business day is one
on which the New York Stock Exchange is open for trading. A business day for the
Money Market Fund includes any day on which the New York Stock Exchange is open
for trading and the Boston Federal Reserve Bank is open. Net asset value per
share is computed for a Fund by dividing the current value of the Fund's assets
attributable to the Class S Shares, less liabilities attributable to the Class S
Shares, by the number of Class S Shares of the Fund outstanding, and rounding to
the nearest cent. All Funds determine net asset value as of the close of the New
York Stock Exchange (currently 4:00 p.m. Eastern time). The Money Market Fund
also determines its net asset value as of 1:00 p.m. Eastern time.

VALUATION OF PORTFOLIO SECURITIES

With the exceptions noted below, the Funds value portfolio securities at
"fair market value." This generally means that equity securities and
fixed-income securities listed and traded principally on any national securities
exchange are valued on the basis of the last sale price or, lacking any sale, at
the closing bid price, on the primary exchange on which the security is traded.
United States over-the-counter equity and fixed-income securities and options
are valued on the basis of the closing bid price, and futures contracts are
valued on the basis of last sale price.

Because many fixed-income securities do not trade each day, last sale or
bid prices are frequently not available. Fixed-income securities therefore may
be valued using prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.

International equity securities traded on a national securities exchange
are valued on the basis of the last sale price. International securities traded
over the counter are valued on the basis of the mean of bid prices. In the
absence of a last sale or mean bid price, respectively, such securities may be
valued on the basis of prices provided by a pricing service if those prices are
believed to reflect the fair market value of such securities.

The Money Market Fund's portfolio investments are valued on the basis of
amortized cost, a method by which each portfolio instrument is initially valued
at cost, and thereafter a constant accretion/amortization to maturity of any
discount or premium is assumed. The Money Market Fund utilizes the amortized
cost valuation method in accordance with Rule 2a-7 of the Investment Company Act
of 1940, as amended (the "1940 Act"). Money market instruments maturing within
60 days of the valuation date held by Funds other

48
<PAGE> 49

than the Money Market Fund are also valued at "amortized cost," unless the Board
determines that amortized cost does not represent fair value. While this method
provides certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the instrument.

The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith pursuant to procedures
established by the Board of Trustees.

PURCHASE OF FUND SHARES

Shares of the Funds are sold on each business day directly to Eligible
Investors at the net asset value next determined after an order is received in
proper form, and the order has been accepted. All purchases must be made in US
dollars. The Funds reserve the right to reject any purchase order.

ORDER PROCEDURES

Orders by all investors (except for participants in the Three Day
Settlement Program described below) to purchase Investment Company Funds shares
must be received by the Transfer Agent, either by telephone, mail or entry into
the shareholder recordkeeping system on a day when shares of the Funds are
offered and orders in proper form accepted prior to:

<TABLE>
<S> <C>
Close of the New York Stock Exchange Equity I, Equity II, Equity III, Equity Q,
(currently 4:00 p.m. Eastern time) International, Fixed Income I, Fixed Income
II and Fixed Income III Funds
12:45 p.m. Eastern time Money Market Fund*
</TABLE>

- ------------------------------
* Shares of the Money Market Fund are not available for direct investment until
further notice.

Orders for the Money Market Fund shares placed prior to the above time and
in proper form can be accepted for pricing and investment, and will begin to
earn income, on that day. Money Market Fund orders received after that time will
not be accepted for pricing and investment until the next business day. Orders
for shares of any Fund which are not accepted before the respective time for
that Fund can not be invested in the particular Fund nor begin to earn income
until the next day on which shares of that Fund are offered.

Payment Procedures: Payment for the purchase of Fund shares must be
received by the Funds' Custodian or Transfer Agent, depending on the method of
payment, on the day the order is accepted (except for participants in the Three
Day Settlement Program described below). There are several ways to pay for
orders received for the Funds:

Federal Funds Wire. Payment for orders may be made by wiring federal funds
to the Funds' Custodian, State Street Bank and Trust Company.

Automated Clearing House ("ACH"). Payment for orders may be made through
the ACH to the Funds' Custodian, State Street Bank and Trust Company. However,
funds transferred by ACH may or may not be converted into federal funds the same
day depending on the time the funds are received and the bank wiring the funds.
If the funds are not converted the same day, they will be converted the next
business day. Therefore, the order would be placed the next business day.

49
<PAGE> 50

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to the Transfer
Agent, P.O. Box 1591, Tacoma, WA 98401-1591. Certified checks are not necessary,
but checks are accepted subject to collection at full face value in US funds and
must be drawn in US dollars on a US bank. Investment in the Money Market Fund
will be effected only when the check or draft is converted to federal funds. The
investment will not begin to earn dividend income until the receipt of federal
funds by the Money Market Fund. Investments in the non-Money Market Funds will
be effected upon receipt of the check or draft by the Transfer Agent, when the
check or draft is received prior to the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern time). When the check or draft is received by the
Transfer Agent after the close of the New York Stock Exchange, the order will be
effected on the following business day.

IN-KIND EXCHANGE OF SECURITIES

The Transfer Agent may, at its discretion, permit investors to purchase
shares through the exchange of securities they hold. Any securities exchanged
must meet the investment objective, policies and limitations of the particular
Fund, must have a readily ascertainable market value, must be liquid and must
not be subject to restrictions on resale. The market value of any securities
exchanged, plus any cash, must be at least $100,000. Shares purchased in
exchange for securities generally may not be redeemed or exchanged until the
transfer has settled, which is usually within 15 days following the purchase by
exchange. A gain or loss for federal income tax purposes will generally be
realized by investors who are subject to federal taxation upon the exchange.
Investors interested in making an in-kind exchange are encouraged to consult
with their tax advisers.

The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by a Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.

THREE DAY SETTLEMENT PROGRAM

The Investment Company will accept orders from financial institutions to
purchase shares of the Funds, other than the Money Market Fund, for settlement
on the third business day following the receipt of an order to be paid by a
federal wire if the investor has agreed in writing to indemnify the Funds
against any losses as a result of nonreceipt of payment. For further information
on this program, contact the Investment Company.

THIRD PARTY TRANSACTIONS

Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary, such as a bank, broker-dealer, investment adviser or
others, may be required to pay additional fees by such Intermediary. Investors
should contact the Financial Intermediary for information concerning what
additional fees, if any, may be charged.

EXCHANGE PRIVILEGE

50
<PAGE> 51

Company through another prospectus under certain conditions and only in states
where the exchange may legally be made. For additional information, including a
prospectus of other Investment Company Funds, contact a Financial Intermediary
or the Investment Company. Exchanges may be made (i) by telephone if the
registration of the two accounts are identical; or (ii) in writing addressed to
the Investment Company.

An exchange is a redemption of the shares and is treated as a sale for
income tax purposes, and a short or long-term capital gain or loss may be
realized. The Fund shares to be acquired will be purchased when the proceeds
from the redemption become available (up to seven days from the receipt of the
request). Each investor is encouraged to talk with the investor's tax adviser.

REDEMPTION OF FUND SHARES

SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE
FUNDS AT (800) 972-0700; IN WASHINGTON (206) 627-7001.

Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below.

Payment will ordinarily be made in seven days. Generally, redemption
proceeds will be wire-transferred to the shareholder's account or to an
alternate account provided such request is given to the Transfer Agent in proper
form, at a domestic commercial bank which is a member of the Federal Reserve
System. Although the Funds currently do not charge such a fee, the Funds reserve
the right to charge a fee for the cost of wire-transferred redemptions of less
than $1,000. Payment for redemption requests of investments made by check may be
withheld for up to 15 days after the date of purchase to assure that checks in
payment for orders to purchase shares are collected by the Funds. Upon request,
redemption proceeds will be mailed to the shareholder's address of record or to
an alternate address provided such request is sent to the Transfer Agent in
proper form.

Request Procedures. Requests by all investors to redeem Investment Company
Fund shares must be received by the Funds' Transfer Agent, either by telephone,
mail, entry into the shareholder recordkeeping system, or through the Systematic
Withdrawal Payment Program on the days requests to redeem are tendered, prior
to:

Redemption requests placed for the Money Market Fund prior to the above
time will be tendered that day. Requests for that Fund after the above time will
be taken until 4:00 p.m. Eastern time, but will not be tendered until the next
business day.

Requests for redemption by telephone or entry into the shareholder
recordkeeping system must follow the procedures set forth in the Account
Registration and Investment Instruction Form, or alternate procedures may be
followed provided such requests are given to the Transfer Agent in proper form.
In the unexpected event telephone lines are unavailable, shareholders should use
the mail redemption procedures described below.

Mail. Redemption requests may be made in writing directly to Frank Russell
Investment Management Company, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma,

51
<PAGE> 52

WA 98401. The redemption price will be the net asset value next determined after
receipt by the Management Company of all required documents in good order. "Good
order" means that the request must include the following:

A. A letter of instruction or a stock assignment designating specifically
the number of shares or dollar amount to be redeemed, signed by all
owners of the shares in the exact names in which they appear on the
account, together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and

B. Such other supporting legal documents, if required by applicable law,
in the case of estates, trusts, guardianships, custodianships,
corporations, and pension and profit sharing plans.

SWP Offering Date and Payment Procedures. SWP distributions occur once a
month and are paid by wire or check, according to the instructions provided on
the SWP form. If a client has more than one Fund from which a SWP is to be
received, the client will receive one wire or check for each SWP Fund. SWP
transactions are recorded on the twenty-fifth day of each month. If the
twenty-fifth day falls on a weekend or holiday, the transaction will be recorded
on the preceding business day. SWP payment dates are the first business day
after the trade date. If the SWP is coming out of the Money Market Fund and the
trade date falls on a Friday, or the day before a holiday, income will be earned
until the payment date.

Distribution Frequency. Payments can be scheduled as monthly, quarterly,
semiannual or annual distributions.

SWP Distribution by Wire. Federal Funds Wire payments will be sent to the
designated bank on the payment date.

SWP Distribution by Check. Checks will be sent by US Postal Service first
class mail, to the requested address on the payment date.

A Systematic Withdrawal Payment form must be completed and mailed to Frank
Russell Investment Management Company, Attention: Frank Russell Investment
Company, Operations Department, P.O. Box 1591, Tacoma, WA 98401-1591. The
Systematic Withdrawal Payment form must be received by Frank Russell Investment
Management Company five business days before the initial distribution date.

Redemption in Kind. A Fund may pay any portion of the redemption amount in
excess of $250,000 by a distribution in kind of securities from the Fund's
portfolio, in lieu of cash. Investors will incur brokerage charges on the sale
of these portfolio securities. The Funds reserve the right to suspend the right
of redemption or postpone the date of payment if any unlikely emergency
conditions, as specified in the 1940 Act or determined by the SEC, should
develop.

52
<PAGE> 53

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

Russell Fund Distributors, Inc., a wholly owned subsidiary of the
Management Company, is the principal Distributor for Investment Company shares.
The Distributor receives no compensation from the Investment Company for its
services.

State Street Bank and Trust Company ("State Street"), Boston,
Massachusetts, holds all portfolio securities and cash assets of the Funds, and
provides portfolio recordkeeping services. State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Funds.

Coopers & Lybrand L.L.P., Boston, Massachusetts, are the Funds' independent
accountants. Shareholders will receive unaudited semiannual financial statements
and annual financial statements audited by Coopers & Lybrand L.L.P. Shareholders
may also receive additional reports concerning the Funds, or their accounts,
from the Management Company.

ORGANIZATION, CAPITALIZATION, AND VOTING

The Investment Company was organized as a Maryland corporation on March 6,
1981, and commenced offering shares on October 15, 1981. On January 2, 1985, the
Investment Company reorganized by changing its domicile and legal status to a
Massachusetts business trust and now operates under an amended Master Trust
Agreement dated July 26, 1984. Frank Russell Company has the right to grant the
nonexclusive use of the name "Frank Russell" or any derivation thereof to any
other investment company or other business enterprise, and to withdraw from the
Investment Company the use of the name "Frank Russell."

The Investment Company issues shares of beneficial interest divisible into
an unlimited number of funds, each of which funds is a separate trust under
Massachusetts law, and the funds' shares may be offered in multiple classes.
Shares of each class of a Fund represent proportionate interests in the assets
of that Fund attributable to that class, and have the same voting and other
rights and preferences as the shares of other classes of the Fund. Shares of
each class of a Fund are entitled to such dividends and distributions earned on
the assets belonging to the Fund as may be declared by the Board of Trustees.
Shares of each class of a Fund have a par value of $.01 per share, are fully
paid and nonassessable, and have no preemptive or conversion rights. Each share
of a class of a Fund has one vote; there are no cumulative voting rights. There
are no Annual Meetings of shareholders, but Special Meetings may be held. On any
matter which affects only a particular Fund or class, only shareholders of that
Fund or class, as applicable, will vote, unless otherwise required by the 1940
Act or the amended Master Trust Agreement.

The Funds described in this Prospectus do not currently offer shares of
beneficial interest in any class other than the Class S Shares.

The Trustees hold office for the life of the Investment Company. A Trustee
may resign or retire, and a Trustee may be removed at any time by, in substance,
a vote of two-thirds of the Investment Company shares. A vacancy in the Board of
Trustees shall be filled by the vote of a majority of the remaining Trustees so
long as, in substance, two-thirds of the Trustees have been elected by
shareholders.

At April 30, 1996 the following shareholder may be deemed by the 1940 Act
to "control" the Funds listed after its name because it own more than 25% of the
voting shares of the indicated Funds: U.S. National Bank of Oregon -- Equity I,
Equity Q International and Fixed Income III Funds.

53
<PAGE> 54

MONEY MANAGER PROFILES

The money managers, other than the Investment Manager for the Money Market
Fund, have no other affiliations with the Funds or with Frank Russell Company.
Each money manager has been in business for at least three years and is
principally engaged in managing institutional investment accounts. These
managers may also serve as managers or advisers to other Investment Company
Funds, or to other clients of Frank Russell Company, including its wholly owned
subsidiary, Frank Russell Trust Company.

EQUITY I FUND

Alliance Capital Management L.P., 601 2nd Ave. South, Suite 5000,
Minneapolis, MN 55402-4322, a limited partnership whose (i) general partner is a
wholly owned subsidiary of The Equitable Companies Incorporated ("The
Equitable") and (ii) majority unit holder is ACM, Inc., a wholly owned
subsidiary of The Equitable. As of March 1, 1995, 60.5% of The Equitable was
owned by Axa, a French insurance holding company.

BZW Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San
Francisco, CA 94105, is an indirect wholly-owned subsidiary of Barclays Bank
PLC.

Columbus Circle Investors, Metro Center, One Station Place, 8th Floor,
Stamford, CT 06902, is a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly by
a group comprised of PIMCO Managing Directors.

Equinox Capital Management, Inc., 399 Park Ave., 28th Floor, New York, NY
10022. Equinox is a registered investment adviser with majority ownership held
by Ron Ulrich.

INVESCO Capital Management, Inc., 1315 Peachtree Street N.E., Suite 300,
Atlanta, GA 30309, is a corporation whose indirect parent is INVESCO, PLC, is a
London-based financial services holding company.

Lincoln Capital Management Company, 200 South Wacker Drive, Suite 2100,
Chicago, IL 60606. Lincoln Capital Management, Inc. is a division of Lincoln
Capital Management Company, and is a registered investment adviser with majority
ownership held by John Croghan, Parker Hall, Ken Meyer, Tim Ubben and Ray Zemon.

Suffolk Capital Management, Inc., 250 West 57th Street, Suite 420, New
York, NY 10107. Suffolk Capital Management, Inc. is a registered investment
adviser and a wholly owned subsidiary of United Asset Management Company, a
publicly traded corporation.

Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116,
is a corporation with seven shareholders, with Stanford M. Calderwood holding
majority ownership.

Wellington Management Company, 75 State Street, Boston, MA 02109, is a
private Massachusetts general partnership, of which the following persons are
managing partners: Robert W. Doran, Duncan W. McFarland and John B. Neff.

54
<PAGE> 55

EQUITY II FUND

Delphi Management, Inc., 50 Rowes Wharf, Suite 440, Boston, MA 02110, is
100% owned by Scott Black.

Fiduciary International, Inc., 2 World Trade Center, New York, NY 10048, an
investment adviser registered with the SEC, is an indirect wholly-owned
subsidiary of Fiduciary Trust Company International, a New York state chartered
bank.

GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 720, San Diego, CA
92121, is a California limited partnership and a SEC registered investment
adviser. Its general partners are Robert J. Anslow, Jr. and Marina L. Marrelli.

Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth Levy.

Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.

Wellington Management Company, See: Equity I Fund.

EQUITY III FUND

Brandywine Asset Management, Inc., Three Christina Centre, Suite 1200, 201
N. Walnut Street, Wilmington, DE 19801, is a corporation controlled by its
president, W. Anthony Hitschler and six other principals.

Equinox Capital Management, Inc., See: Equity I Fund.

Trinity Investment Management Corporation, See: Equity I Fund.

EQUITY Q FUND

BZW Barclays Global Fund Advisors, See: Equity I Fund.

Franklin Portfolio Associates Trust, One Post Office Square, Suite 3660,
Boston, MA 02109, is a Massachusetts business trust owned by Mellon Financial
Services Corporation, a holding company of Mellon Bank Corporation.

J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 14th Floor, New
York, NY 10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a
publicly held bank holding company.

INTERNATIONAL FUND

Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, MA 02110, is a
company whose majority ownership is held by the four senior partners: Jeremy
Grantham, Richard Mayo, Eyk De Mol Van Otterloo, and Kingsley Durant.

J.P. Morgan Investment Management, Inc., See: Equity Q Fund.

Marathon Asset Management Limited, 115 Shaftesbury Ave., London, England
WC2H 8AD, is a corporation 33.3% owned by each of the following: Jeremy Hosking,
William Arah and Neil Ostrer.

55
<PAGE> 56

Oechsle International Advisors, One International Place, 44th Floor,
Boston, MA 02110, is a limited partnership which is 100% controlled by its
general partners. The general partners are: S. Dewey Keesler, Stephen P. Langer,
Walter Oechsle, L. Sean Roche, Steven H. Schaefer and Tetsuo Shiozumi.

Rowe Price-Fleming International, Inc., 100 East Pratt Street, 9th Floor,
Baltimore, MD 21202, and 4th Floor, 25 Copthall Ave., London, England EC2R 7DR,
which is a joint venture of T. Rowe Price Associates, Inc., and The Fleming
Group, each of which owns 50% of the company. Ownership of The Fleming Group
holding is split equally between Copthall Overseas Limited, a subsidiary of
Robert Fleming Holdings, and Jardine Fleming International Holdings Limited, a
subsidiary of Jardine Fleming Holdings. Robert Fleming Holdings is a
London-based UK holding company with the majority of the shares distributed: 51%
to public companies and 38% to the Fleming family. Jardine Fleming is a Hong
Kong-based holding company which is owned 50% by Robert Fleming Holdings and 50%
by Jardine Matheson & Co., the Hong Kong trading company, a wholly owned
subsidiary of Jardine Matheson Holdings Limited. The stock of T. Rowe Price
Associates, Inc., is publicly traded with a substantial percentage of such stock
owned by the company's active management.

FIXED INCOME I FUND

Lincoln Capital Management Company, See: Equity I Fund.

Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660, is a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly by
a group comprised of PIMCO Managing Directors.

Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, is a
company whose ownership is divided among seventeen directors, with no director
having more than a 25% ownership interest.

FIXED INCOME II FUND

BlackRock Financial Management, 345 Park Ave., 31st Floor, New York, NY
10154, is a wholly-owned subsidiary of PNC Bank.

Standish, Ayer & Wood, Inc., See: Fixed Income I Fund.

STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue, Hamilton
HM LX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.

FIXED INCOME III FUND

BEA Associates, 153 East 53rd Street, New York, NY 10022, is a general
partnership of Credit Suisse Capital Corporation ("CS Capital") and Basic
Appraisals, Inc. ("Basic"). CS Capital is an 80% partner, and is a wholly-owned
subsidiary of Credit Suisse Investment Corporation, which is in turn a
wholly-owned subsidiary of Credit Suisse, a Swiss bank, which is in turn a
subsidiary of CS Holding, a Swiss corporation. No one person or entity possesses
a controlling interest in Basic, the 20% partner. BEA Associates is a registered
investment adviser.

Pacific Investment Management Company, See: Fixed Income I Fund.

Standish, Ayer & Wood, Inc., See: Fixed Income I Fund.

56
<PAGE> 57

MONEY MARKET FUND

Frank Russell Investment Management Company, 909 A Street, Tacoma, WA
98402, is a registered investment adviser wholly owned by Frank Russell Company.

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUNDS OR THE MONEY MANAGERS SINCE THE DATE HEREOF; HOWEVER, IF
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.

57
<PAGE> 58

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (206) 627-7001

MONEY MANAGERS

EQUITY I FUND
Alliance Capital Management L.P.
BZW Barclays Global Fund Advisors
Columbus Circle Investors
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company
Suffolk Capital Management, Inc.
Trinity Investment Management Corporation
Wellington Management Company

EQUITY II FUND
Delphi Management, Inc.
Fiduciary International, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc.
Sirach Capital Management, Inc.
Wellington Management Company

EQUITY III FUND
Brandywine Asset Management, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation

EQUITY Q FUND
BZW Barclays Global Fund Advisors
Franklin Portfolio Associates Trust
J.P. Morgan Investment Management, Inc.

INTERNATIONAL FUND
Grantham, Mayo, Van Otterloo & Co.
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited
Oechsle International Advisors
Rowe Price-Fleming International, Inc.

FIXED INCOME I FUND
Lincoln Capital Management Company
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.

FIXED INCOME II FUND
BlackRock Financial Management
Standish, Ayer & Wood, Inc.
STW Fixed Income Management Ltd.

FIXED INCOME III FUND
BEA Associates
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.

MONEY MARKET FUND
Frank Russell Investment Management Company

58
<PAGE> 59

MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Co.
909 A Street
Tacoma, Washington 98402

CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402

DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 98402

INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109

LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 -- One Commerce Square
Philadelphia, PA 19103-7098

OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (206) 627-7001

59
<PAGE> 60

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (206) 627-7001

Frank Russell Investment Management Company (the "Management Company")
operates and administers all of the Funds which comprise the Investment Company.
The Management Company is a wholly owned subsidiary of Frank Russell Company,
which researches and recommends to the Management Company, and to the Investment
Company, one or more investment management organizations to manage the portfolio
of each of the individual Funds. There is no sales charge for investing in the
Class S Shares of the Funds.

<TABLE>
<S> <C>
Diversified Equity Fund International Securities Fund
Special Growth Fund Diversified Bond Fund
Equity Income Fund Volatility Constrained Bond Fund
Quantitative Equity Fund Multistrategy Bond Fund
</TABLE>

This Prospectus sets forth concisely information about the Investment
Company and the Class S Shares of eight of its Funds that a prospective investor
ought to know before investing. The Investment Company has filed a Statement of
Additional Information dated July 8, 1996, with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated herein by
reference and may be obtained without charge by writing to the Secretary, Frank
Russell Investment Company, at the address shown above or by telephoning (800)
972-0700. This Prospectus should be read carefully and retained for future
reference.

This Prospectus relates only to the Class S Shares of the eight Funds. The
Funds also offer shares of beneficial interest in another class of shares, the
Class C Shares, through a separate prospectus. For more information concerning
Class C Shares of the Funds, contact the person or organization from which you
obtained this prospectus or write to the Secretary, Frank Russell Investment
Company, at the address shown above, or telephone (800) 972-0700.
PROSPECTUS DATED JULY 8, 1996
<PAGE> 61

Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:

DIVERSIFIED EQUITY FUND -- Income and capital growth by investing principally in
equity securities.

SPECIAL GROWTH FUND -- Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from Diversified Equity Fund, by investing in equity securities.

EQUITY INCOME FUND -- A high level of current income, while maintaining the
potential for capital appreciation by investing primarily in income-producing
equity securities.

QUANTITATIVE EQUITY FUND -- Total return greater than the total return of the US
stock market as measured by the Russell 1000(R) Index over a market cycle of
four to six years, while maintaining volatility and diversification similar to
the Index by investing in equity securities.

INTERNATIONAL SECURITIES FUND -- Favorable total return and additional
diversification for US investors by investing primarily in equity and
fixed-income securities of non-US companies, and securities issued by non-US
governments.

DIVERSIFIED BOND FUND -- Effective diversification against equities and a stable
level of cash flow by investing in fixed-income securities.

VOLATILITY CONSTRAINED BOND FUND -- Preservation of capital and generation of
current income consistent with the preservation of capital by investing
primarily in fixed-income securities with low-volatility characteristics.

MULTISTRATEGY BOND FUND -- Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from broad fixed-income market portfolios, by investing in fixed-income
securities.

This Prospectus describes and offers Class S Shares of eight Internal Fee Funds.
Another prospectus describes and offers Class S Shares of nine External Fee
Funds, while a third prospectus describes and offers Class S Shares in four
Internal Fee Funds and two External Fee Funds. The principal distinction between
the External and the Internal Fee Funds is that a shareholder of an External Fee
Fund may pay a quarterly shareholder investment services fee directly to the
Management Company. The fee is computed on the amount the shareholder has
invested in an External Fee Fund. Each shareholder of the Internal Fee Funds
pays no such fees. The Investment Company's Funds had aggregate net assets of
$8.9 billion on April 30, 1996.

The net assets of these eight Funds on April 30, 1996, were:

<TABLE>
<S> <C>
Diversified Equity $577,931,555
Special Growth $350,341,011
Equity Income $186,614,025
Quantitative Equity $540,085,935

International Securities $690,786,268
Diversified Bond $509,958,358
Volatility Constrained Bond $168,731,410
Multistrategy Bond $240,888,854
</TABLE>

2
<PAGE> 62

HIGHLIGHTS AND TABLE OF CONTENTS

ANNUAL FUND OPERATING EXPENSES summarizes the fees paid by shareholders and
provides an example showing the effect of these fees on a $1,000 investment over
time. PAGE 5.

FINANCIAL HIGHLIGHTS summarizes significant financial information concerning the
Funds for the period stated herein. PAGE 13.

ELIGIBLE INVESTORS are principally those institutional investors which invest
for their own account or in a fiduciary or agency capacity, and which have
entered into an Asset Management Services Agreement with the Management Company;
and institutions or individuals who have acquired shares through such
institutions. PAGE 22.

INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES, AND RISKS apply to each Fund.
Those objectives, restrictions and policies designated "fundamental" may not be
changed without the approval of a majority of the Fund's shareholders. Risks
associated with certain Fund investment policies, such as market volatility
risk, political risk, and credit risk, are disclosed in the context of policies
giving rise to such risks. PAGE 26.

3
<PAGE> 63

PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains. PAGE 40.

DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or received
in cash. Dividends from net investment income are declared Monthly, by the
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds;
Quarterly, by the Diversified Equity, Special Growth, Equity Income and
Quantitative Equity Funds; and Annually, by the International Securities Fund.
All Funds declare distributions from net realized capital gains, if any, at
least annually. PAGE 40.

INCOME TAXES PAID BY THE FUNDS should be nominal. Taxable shareholders of the
Funds will be subject to federal taxes on dividends and capital gains
distributions and may also be subject to state or local taxes. PAGE 41.

FUND PERFORMANCE, including yields and total return information, is calculated
in accordance with formulas prescribed by the Securities and Exchange
Commission. PAGE 42.

VALUATION OF FUND SHARES occurs each business day. The value of a Class S share
purchased or redeemed is based upon the next computed current market value of
the assets, less liabilities, of each Class S Fund. Unless otherwise indicated,
"shares" in this Prospectus refers to the Class S Shares of the Funds. PAGE 43.

PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and orders
to purchase are accepted on each business day. PAGE 44.

THE FUNDS also offer a second class of shares, the Class C Shares, which are
designed to meet different investor needs. PAGE 48.

4
<PAGE> 64

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE DIVERSIFIED EQUITY FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .78%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .06
Other Fees............................................................ .03
---
Total Other Expenses.................................................. .18
----
Total Class S Operating Expenses**....................................... .96%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $10 $31 $53 $118
--- --- --- -----
--- --- --- -----
</TABLE>

- ------------------------------
** Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

5
<PAGE> 65

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE SPECIAL GROWTH FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .95%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .15%
Transfer Agent Fees................................................... .10
Other Fees............................................................ .04
---
Total Other Expenses.................................................. .29
----
Total Class S Operating Expenses**....................................... 1.24%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $13 $39 $68 $150
--- --- --- -----
--- --- --- -----
</TABLE>

6
<PAGE> 66

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE EQUITY INCOME FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .80%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .15%
Transfer Agent Fees................................................... .13
Other Fees............................................................ .05
---
Total Other Expenses.................................................. .33
----
Total Class S Shares Operating Expenses**................................ 1.13%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $12 $36 $62 $137
--- --- --- -----
--- --- --- -----
</TABLE>

7
<PAGE> 67

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE QUANTITATIVE EQUITY FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .78%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .06
Other Fees............................................................ .03
---
Total Other Expenses.................................................. .18
----
Total Class S Shares Operating Expenses**................................ .96%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $10 $31 $53 $118
--- --- --- -----
--- --- --- -----
</TABLE>

8
<PAGE> 68

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE INTERNATIONAL SECURITIES FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .95%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .29%
Transfer Agent Fees................................................... .06
Other Fees............................................................ .03
---
Total Other Expenses.................................................. .38
----
Total Class S Shares Operating Expenses**................................ 1.33%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $14 $42 $73 $160
--- --- --- -----
--- --- --- -----
</TABLE>

9
<PAGE> 69

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE DIVERSIFIED BOND FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .45%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .06%
Transfer Agent Fees................................................... .05
Other Fees............................................................ .03
---
Total Other Expenses.................................................. .14
----
Total Class S Shares Operating Expenses**................................ .59%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $6 $19 $33 $74
--- --- --- -----
--- --- --- -----
</TABLE>

- ------------------------------
** Investors purchasing in the Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

10
<PAGE> 70

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE VOLATILITY CONSTRAINED BOND FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .50%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .18%
Transfer Agent Fees................................................... .09
Other Fees............................................................ .05
---
Total Other Expenses.................................................. .32
----
Total Class S Shares Operating Expenses**................................ .82%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $8 $26 $46 $101
--
--- --- -----
--
--- --- -----
</TABLE>

11
<PAGE> 71

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE MULTISTRATEGY BOND FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1).................................... .57%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .09
Other Fees............................................................ .05
---
Total Other Expenses.................................................. .23
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)**......... .80%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $8 $26 $44 $99
--
--- --- ---
--
--- --- ---
</TABLE>

12
<PAGE> 72

FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED EQUITY FUND*

DIVERSIFIED EQUITY FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR...... $32.26 $34.88 $35.60 $36.36 $30.66 $35.22 $30.46 $27.22 $31.20 $27.85
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. .60 .58 .56 .60 .81 .99 .94 .89 1.37 .78
Net realized and unrealized gain
(loss)
on investments...................... 10.63 (.49) 3.03 2.30 8.36 (3.45) 7.68 3.57 1.05 3.28
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations.... 11.23 .09 3.59 2.90 9.17 (2.46) 8.62 4.46 2.42 4.06
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................. (.60) (.58) (.55) (.61) (.82) (.96) (1.11) (.81) (.97) (.67)
Net realized gain on investments...... (4.27) (1.87) (3.76) (3.05) (2.65) (1.14) (2.75) (.41) (5.43) (.04)
In excess of net realized gain
on investments...................... -- (.26) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................. (4.87) (2.71) (4.31) (3.66) (3.47) (2.10) (3.86) (1.22) (6.40) (.71)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............ $38.62 $32.26 $34.88 $35.60 $36.36 $30.66 $35.22 $30.46 $27.22 $31.20
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........................ 35.17 (0.01) 10.53 8.32 31.05 (7.01) 29.06 16.37 6.94 14.63
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets.............................. .95 .95 .96 .98 .98 1.03 1.01 1.00 .97 .98
Net investment income to average
net assets.......................... 1.56 1.73 1.54 1.69 2.28 2.97 2.65 2.92 2.27 2.87
Portfolio turnover.................... 92.53 57.53 99.80 77.02 116.53 96.90 61.80 66.02 87.69 80.50
Net assets, end of year ($000
omitted)............................ 530,645 414,036 388,420 337,549 325,746 251,254 234,988 202,948 198,902 214,325
</TABLE>

- ------------------------------
* See the notes to financial statements which appear in the Investment Company's
Annual Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.

13
<PAGE> 73

FINANCIAL HIGHLIGHTS OF THE SPECIAL GROWTH FUND*

SPECIAL GROWTH FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR........... $33.47 $35.82 $36.63 $34.47 $24.71 $29.35 $26.19 $23.58 $26.68 $25.10
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... .18 .16 .07 .05 .24 .42 .42 .24 .30 .28
Net realized and unrealized gain (loss)
on investments........................... 9.25 (.71) 5.22 4.22 10.34 (4.57) 5.78 2.99 1.59 1.74
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total From Investment Operations......... 9.43 (.55) 5.29 4.27 10.58 (4.15) 6.20 3.23 1.89 2.02
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income...................... (.21) (.10) (.07) (.06) (.24) (.42) (.48) (.21) (.35) (.25)
Net realized gain on investments........... (3.52) (.85) (6.03) (2.05) (.58) (.07) (2.56) (.41) (4.64) (.19)
In excess of net realized gain on
investments.............................. -- (.85) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total Distributions...................... (3.73) (1.80) (6.10) (2.11) (.82) (.49) (3.04) (.62) (4.99) (.44)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR................. $39.17 $33.47 $35.82 $36.63 $34.47 $24.71 $29.35 $26.19 $23.58 $26.68
======= ======= ======= ======= ======= ====== ====== ====== ====== ======
TOTAL RETURN (%)............................. 28.52 (3.71) 15.48 12.52 43.11 (14.28) 23.92 13.82 6.54 8.07
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net to average net
assets................................... 1.22 1.20 1.31 1.33 1.36 1.50 1.49 1.47 1.37 1.49
Operating expenses, gross to average net
assets................................... 1.22 1.20 1.31 1.33 1.36 1.53 1.49 1.47 1.37 1.51
Net investment income to average net
assets................................... .49 .50 .19 .14 .80 1.57 1.42 .92 1.07 1.20
Portfolio turnover......................... 87.56 55.40 91.97 42.20 42.81 63.87 85.24 51.75 161.46 99.59
Net assets, end of year ($000 omitted)..... 313,678 229,077 188,891 134,913 105,245 62,116 60,146 47,405 45,460 41,523
Per share amount of fees reimbursed
($ omitted).............................. -- -- -- -- -- .0093 -- -- -- .0026
</TABLE>

14
<PAGE> 74

FINANCIAL HIGHLIGHTS OF THE EQUITY INCOME FUND*

EQUITY INCOME FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR.......... $32.21 $35.90 $35.32 $36.54 $30.75 $34.91 $30.85 $26.92 $34.66 $31.98
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... .94 .90 .83 .99 1.11 1.43 1.34 1.22 1.18 1.36
Net realized and unrealized gain (loss) on
investments............................. 10.08 (.70) 3.69 3.08 7.15 (3.83) 6.47 3.96 (1.44) 2.89
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
Total From Investment Operations........ 11.02 .20 4.52 4.07 8.26 (2.40) 7.81 5.18 (.26) 4.25
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income..................... (.97) (.89) (.83) (1.00) (1.10) (1.37) (1.50) (1.25) (1.50) (1.25)
In excess of net investment income........ -- -- (.00) -- -- -- -- -- -- --
Net realized gain on investments.......... (3.83) (3.00) (3.11) (4.29) (1.37) (.39) (2.25) -- (5.98) (.32)
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
Total Distributions..................... (4.80) (3.89) (3.94) (5.29) (2.47) (1.76) (3.75) (1.25) (7.48) (1.57)
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
NET ASSET VALUE, END OF YEAR................ $38.43 $32.21 $35.90 $35.32 $36.54 $30.75 $34.91 $30.85 $26.92 $34.66
======= ======= ======= ======= ======= ====== ======= ====== ====== ======
TOTAL RETURN (%)............................ 34.76 (.69) 13.23 11.51 27.52 (6.90) 25.61 19.42 (2.44) 13.42
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets.................................. 1.06 1.04 1.05 1.08 1.11 1.14 1.15 1.13 1.06 1.02
Net investment income to average net
assets.................................. 2.51 2.56 2.23 2.68 3.11 4.12 3.94 4.08 3.30 4.05
Portfolio turnover........................ 92.40 89.91 78.72 95.07 61.73 65.97 79.82 58.12 98.67 83.55
Net assets, end of year ($000 omitted).... 180,116 144,285 149,532 134,365 122,689 99,575 101,589 68,998 61,300 75,032
</TABLE>

15
<PAGE> 75

FINANCIAL HIGHLIGHTS OF THE QUANTITATIVE EQUITY FUND*

QUANTITATIVE EQUITY FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR............... $24.84 $26.44 $25.82 $25.88 $21.07 $23.57 $20.21 $18.08 $20.00
------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................... .50 .49 .45 .49 .58 .66 .68 .56 .32
Net realized and unrealized gain (loss)
on investments............................... 8.72 (.19) 2.69 1.67 5.93 (1.99) 4.53 2.14 (1.86)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment Operations............. 9.22 .30 3.14 2.16 6.51 (1.33) 5.21 2.70 (1.54)
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.......................... (.51) (.49) (.45) (.49) (.58) (.64) (.76) (.57) (.25)
Net realized gain on investments............... (2.79) (1.41) (2.07) (1.73) (1.12) (.53) (1.09) -- (.13)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions.......................... (3.30) (1.90) (2.52) (2.22) (1.70) (1.17) (1.85) (.57) (.38)
------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF YEAR..................... $30.76 $24.84 $26.44 $25.82 $25.88 $21.07 $23.57 $20.21 $18.08
======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(A).............................. 37.69 .19 12.56 8.67 31.70 (5.60) 26.08 15.05 (7.74)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (b)... .93 .94 .98 1.02 1.03 1.12 1.14 1.16 .97
Net investment income to average net assets
(b).......................................... 1.71 1.95 1.68 1.94 2.39 2.94 3.00 3.00 3.38
Portfolio turnover (b)......................... 78.83 45.97 62.48 59.19 58.07 57.49 90.65 59.37 47.78
Net assets, end of year ($000 omitted)......... 488,948 380,592 314,647 244,870 201,614 147,730 124,111 89,858 64,182
</TABLE>

- ------------------------------
++ For the period May 15, 1987 (commencement of operations) to December 31,
1987.
(a) Periods of less than one year are not annualized.
(b) The ratios for the period ended December 31, 1987 are annualized.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.

16
<PAGE> 76

FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL SECURITIES FUND*

INTERNATIONAL SECURITIES FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR........ $53.96 $57.95 $44.75 $49.15 $44.60 $55.81 $50.49 45.26 $49.22 $34.16
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... .56 .44 .40 .61 .72 1.05 .67 .86 .55 .19
Net realized and unrealized gain (loss)
on investments (a).................... 4.89 1.23 14.53 (4.02) 4.60 (9.53) 10.32 8.98 6.84 15.90
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
Total From Investment Operations...... 5.45 1.67 14.93 (3.41) 5.32 (8.48) 10.99 9.84 7.39 16.09
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
LESS DISTRIBUTIONS:
Net investment income................... (.88) (.04) (.38) (.68) (.76) (1.08) (.89) (.95) (.45) (.02)
In excess of net investment income...... (.23) (.02) (.23) -- -- -- -- -- -- --
Net realized gain on investments........ (1.69) (5.60) (1.12) (.31) (.01) (1.65) (4.78) (3.66) (10.90) (1.01)
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
Total Distributions................... (2.80) (5.66) (1.73) (.99) (.77) (2.73) (5.67) (4.61) (11.35) (1.03)
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
NET ASSET VALUE, END OF YEAR.............. $56.61 $53.96 $57.95 $44.75 $49.15 $44.60 $55.81 $50.49 $45.26 $49.22
======= ======= ======= ======= ======= ======= ======= ====== ====== =======
TOTAL RETURN (%).......................... 10.20 4.86 33.48 (6.94) 11.99 (15.34) 22.24 22.05 15.89 48.54
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
assets................................ 1.30 1.30 1.38 1.45 1.49 1.50 1.50 1.50 1.50 1.50
Operating expenses, gross, to average
assets................................ 1.31 1.33 1.42 1.47 1.49 1.50 1.54 1.50 1.50 1.61
Net investment income to average net
assets................................ .97 .70 .82 1.37 1.68 2.28 1.54 1.60 .91 .96
Portfolio turnover...................... 42.96 72.23 60.22 48.93 52.46 68.89 57.16 43.50 113.04 55.53
Net assets, end of year ($000
omitted).............................. 623,389 563,333 454,482 262,886 243,065 169,818 123,823 91,006 88,321 100,733
Per share amount of fees reimbursed ($
omitted).............................. .0080 .0178 .0161 .0054 -- -- .0169 -- -- .0347
</TABLE>

- ------------------------------
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.03 per share.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.

17
<PAGE> 77

FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED BOND FUND*

DIVERSIFIED BOND FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR...... $21.53 $23.73 $23.49 $24.29 $22.81 $22.90 $22.38 $22.38 $25.00 $23.29
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 1.54 1.46 1.48 1.62 1.72 1.74 1.87 1.69 1.55 1.73
Net realized and unrealized gain
(loss)
on investments...................... 2.18 (2.22) .83 (.10) 1.61 (.09) .83 (.02) (1.28) 1.76
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations.... 3.72 (.76) 2.31 1.52 3.33 1.65 2.70 1.67 .27 3.49
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................. (1.56) (1.42) (1.48) (1.63) (1.69) (1.74) (1.92) (1.67) (1.65) (1.76)
In excess of net investment income.... -- -- (.01) -- -- -- -- -- -- --
Net realized gain on investments...... -- -- (.58) (.69) (.16) -- (.26) -- (1.24) (.02)
In excess of net realized gain on
investments......................... -- (.02) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................. (1.56) (1.44) (2.07) (2.32) (1.85) (1.74) (2.18) (1.67) (2.89) (1.78)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............ $23.69 $21.53 $23.73 $23.49 $24.29 $22.81 $22.90 $22.38 $22.38 $25.00
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........................ 17.76 (3.25) 10.02 6.57 15.29 7.58 12.52 7.67 1.25 15.49
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average assets... .59 .56 .58 .62 .74 .88 .93 .93 .90 .96
Operating expenses, gross, to average assets... .59 .56 .58 .67 .74 .88 .93 .93 .90 .96
Net investment income to average
net assets.......................... 6.69 6.57 6.13 6.79 7.38 7.89 8.16 7.48 7.05 7.27
Portfolio turnover.................... 135.85 153.21 177.74 228.37 130.96 94.88 195.14 197.15 180.54 229.48
Net assets, end of year ($000
omitted)............................ 513,808 525,315 477,341 412,394 344,081 294,677 230,156 211,656 197,730 122,333
Per share amount of fees waived
($ omitted)......................... -- -- -- .0115 -- -- -- -- -- --
</TABLE>

18
<PAGE> 78

FINANCIAL HIGHLIGHTS OF THE VOLATILITY CONSTRAINED BOND FUND*

VOLATILITY CONSTRAINED BOND FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR...... $18.64 $19.78 $19.51 $20.33 $19.51 $19.37 $19.14 $19.21 $20.06 $19.93
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 1.21 1.15 .82 1.34 1.45 1.52 1.66 1.55 1.48 1.53
Net realized and unrealized gain
(loss)
on investments...................... .58 (1.16) .45 (.88) .80 .13 .30 (.10) (.67) .13
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations.... 1.79 (.01) 1.27 .46 2.25 1.65 1.96 1.45 .81 1.66
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................. (1.22) (1.13) (.71) (1.28) (1.43) (1.51) (1.73) (1.52) (1.59) (1.53)
Net realized gain on investments...... -- -- -- -- -- -- -- -- (.07) --
Tax Return of capital................. -- -- (.29) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................. (1.22) (1.13) (1.00) (1.28) (1.43) (1.51) (1.73) (1.52) (1.66) (1.53)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............ $19.21 $18.64 $19.78 $19.51 $20.33 $19.51 $19.37 $19.14 $19.21 $20.06
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........................ 9.89 (.02) 6.67 2.29 12.00 8.92 10.64 7.77 4.27 8.68
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets.............................. .71 .67 .66 .68 .62 .62 .61 .59 .58 .58
Net investment income to average
net assets.......................... 6.33 5.97 5.79 6.74 7.34 7.88 8.41 7.97 7.75 7.88
Portfolio turnover.................... 256.72 182.65 220.77 312.05 159.20 181.66 331.12 238.69 190.36 227.17
Net assets, end of year ($000
omitted)............................ 181,881 195,007 225,672 292,909 293,603 240,887 214,745 234,095 251,702 214,860
</TABLE>

19
<PAGE> 79

FINANCIAL HIGHLIGHTS OF THE MULTISTRATEGY BOND FUND*

MULTISTRATEGY BOND FUND

<TABLE>
<CAPTION>
1995 1994 1993++
<S> <C> <C> <C>
----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR........................................................... $9.29 $10.31 $10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................................................................... .65 .58 .46
Net realized and unrealized gain (loss) on investments..................................... .97 (1.03) .40
------- ------- -------
Total From Investment Operations......................................................... 1.62 (.45) .86
------- ------- -------
LESS DISTRIBUTIONS:
Net investment income...................................................................... (.66) (.57) (.46)
Net realized gain on investments........................................................... -- -- (.08)
In excess of net realized gain on investments.............................................. -- -- (.01)
------- ------- -------
Total Distributions...................................................................... (.66) (.57) (.55)
------- ------- -------
NET ASSET VALUE, END OF YEAR................................................................. $10.25 $9.29 $10.31
======= ======= =======
TOTAL RETURN (%)(A).......................................................................... 17.92 (4.35) 8.74
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)......................................... .85 .85 .85
Operating expenses, gross, to average net assets (b)....................................... .89 .90 1.20
Net investment income to average net assets (b)............................................ 6.61 6.26 5.60
Portfolio turnover (b)..................................................................... 142.26 136.39 188.95
Net assets, end of year ($000 omitted)..................................................... 218,765 173,035 98,374
Per share amount of fees waived ($ omitted)................................................ -- -- .0002
Per share amount of fees reimbursed ($ omitted)............................................ .0042 .0043 .0286
</TABLE>

- ------------------------------
++ For the period January 29, 1993 (commencement of operations) to December
31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.

20
<PAGE> 80

THE PURPOSE OF THE FUNDS

FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS

Three functions are at the core of Frank Russell Company's consulting
service:

Objective Setting: Defining appropriate investment objectives and desired
investment returns based upon the client's unique situation and tolerance for
risk.

When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique with the objectives of
reducing risk and increasing returns.

MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION

21
<PAGE> 81

Substantial pools of investment assets are required to achieve the cost
effective and efficient allocation of assets among various asset classes and
investment styles, to use multiple money managers, and to support the research
and evaluation efforts required to select appropriate money managers. By pooling
the assets of institutions and individuals with smaller to medium-sized accounts
in a series of Funds with different objectives and policies, Frank Russell
Company believes that it is able to provide its multi-style, multi-manager
diversification techniques and money manager evaluation services to Eligible
Investors on a basis which is both efficient and cost effective for the investor
and Frank Russell Company.

ELIGIBLE INVESTORS

- Bank trust departments managing discretionary institutional or personal
trust accounts

- Banks, other than through their trust departments

- Registered investment advisers

- Endowment funds and charitable foundations

- Broker-Dealers

- Employee welfare plans

- Pension or profit sharing plans

- Insurance companies

22
<PAGE> 82

Either the client or the Management Company may terminate the Agreement
upon written notice as provided for in the Agreement. The Management Company
does not expect to exercise its right to terminate the Agreement unless a client
does not (i) promptly pay fees due to the Management Company; or (ii) invest
sufficient assets in the Funds to compensate the Management Company for
providing services to the client with respect to assets invested in the Funds.
Upon termination of an Agreement by the client or the Management Company, the
Management Company will no longer provide asset-allocation, objective-setting or
other services.

GENERAL MANAGEMENT OF THE FUNDS

- Randall P. Lert, who has been Chief Investment Officer, Frank Russell
Investment Management Company since 1989.

23
<PAGE> 83

- Peter F. Apanovitch, who has been the Manager of Short-Term Investment
Funds for Frank Russell Investment Management Company and Frank Russell
Trust Company since 1991.

George F. Russell, Jr., Chairman of the Board of Trustees of the Investment
Company, is the Chairman of the Board and controlling shareholder of Frank
Russell Company. The Management Company is a wholly owned subsidiary of Frank
Russell Company.

24
<PAGE> 84

Income Fund, 0.80%; Quantitative Equity Fund, 0.78%; International Securities
Fund, 0.95%; Diversified Bond Fund, 0.45%; Volatility Constrained Bond Fund,
0.50%; and Multistrategy Bond Fund, 0.65%. The fees of the Funds, other than the
Diversified Bond and Volatility Constrained Bond Funds, may be higher than the
fees charged by some mutual funds with similar objectives which use only a
single money manager.

The Management Company has voluntarily agreed to waive all or a portion of
its management fee with respect to certain funds. In addition to these
"voluntary limits," the Management Company has agreed to reimburse each Fund the
amount, if any, by which a Fund's expenses exceed state law expense limitations.
Currently, California has an expense limitation of 2.5% of a Fund's first $30
million in average net assets, 2.0% of the next $70 million in average net
assets, and 1.5% of the remaining average net assets for any fiscal year as
determined under the state's regulations. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or rescinded
at any time.

Frank Russell Company provides its Portfolio Verification System ("PVS") to
all the Funds pursuant to a written Service Agreement. The PVS computerized data
base system records detailed transaction data for each of the Funds necessary to
prepare various financial and Internal Revenue Service accounting reports. For
these services, the Funds pay the following annual fees:

Annual minimum charges are: Diversified Equity -- $25,000; Special
Growth -- $15,000; Equity Income -- $12,000; Quantitative Equity -- $23,000;
Diversified Bond -- $31,000; Volatility Constrained Bond -- $22,000;
Multistrategy Bond -- $25,000; and $290,000 in the aggregate for all
international portfolios. Any additional domestic equity or fixed-income funds
will be billed using the same fee schedule, with an annual minimum fee of
$20,000 and $25,000, respectively.

EXPENSES OF THE FUNDS

The Funds, and when appropriate each class, will pay their own expenses
other than those expressly assumed by the Management Company. The Funds' Class S
Shares' expenses for the year ended December 31, 1995, as a percentage of
average net assets, are shown in the Financial Highlights tables. Principal
expenses are: the management, transfer agency and recordkeeping fees payable to
the Management Company; fees for custodial and portfolio accounting payable to
State Street Bank and Trust Company; bookkeeping service fees for preparing tax
records payable to Frank Russell Company; fees for independent auditing and
legal services; and fees for filing reports and registering shares with
regulatory bodies.

THE MONEY MANAGERS

The assets of each Fund are allocated currently among the money managers
listed in the section "Money Manager Profiles." THE ALLOCATION OF A FUND'S
ASSETS AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY THE MANAGEMENT
COMPANY. THE MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED
AT ANY TIME BY THE MANAGEMENT COMPANY, SUBJECT TO APPROVAL BY THE BOARD OF
TRUSTEES OF THE INVESTMENT COMPANY. The Funds will notify shareholders of the
Fund concerned within 60 days when a money manager begins or stops providing
services.

25
<PAGE> 85

From its management fees, the Management Company, as agent for the
Investment Company, pays all fees to the money managers for their investment
selection services. Quarterly, each money manager is paid the pro rata portion
of an annual fee, based on the quarterly average of all the assets allocated to
the money manager. For the period, management fees paid to the money managers
were equivalent to the following annual rates expressed as a percentage of the
average daily net assets of each Fund: Diversified Equity Fund, .24%; Special
Growth Fund, .41%; Equity Income Fund, .20%; Quantitative Equity Fund, .21%;
International Securities Fund, .44%; Diversified Bond Fund, .09%; Volatility
Constrained Bond Fund, .19%; and Multistrategy Bond Fund, .22%. Fees paid to the
money managers are not affected by any voluntary or statutory expense
limitations. Some money managers may receive investment research prepared by
Frank Russell Company as additional compensation, or may receive brokerage
commissions for executing portfolio transactions for the Funds through
broker-dealer affiliates.

Each money manager has agreed that once the Investment Company has advanced
fees to the Management Company as agent to make payment of the money manager's
fee, the money manager will look only to the Management Company for the payment
of its fee.

The money managers are selected for the Funds based primarily upon the
research and recommendations of Frank Russell Company, which evaluates
quantitatively and qualitatively the manager's skills and results in managing
assets for specific asset classes, investment styles and strategies. Short-term
investment performance, by itself, is not a controlling factor in selecting or
terminating a money manager.

Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund within the Fund's investment objectives,
restrictions and policies, and the more specific strategies developed by Frank
Russell Company and the Management Company. Although the money managers'
activities are subject to general oversight by the Board of Trustees and
officers of the Investment Company, NEITHER THE BOARD, THE OFFICERS, THE
MANAGEMENT COMPANY, NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF
THE MONEY MANAGERS' INDIVIDUAL SECURITY SELECTIONS.

INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES, AND RISKS

Each Fund has certain "fundamental" investment objectives, restrictions and
policies which may be changed only with the approval of a majority of the Fund's
shareholders. If there is a change in a fundamental investment objective,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. Other policies
reflect current practices of the Funds, and may be changed by the Funds without
the approval of shareholders. This section of the Prospectus describes the
Funds' principal objectives, restrictions, policies, and risks. A more detailed
discussion appears in the Statement of Additional Information.

INVESTMENT OBJECTIVES

Each Fund's objective is "fundamental," as are the types of securities in
which it will invest. Ordinarily, each Fund will invest more than 65% of its
total assets in the types of securities identified in its statement of
objectives. However, the Funds may hold assets as cash reserves for temporary
and defensive purposes when their money managers deem that a more conservative
approach is desirable or when suitable purchase opportunities do not exist.
(See, "Investment Policies -- Cash Reserves.")

26
<PAGE> 86

DIVERSIFIED EQUITY FUND

The Diversified Equity Fund's objective is to provide income and capital
growth by investing principally in equity securities.

The Fund may invest in common and preferred stocks, securities convertible
into common stocks, rights and warrants.

SPECIAL GROWTH FUND

The Special Growth Fund's objective is to maximize total return primarily
through capital appreciation and by assuming a higher level of volatility than
is ordinarily expected from the Diversified Equity Fund, by investing in equity
securities.

Current income is a secondary consideration in selecting securities. The
Fund may invest in common and preferred stock, convertible securities, rights
and warrants. The Fund's investments may include companies whose securities have
been publicly traded for less than five years and smaller companies, such as
companies not listed in the Russell 1000(R) Index. A substantial portion of the
Fund's portfolio will generally consist of equity securities of "emerging
growth-type" companies which tend to reinvest most of their earnings, rather
than pay significant cash dividends; or companies characterized as "special
situations" where the money manager believes that cyclical developments in the
securities markets, the industry, or the issuer itself present opportunities for
capital growth.

EQUITY INCOME FUND

The Equity Income Fund's objective is to achieve a high level of current
income, while maintaining the potential for capital appreciation, by investing
primarily in income-producing equity securities.

The income objective of the Fund is to exceed the yield on the S&P 500
Index. The Index yield will change from year to year due to changes in prices
and dividends of stocks in the Index. Income streams will be considered in light
of their current level and the opportunity for future growth. Capital
appreciation may not be comparable to that achieved by Funds such as the Special
Growth Fund whose major objective is appreciation, although the Management
Company believes that a high and growing stream of income is conducive to higher
capital values. The Fund may also invest in preferred stock, convertible
securities, rights and warrants.

QUANTITATIVE EQUITY FUND

The Quantitative Equity Fund's objectives are to provide a total return
greater than the total return of the US stock market as measured by the Russell
1000(R) Index over a market cycle of four to six years, while maintaining
volatility and diversification similar to the Index by investing in equity
securities.

The Fund will maintain industry weights and economic sector weights near
those of the Index. Over time, the Fund's average price/earnings ratio, yield
and other fundamental characteristics are expected to be near the averages for
the Index. However, the Fund's money managers may temporarily deviate from Index
characteristics based upon the managers' investment judgment that this will
increase the Fund's total return. The money managers of the Fund generally make
stock selections from the set of stocks comprising the Russell 1000(R) Index.

27
<PAGE> 87

The Fund will seek to achieve its investment objectives by using various
quantitative management techniques. The Management Company believes quantitative
management over a market cycle should provide a portfolio with consistent
performance, diversification, market-like volatility and limited market
underperformance. However, there is no guarantee the Fund will have such
characteristics at any one time.

The Fund will attempt to be fully invested in common stock at all times.
However, the Fund reserves the right to hold up to 20% of Fund assets in liquid
reserve for redemption needs.

INTERNATIONAL SECURITIES FUND

The International Securities Fund's objectives are to provide favorable
total return and additional diversification for US investors by investing
primarily in equity and fixed-income securities of non-US companies, and
securities issued by non-US governments.

DIVERSIFIED BOND FUND

The Diversified Bond Fund's objectives are to provide effective
diversification against equities and a stable level of cash flow by investing in
fixed-income securities.

The Fund's portfolio will consist primarily of conventional debt
instruments, including bonds, debentures, US government and US government agency
securities, preferred and convertible preferred stocks, and variable amount
demand master notes. (These notes represent a borrowing arrangement under a
letter agreement between a commercial paper issuer and an institutional lender,
such as the Fund.) Investment selections will be based on fundamental economic,
market, and other factors leading to valuation by sector, maturity, quality and
such other criteria as are appropriate to meet the stated objectives. The Fund
will ordinarily invest at least 65% of its net assets in securities rated no
less than A or A-2 by Standard & Poor's Ratings Group ("S&P") or A or Prime-2 by
Moody's Investors Service, Inc. ("Moody's"), or judged by the money manager to
be of at least equal credit quality to those designations.

28
<PAGE> 88

VOLATILITY CONSTRAINED BOND FUND

The Volatility Constrained Bond Fund's objectives are the preservation of
capital and the generation of current income consistent with the preservation of
capital by investing primarily in fixed-income securities with low-volatility
characteristics.

Although the Fund will invest primarily in debt securities denominated in
the US dollar, the money managers will actively manage the Fund's portfolio in
accordance with a multi-market investment strategy, allocating investments among
securities denominated in the US dollar and the currencies of a number of
foreign countries and, where consistent with its policy of investing only in
high-quality securities, within each such country, among different types of debt
securities. The money managers which invest in foreign denominated securities
will maintain a substantially neutral currency exposure relative to the US
dollar, and will establish and adjust cross currency hedges based on their
perception of the most favorable markets and issuers. In this regard, the
percentage of assets invested in securities of a particular country or
denominated in a particular currency will vary in accordance with a money
manager's assessment of the relative yield of such securities and the
relationship of a country's currency to the US dollar. Fundamental economic
strength, credit quality and interest rate trends will be the principal factors
considered by the money managers in determining whether to increase or decrease
the emphasis placed upon a particular type of security or industry sector within
the Fund's investment portfolio. The Fund will not invest more than 10% of its
total assets in debt securities denominated in a single currency other than the
US dollar. At this time, the Management Company intends to limit total non-US
dollar investments to no more than 25% of total Fund assets.

The Fund will invest in debt securities denominated in currencies of
countries whose governments are considered by it to be stable (or, when the Fund
invests in countries considered unstable or undeveloped, it will only do so when
it believes it is able to hedge substantially the risk of a decline in the
currency in which the Fund's portfolio securities are denominated). In addition
to the US dollar, such currencies include, among others, the Australian Dollar,
Austrian Schilling, Belgian Franc, British Pound Sterling, Canadian Dollar,
Danish Krone, Dutch Guilder, European Currency Unit ("ECU"), French Franc, Irish
Punt, Italian Lira, Japanese Yen, New Zealand Dollar, Norwegian Krone, Spanish
Peseta, Swedish Krona, Swiss Franc and German Mark. An issuer of debt securities
purchased by the Fund may be domiciled in a country other than a country in
whose currency the instrument is denominated.

29
<PAGE> 89

foreign branches of foreign banks) having total assets of more than $500 million
and determined by the money managers to be of high-quality; and (e) commercial
paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, Fitch-1 or Fitch-2
by Fitch Investors Service, Inc., Duff 1 or Duff 2 by Duff & Phelps, Inc., TBW-1
or TBW-2 by Thomson Bank Watch, Inc., or, if not rated, issued by US or foreign
companies having outstanding debt securities rated AAA, AA or A by S&P, or Aaa,
Aa or A by Moody's and determined by the money managers to be of high-quality.

As described above, the Fund may invest in debt securities issued by
supranational organizations such as: the World Bank, which was chartered to
finance development projects in developing member countries; the European
Community, which is an organization consisting of certain European states
engaged in cooperative economic activities; the European Coal and Steel
Community, which is an economic union of various European nations' steel and
coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions.

The Fund may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specific amounts of currency of member states of the
European Community. The specific amounts of currency comprising the ECU may be
adjusted by the Counsel of Ministers of the European Community to reflect
changes in the relative values of the underlying currencies. The money managers
investing in such securities do not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranationals, in particular, issue ECU-denominated
obligations.

MULTISTRATEGY BOND FUND

The Multistrategy Bond Fund's objective is to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from broad fixed-income market
portfolios, by investing in fixed-income securities.

30
<PAGE> 90

portfolio to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.

As described above, the Fund may invest in debt securities issued by
supranational organizations. Supranational organizations are described under
"Volatility Constrained Bond Fund."

Investments in bank certificates of deposit, time deposits and bankers'
acceptances include Eurodollar Certificates of Deposit, which are issued by
foreign branches of US or foreign banks; Eurodollar Time Deposits, which are
issued by foreign branches of US or foreign banks; and Yankee Certificates of
Deposit, which are issued by US branches of foreign banks. These instruments may
be US dollar or foreign currency denominated and are subject to the risks of
non-US issuers described under "Investment Policies -- Investment in Foreign
Securities."

The variable and floating rate securities the Fund may invest in provide
for a periodic adjustment in the interest rate paid on the obligations. The
terms of such obligations must provide that interest rates are adjusted
periodically based upon some appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be regular,
and range from daily up to annually, or may be event based, such as a change in
the prime rate. The Fund may also invest in zero coupon US Treasury, foreign
government and US and foreign corporate debt securities, which are bills, notes
and bonds that have been stripped of their unmatured interest coupons and
receipts or certificates representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its holder
prior to maturity. Accordingly, such securities usually trade at a deep discount
from their face or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest.

The Fund's portfolio may include debt securities issued by domestic or
foreign entities, and denominated in US dollars or foreign currencies. It is
anticipated that no more than 25% of the Fund's net assets will be denominated
in foreign currencies. Foreign currency exchange transactions (options on
foreign currencies, foreign currency futures contracts and forward foreign
currency contracts) will only be used by the Fund for the purpose of hedging
against foreign currency exchange risk arising from the Fund's investment, or
anticipated investment, in securities denominated in foreign currencies. Foreign
investment may include emerging market debt. The risks associated with
investment in securities issued by foreign governments and companies are
described under "Investment Policies -- Investment in Foreign Securities."
Emerging markets consist of countries determined by the money managers of the
Fund to have developing or emerging economies and markets. These countries
generally include every country in the world except the United States, Canada,
Japan, Australia and most countries located in Western Europe. Emerging market
debt that the Fund may invest in includes bonds, notes and debentures of
emerging market governments and debt and other fixed income securities issued or
guaranteed by such governments' agencies, instrumentalities or central banks, or
by banks or other companies in emerging markets determined by the money managers
to be suitable investments for the Fund. Under current market conditions, it is
expected that emerging market debt will consist predominantly of Brady Bonds and
other sovereign debt. Brady Bonds are products of the "Brady Plan," under which
bonds are issued in exchange for cash and certain of the country's outstanding
commercial bank loans.

31
<PAGE> 91

capacity to pay interest and repay principal in accordance with the terms of the
obligation. For S&P, BB indicates the lowest degree of speculation and C the
highest. For Moody's, Ba indicates the lowest degree of speculation and C the
highest. These lower rated debt securities may include obligations that are in
default or that face the risk of default with respect to principal or interest.
Such securities are sometimes referred to as "junk bonds." For additional
information on the ratings used by S&P and Moody's and a description of lower
rated debt securities, please refer to the Funds' Statement of Additional
Information.

INVESTMENT RESTRICTIONS

1. Invest in any security if, as a result of such investment, less than
75% of its total assets would be represented by cash; cash items;
securities of the US government, its agencies, or instrumentalities;
securities of other investment companies; and other securities limited
in respect of each issuer to an amount not greater in value than 5% of
the total assets of such Fund. A Fund's investment in "cash reserves"
(see the next section) in shares of the Investment Company's Money
Market Fund are not subject to this restriction or to restrictions 2 or
3.

2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other
than the US government, its agencies and instrumentalities).

3. Acquire more than 5% of the outstanding voting securities, or 10% of
all of the securities, of any one issuer.

INVESTMENT POLICIES

The Funds use certain investment instruments and techniques commonly used
by institutional investors. The principal policies are the following:

Cash Reserves. Each Fund is authorized to invest its cash reserves (i.e.,
funds awaiting investment in the specific types of securities to be acquired by
a Fund) in money market instruments and in debt securities which are at least
comparable in quality to the Fund's permitted investments. In lieu of having
each of these Funds make separate, direct investments in money market
instruments, each Fund and its money managers may elect to invest the Fund's
cash reserves in the Investment Company's Money Market Fund.

The Investment Company's Money Market Fund, described in a separate
prospectus, seeks to maximize current income to the extent consistent with the
preservation of capital and liquidity, and the maintenance of a stable $1.00 per
share net asset value by investing solely in short-term money market
instruments. The Management Company currently does not collect a management or
advisory fee from the Money Market Fund, thereby eliminating any duplication of
fees. The Funds will use this procedure only so long as doing so does not
adversely affect the portfolio management and operations of the Money Market
Fund and the Investment Company's other Funds.

32
<PAGE> 92

The Russell 1000(R) Index is used as the basis for the Quantitative Equity
Fund's performance because it, in the Management Company's opinion, represents
the universe of stocks in which most active money managers invest and is
representative of the performance of publicly traded common stocks most
institutional investors purchase.

Repurchase Agreements. Each Fund may enter into repurchase agreements with
a bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day). If
the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at time of the agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Investment Policies -- Illiquid Securities," no Fund
will invest more than 15% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days.

Forward Commitments. Each Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (a "forward
commitment" or "when-issued" transaction), so long as such transactions are
consistent with each Fund's ability to manage its investment portfolio and honor
redemption requests. When effecting such transactions, cash or liquid high-grade
debt obligations of the Fund of a dollar amount sufficient to make payment for
the portfolio securities to be purchased will be segregated on the Fund's
records at the trade date and maintained until the transaction is settled.

33
<PAGE> 93

Lending Portfolio Securities. Each Fund may lend portfolio securities with
a value of up to 50% of its total assets. Such loans may be terminated at any
time. A Fund will receive either cash (and agree to pay a "rebate" interest
rate), US government or US government agency securities as collateral in an
amount equal to at least 100% of the current market value of the current loaned
securities plus accrued interest. The collateral is "marked-to-market" on a
daily basis, and the borrower will furnish additional collateral in the event
that the value of the collateral drops below 100% of the market value of the
loaned securities.

Illiquid Securities. The Funds will not purchase or otherwise acquire any
security if, as a result, more than 15% of a Fund's net assets (taken at current
value) would be invested in securities, including repurchase agreements of more
than seven days' duration, that are illiquid by virtue of the absence of a
readily available market or because of legal or contractual restrictions on
resale. In addition, the Funds will not invest more than 10% of their respective
net assets (taken at current value) in securities of issuers which may not be
sold to the public without registration under the Securities Act of 1933 (the
"1933 Act"). These policies do not include (1) commercial paper issued under
Section 4(2) of the 1933 Act, or (2) restricted securities eligible for resale
to qualified institutional purchasers pursuant to Rule 144A under the 1933 Act
that are determined to be liquid by the money managers in accordance with Board
approved guidelines. Such guidelines take into account trading activity for such
securities and the availability of reliable pricing information, among other
factors. If there is a lack of trading interest in a particular Rule 144A
security, a Fund's holding of that security may be illiquid. There may be
undesirable delays in selling illiquid securities at prices representing their
fair value.

Liquidity Portfolios. The Management Company will exercise investment
discretion or select a money manager to exercise investment discretion for
approximately 5%-15% of the Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and International Securities Funds' assets assigned to a
"Liquidity Portfolio." The Liquidity Portfolio will be used to create
temporarily an equity exposure for cash balances until those balances are
invested in equities or used for Fund transactions.

34
<PAGE> 94

corporations involves considerations and possible risks not typically associated
with investing in obligations issued by the US government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies, and foreign companies generally are not subject to the
same uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, application of foreign tax laws,
including withholding taxes, changes in governmental administration or economic
or monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including nationalization,
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods or restrictions affecting the
prompt return of capital to the United States.

The risks associated with investing in foreign securities are often
heightened for investments in developing or emerging markets. Investments in
emerging or developing markets involve exposure to economic structures that are
generally less diverse and mature, and to political systems which can be
expected to have less stability, than those of more developed countries.
Moreover, the economies of individual emerging market countries may differ
favorably or unfavorably from the US economy in such respects as the rate of
growth in gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Because the Funds'
foreign securities will generally be denominated in foreign currencies, the
value of such securities to the Funds will be affected by changes in currency
exchange rates and in exchange control regulations. A change in the value of a
foreign currency against the US dollar will result in a corresponding change in
the US dollar value of the Funds' foreign securities. In addition, some emerging
market countries may have fixed or managed currencies which are not
free-floating against the US dollar. Further, certain emerging market countries'
currencies may not be internationally traded. Certain of these currencies have
experienced a steady devaluation relative to the US dollar. Many emerging market
countries have experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid fluctuations in inflation
rates have had, and may continue to have, negative effects on the economies and
securities markets of certain emerging market countries.

Forward Foreign Currency Exchange Contracts ("forward currency
contracts"). The International Securities, Diversified Bond, Volatility
Constrained Bond and Multistrategy Bond Funds may enter into forward currency
contracts, which are agreements to exchange one currency for another -- for
example, to exchange a certain amount of US dollars for a certain amount of
Japanese yen -- at a future date. The date (which may be any agreed upon fixed
number of days in the future), the amount of currency to be exchanged and the
price at which the exchange will take place will be negotiated and fixed for the
term of the contract at the time that a Fund enters into a contract. The Funds
may engage in forward contracts that involve a currency whose changes in value
are considered to be linked (a proxy) to a currency or currencies in which some
or all of the Funds' portfolio securities are denominated. Forward currency
contracts are (a) traded in an interbank market conducted directly between
currency traders (typically, commercial banks or other financial institutions)
and their customers, (b) generally have no deposit requirements and (c) are
consummated without payment of any commissions. The Funds may, however, enter
into forward currency contracts containing either or both deposit requirements
and commissions. In order to assure that the Funds' forward currency contracts
are not used to achieve investment leverage, the Funds will segregate cash or
readily

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<PAGE> 95

marketable high-quality securities in an amount at all times equal to or
exceeding the Fund's commitment with respect to these contracts.

The market for forward currency contracts may be limited with respect to
certain currencies. These factors will restrict a Fund's ability to hedge
against the risk of devaluation of currencies in which the Fund holds a
substantial quantity of securities and are unrelated to the qualitative rating
that may be assigned to any particular portfolio security. Where available, the
successful use of forward contracts draws upon a money manager's special skills
and experience with respect to such instruments and usually depends on the money
manager's ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
Fund may not achieve the anticipated benefits of forward contracts or may
realize losses and thus be in a worse position than if such strategies had not
been used. Unlike many exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with respect to forward
contracts, and adverse market movements could therefore continue to an unlimited
extent over a period of time. In addition, the correlation between movements in
the prices of such instruments and movements in the price of the securities and
currencies hedged or used for cover will not be perfect. In the case of proxy
hedging, there is also a risk that the perceived linkage between various
currencies may not be present or may not be present during the particular time
the Funds are engaged in that strategy.

A Fund's ability to dispose of its positions in forward contracts will
depend on the availability of active markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of forward contracts. Forward foreign currency contracts may be closed out
only by the parties entering into an offsetting contract. Therefore, no
assurance can be given that a Fund will be able to utilize these instruments
effectively for the purposes set forth above.

Options. The Funds may purchase and sell (write) call and put options on
securities and securities indexes provided such options are traded on a national
securities exchange or in an over-the-counter market. The Funds may also
purchase and sell put and call options on foreign currencies.

36
<PAGE> 96

sell, and obligates the writer to buy, the underlying security at the exercise
price at any time during the option period.

Securities Index Options. An option on a securities index is a contract
which gives the purchaser of the option, in return for the premium paid, the
right to receive from the writer of the option cash equal to the difference
between the closing price of the index and the exercise price of the option
times a multiplier established by the exchange on which the stock index is
traded. It is similar to an option on a specific security except that settlement
is in cash and gains and losses depend on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
price movements in the specific security. None of the Funds, other than the
Diversified Equity, Special Growth, Equity Income, Quantitative Equity and
International Securities Funds, currently intends to purchase and write call and
put options on securities indexes.

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<PAGE> 97

on Securities" above.) None of the Funds, other than the Multistrategy Bond
Fund, currently intends to write or purchase such options.

Futures Contracts and Options on Futures Contracts. The Funds may invest
in interest rate futures contracts, stock index futures contracts and foreign
currency futures contracts and options thereon that are traded on a United
States or foreign exchange or board of trade.

An interest rate or foreign currency futures contract is an agreement
between two parties (buyer and seller) to take or make delivery of a specified
quantity of financial instruments (such as GNMA certificates or Treasury bonds)
or foreign currency at a specified price at a future date. A futures contract on
an index (such as the S&P 500) is an agreement between two parties (buyer and
seller) to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written. In
the case of futures contracts traded on US exchanges, the exchange itself or an
affiliated clearing corporation assumes the opposite side of each transaction
(i.e., as buyer or seller). A futures contract may be satisfied or closed out by
delivery or purchase, as the case may be, of the financial instrument or by
payment of the change in the cash value of the index. Frequently, using futures
to effect a particular strategy instead of using the underlying or related
security or index will result in lower transaction costs being incurred.

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<PAGE> 98

hedged securities in a Fund and the hedging vehicle so that the portfolio return
might have been greater had hedging not been attempted.

High Risk Bonds. The Funds, other than Multistrategy Bond Fund, do not
invest assets in securities rated less than BBB by S&P or Baa by Moody's, or in
unrated securities judged by the money managers to be of a lesser credit quality
than those designations. Securities rated BBB by S&P or Baa by Moody's and above
are considered by those rating agencies to be "investment grade" securities,
although Moody's considers securities rated Baa, and S&P considers bonds rated
BBB, to have some speculative characteristics. The Funds, other than
Multistrategy Bond Fund, will dispose of, in a prudent and orderly fashion,
securities whose ratings drop below these minimum ratings. The market value of
debt securities generally varies inversely in relation to interest rates.

The Multistrategy Bond Fund will invest in "investment grade" securities
and may invest up to 25% of its total assets in debt securities rated less than
BBB by S&P or Baa by Moody's, or in unrated securities judged by the money
managers of the Fund to be of comparable quality. Lower rated debt securities
generally offer a higher yield than that available from higher grade issues.
However, lower rated debt securities involve higher risks, in that they are
especially subject to adverse changes in general economic conditions and in the
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of principal and interest and increase the
possibility of default. In addition, the market for lower rated debt securities
has expanded rapidly in recent years, and its growth paralleled a long economic
expansion. The market for lower rated debt securities is generally thinner and
less active than that for higher quality securities, which would limit the
Fund's ability to sell such securities at fair value in response to changes in
the economy or the financial markets. While such debt may have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions. The money managers of the Fund will seek to
reduce the risks associated with investing in such securities by

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<PAGE> 99

limiting the Fund's holdings in such securities and by the depth of their own
credit analysis. For additional information, please refer to the Statement of
Additional Information.

PORTFOLIO TRANSACTION POLICIES

Decisions to buy and sell securities are made by the money managers for the
assets assigned to them, and by the Management Company or the money manager for
the Liquidity Portfolios. The Funds do not give significant weight to attempting
to realize long-term, rather than short-term, capital gains while making
portfolio investment decisions. The money managers make decisions to buy or sell
securities independently from other money managers. Thus, one money manager
could be selling a security when another money manager for the same Fund (or for
another series of the Investment Company) is purchasing the same security. In
addition, when a money manager's services are terminated and another retained,
the new manager may significantly restructure the portfolio. These practices may
increase the Funds' portfolio turnover rates, realization of gains or losses,
brokerage commissions and other transaction based costs. The annual portfolio
turnover rates for each of the Funds are shown in the Financial Highlights
tables.

The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc., an affiliate of the Management Company, when the money manager
determines that the Funds will receive competitive execution, price and
commissions. Frank Russell Securities, Inc. refunds to the Fund up to 70% of the
commissions paid by that Fund when it effects such transactions, after
reimbursement for research services provided to the Management Company. This
arrangement is used by the Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and International Securities Funds. All Funds may also
effect portfolio transactions through and pay brokerage commissions to the money
managers (or their affiliates).

DIVIDENDS AND DISTRIBUTIONS

INCOME DIVIDENDS

The Board of Trustees presently intends to declare dividends from net
investment income and net short-term capital gains, if any, for payment on the
following schedule:

<TABLE>
<CAPTION>
DECLARED PAYABLE
- ------------------------------------------------
<S> <C> <C>
Monthly Early in the following month Diversified Bond, Volatility
Constrained Bond and
Multistrategy Bond Funds
Quarterly Mid: April, July, October and Diversified Equity, Special
December Growth, Equity Income and
Quantitative Equity Funds
Annually Mid-December International Securities Fund
</TABLE>

CAPITAL GAINS DISTRIBUTIONS

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<PAGE> 100

shareholders by January 31, are deemed to have been paid by a Fund and received
by shareholders on December 31 of the prior year. Capital gains realized during
November and December will be distributed during the month of February of the
following year.

AUTOMATIC REINVESTMENT

TAXES

For taxable shareholders: Dividends from net investment income and
short-term capital gains will be taxable as ordinary dividends, whether paid in
cash or reinvested in additional shares. However, depending upon the state tax
rules pertaining to a shareholder, a portion of the dividends paid by the
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
attributable to direct US Treasury and agency obligations may be exempt from
state and local taxes. Long-term capital gains distributions declared by the
Investment Company's Board are taxed as long-term gains regardless of the length
of time a shareholder has held such shares. Distributions paid in excess of a
Fund's earnings will be treated as a non-taxable return of capital. Dividends
and distributions may otherwise also be subject to state or local taxes.

For corporate investors, dividends from net investment income paid by the
Diversified Equity, Special Growth, Equity Income and Quantitative Equity Funds
will generally qualify in part for the corporate dividends-received deduction.
However, the portion of the dividends so qualified depends on the aggregate
qualifying dividend income received by such a Fund from domestic (US) sources.
Certain holding period and debt financing restrictions may apply to the
corporate investor seeking to claim the deduction.

The International Securities, Diversified Bond, Volatility Constrained Bond
and Multistrategy Bond Funds will receive dividends and interest paid by non-US
issuers which will frequently be subject to

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<PAGE> 101

withholding taxes by non-US governments. The Management Company expects the
International Securities Fund to invest more than 50% of its total assets in
non-US securities and to file specified elections with the Internal Revenue
Service which will permit its shareholders either to deduct (as an itemized
deduction in the case of an individual) such foreign taxes in computing taxable
income, or to use these withheld foreign taxes as credits against US income
taxes. The Fund's taxable shareholders must include their pro rata portion of
the taxes withheld on their gross income for federal income tax purposes.

Shareholders of holding non-US holdings should also be aware that for
federal income tax purposes, foreign exchange losses realized by a Fund are
treated as ordinary losses. This treatment may have the effect of reducing a
Fund's income available for distribution to shareholders.

The Diversified Bond, Volatility Constrained Bond and Multistrategy Bond
Funds may acquire zero coupon securities issued with original issue discount. As
the holder of such a security, the Funds will have to include in taxable income
a portion of the original issue discount that accrues on the security for the
taxable year, even if the Funds receive no payment on the security during the
year. Because the Funds annually must distribute substantially all of their net
investment income, the Funds may be required in a particular year to distribute
as a dividend an amount that is greater than the total amount of cash the Funds
actually receive. Those distributions will be made from a Fund's cash assets or
from the proceeds of sales of portfolio securities, if necessary. The Funds may
realize capital gains or losses from those sales, which could further increase
or decrease the Funds' dividends and distributions paid to shareholders.

Shareholders of the appropriate Funds will be notified after each calendar
year of the amounts: of ordinary income dividends and long-term capital gains
distributions, including any amounts which are deemed paid on December 31 of the
prior year; of the dividends which qualify for the 70% dividends-received
deduction available to corporations; of income which is a tax preference item
(if any) for alternative minimum tax purposes; of the International Securities
Fund's foreign taxes withheld; and of the percentages of the Diversified Bond,
Volatility Constrained Bond and Multistrategy Bond Funds' income attributable to
US government, Treasury and agency securities.

Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the
Statement of Additional Information.

CALCULATION OF FUND PERFORMANCE

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<PAGE> 102

the initial amount invested to the ending redeemable value. The calculation
assumes that all dividends and distributions are reinvested on the reinvestment
dates during the relevant time period, and includes all recurring fees that are
charged to all shareholder accounts. The average annual total returns for Class
S shares of each of the Funds are as follows:

<TABLE>
<CAPTION>
5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
1 YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1995 1995 1995 INCEPTION
1995 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
------------ ------------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Diversified Equity 35.17% 16.22% 13.76% 15.06% 09/05/85
Special Growth 28.52 18.13 12.34 13.69 09/05/85
Equity Income 34.76 16.91 12.93 13.79 09/05/85
Quantitative Equity 37.69 17.31 -- 12.55 05/15/87
International Securities 10.20 9.95 13.33 14.36 09/05/85
Diversified Bond 17.76 9.01 8.90 9.37 09/05/85
Volatility Constrained
Bond 9.89 6.06 7.04 7.10 09/05/85
Multistrategy Bond 17.92 -- -- 7.24 01/29/93
</TABLE>

The Diversified Bond, Volatility Constrained Bond and Multistrategy Bond
Funds also may from time to time advertise their yields. Yield, which is based
on historical earnings and is not intended to indicate future performance, is
calculated by dividing the net investment income per share earned during the
most recent 30-day (or one month) period by the maximum offering price per share
on the last day of the month. This income is then annualized. That is, the
amount of income generated by the investment during that 30-day (or one month)
period is assumed to be generated each month over a 12-month period and is shown
as a percentage of the investment. For purposes of the yield calculation,
interest income is computed based on the yield to maturity of each debt
obligation and dividend income is computed based upon the stated dividend rate
of each security in a Fund's portfolio. The calculation includes all recurring
fees that are charged to all shareholder accounts. The 30-day yields for the
year ended December 31, 1995 for shares of the Diversified Bond, Volatility
Constrained Bond and Multistrategy Bond Funds were, respectively, 5.96%, 5.94%
and 6.23%.

Each Fund may also advertise non-standardized performance information which
is for periods in addition to those required to be presented.

VALUATION OF FUND SHARES

NET ASSET VALUE PER SHARE

The net asset value per share is calculated for shares of each class of
each Fund on each business day on which shares are offered or orders to redeem
are tendered. (Unless otherwise indicated, "shares" refers to the Class S Shares
of the Funds.) For all Funds, a business day is one on which the New York Stock
Exchange is open for trading. Net asset value per share is computed for a Fund's
Class S Shares by dividing the current value of the Fund's assets attributable
to the Class S Shares, less liabilities attributable to the Class S Shares, by
the number of Class S Shares of the Fund outstanding, and rounding to the
nearest cent. All Funds determine net asset value as of the close of the New
York Stock Exchange (currently 4:00 p.m. Eastern time).

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<PAGE> 103

VALUATION OF PORTFOLIO SECURITIES

Money market instruments maturing within 60 days of the valuation date held
by Funds are valued on the basis of amortized cost, a method by which each
portfolio instrument is initially valued at cost, and thereafter a constant
accretion/amortization to maturity of any discount or premium is assumed. The
Funds utilize the amortized cost valuation method in accordance with Rule 2a-7
of the Investment Company Act of 1940, as amended (the "1940 Act"). Such money
market instruments are valued at "amortized cost" unless the Board determines
that amortized cost does not represent fair value. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Funds would
receive if they sold the instrument.

The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith pursuant to procedures
established by the Board of Trustees.

PURCHASE OF FUND SHARES

ORDER PROCEDURES

Payment Procedures: Payment for the purchase of Fund shares must be
received by the Funds' Custodian or Transfer Agent, depending on the method of
payment, on the day the order is accepted (except

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<PAGE> 104

for participants in the Three Day Settlement Program described below). There are
several ways to pay for orders received for the Funds:

Federal Funds Wire. Payment for orders may be made by wiring federal funds
to the Funds' Custodian, State Street Bank and Trust Company.

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to the Transfer
Agent, P.O. Box 1591, Tacoma, WA 98401-1591. Certified checks are not necessary,
but checks are accepted subject to collection at full face value in US funds and
must be drawn in US dollars on a US bank. Investments in the Funds will be
effected upon receipt of the check or draft by the Transfer Agent when the check
or draft is received prior to the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern time). When the check or draft is received by the
Transfer Agent after the close of the New York Stock Exchange, the order will be
effected on the following business day.

IN-KIND EXCHANGE OF SECURITIES

THREE DAY SETTLEMENT PROGRAM

The Investment Company will accept orders from financial institutions to
purchase shares of the Funds for settlement on the third business day following
the receipt of an order to be paid by federal wire if the investor has agreed in
writing to indemnify the Funds against any losses as a result of nonreceipt of
payment. For further information on this program, contact the Investment
Company.

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<PAGE> 105

THIRD PARTY TRANSACTIONS

Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary, such as a bank, broker-dealer, investment adviser or
others, may be required to pay additional fees by such Intermediary. Investors
should contact such Financial Intermediary for information concerning what
additional fees, if any, may be charged.

EXCHANGE PRIVILEGE

Shareholders may exchange shares of any Fund offered by this Prospectus for
shares of another Fund offered by this Prospectus on the basis of current net
asset value per share at the time of the exchange. Shares of a Fund offered by
this Prospectus may only be exchanged for shares of a Fund offered by the
Investment Company through another prospectus under certain conditions and only
in states where the exchange may legally be made. For additional information,
including a prospectus of other Investment Company Funds, contact a Financial
Intermediary or the Investment Company. Exchanges may be made (i) by telephone
if the registrations of the two accounts are identical; or (ii) in writing
addressed to the Investment Company.

REDEMPTION OF FUND SHARES

SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE
FUNDS AT (800) 972-0700; IN WASHINGTON (206) 627-7001.

Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below.

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<PAGE> 106

event telephone lines are unavailable, shareholders should use the mail
redemption procedures described below.

Mail. Redemption requests may be made in writing directly to Frank Russell
Investment Management Company, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401. The redemption price
will be the net asset value next determined after receipt by the Management
Company of all required documents in good order. "Good order" means that the
request must include the following:

B. Such other supporting legal documents, if required by applicable law,
in the case of estates, trusts, guardianships, custodianships,
corporations, and pension and profit sharing plans.

Distribution Frequency. Payments can be scheduled as monthly, quarterly,
semiannual or annual distributions.

SWP Distribution by Wire. Federal Funds Wire payments will be sent to the
designated bank on the payment date.

SWP Distribution by Check. Checks will be sent by US Postal Service first
class mail, to the requested address on the payment date.

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<PAGE> 107

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

ORGANIZATION, CAPITALIZATION, AND VOTING

In addition to offering Class S Shares, the Funds also offer beneficial
interests in Class C Shares, which are described in a separate prospectus
relating to that class. Class C Shares are designed to meet different investor
needs and are subject to a Rule 12b-1 distribution fee and to a shareholder
servicing fee, which may affect the performance of the Class C Shares. To obtain
more information concerning Class C Shares, contact the Financial Intermediary
from whom you obtained this prospectus or write to the Secretary, Frank Russell
Investment Company, at the address listed on the cover of this Prospectus, or
call (800) 972-0700.

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<PAGE> 108

A vacancy in the Board of Trustees shall be filled by the vote of a majority of
the remaining Trustees so long as, in substance, two-thirds of the Trustees have
been elected by shareholders.

MONEY MANAGER PROFILES

The money managers have no other affiliations with the Funds or with Frank
Russell Company. Each money manager has been in business for at least three
years, and is principally engaged in managing institutional investment accounts.
These managers may also serve as managers or advisers to other Investment
Company Funds, or to other clients of Frank Russell Company, including its
wholly owned subsidiary, Frank Russell Trust Company.

DIVERSIFIED EQUITY FUND

Alliance Capital Management L.P., 601 2nd Ave. South, Suite 5000,
Minneapolis, MN 55402-4322, is a limited partnership whose (i) general partner
is a wholly owned subsidiary of The Equitable Companies Incorporated ("The
Equitable") and (ii) majority unit holder is ACM, Inc., a wholly owned
subsidiary of The Equitable. As of March 1, 1995, 60.5% of The Equitable was
owned by Axa, a French insurance holding company.

BZW Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San
Francisco, CA 94105, is an indirect, wholly owned subsidiary of Barclays Bank
PLC.

Columbus Circle Investors, Metro Center, One Station Place, 8th Floor,
Stamford, CT 06902, a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly by
a group comprised of PIMCO Managing Directors.

Equinox Capital Management, Inc., 399 Park Ave., 28th Floor, New York, NY
10022. Equinox is a registered investment adviser with majority ownership held
by Ron Ulrich.

INVESCO Capital Management, Inc., 1315 Peachtree Street N.E., Suite 300,
Atlanta, GA 30309, is a corporation whose indirect parent is INVESCO, PLC, a
London-based financial services holding company.

Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116,
is a corporation with seven shareholders, with Stanford M. Calderwood holding
majority ownership.

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<PAGE> 109

SPECIAL GROWTH FUND

Delphi Management, Inc., 50 Rowes Wharf, Suite 440, Boston, MA 02110, is
100% owned by Scott Black.

Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth Levy.

Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.

Wellington Management Company, See: Diversified Equity Fund.

EQUITY INCOME FUND

Equinox Capital Management, Inc., See: Diversified Equity Fund.

Trinity Investment Management Corporation, See: Diversified Equity Fund.

QUANTITATIVE EQUITY FUND

BZW Barclays Global Fund Advisors, See: Diversified Equity Fund.

J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 14th Floor, New
York, NY 10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a
publicly held bank holding company.

INTERNATIONAL SECURITIES FUND

Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, MA 02110, is a
corporation whose majority ownership is held by the four senior partners: Jeremy
Grantham, Richard Mayo, Eyk De Mol Van Otterloo, and Kingsley Durant.

J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.

Marathon Asset Management Limited, 115 Shaftesbury Ave., London, England
WC2H 8AD, is a corporation 33.3% owned by each of the following: Jeremy Hosking,
William Arah and Neil Ostrer.

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<PAGE> 110

DIVERSIFIED BOND FUND

Lincoln Capital Management Company, See: Diversified Equity Fund.

Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660, is a subsidiary partnership of PIMCO Advisers L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly by
a group comprised of PIMCO Managing Directors.

Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, whose
ownership is divided among seventeen directors, with no director having more
than a 25% ownership interest.

VOLATILITY CONSTRAINED BOND FUND

BlackRock Financial Management, 345 Park Ave., 31st Floor, New York, NY
10154, is a wholly-owned indirect subsidiary of PNC Bank.

Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.

STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue, Hamilton
HM LX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.

MULTISTRATEGY BOND FUND

BEA Associates, 153 East 53rd Street, New York, NY 10022, is a general
partnership of Credit Suisse Capital Corporation ("CS Capital") and Basic
Appraisals, Inc. ("Basic"). CS Capital is an 80% partner, and is a wholly owned
subsidiary of Credit Suisse Investment Corporation, which is in turn a
wholly-owned subsidiary of Credit Suisse, a Swiss bank, which is in turn a
subsidiary of CS Holding, a Swiss corporation. No one person or entity possesses
a controlling interest in Basic, the 20% partner. BEA Associates is a registered
investment adviser.

Pacific Investment Management Company, See: Diversified Bond Fund.

Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.

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<PAGE> 111

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUNDS OR THE MONEY MANAGERS SINCE THE DATE HEREOF; HOWEVER, IF
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.

52
<PAGE> 112

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (206) 627-7001

MONEY MANAGERS

DIVERSIFIED EQUITY
Alliance Capital Management L.P.
BZW Barclays Global Fund Advisors
Columbus Circle Investors
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company
Suffolk Capital Management, Inc.
Trinity Investment Management Corporation
Wellington Management Company

SPECIAL GROWTH
Delphi Management, Inc.
Fiduciary International, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc.
Sirach Capital Management, Inc.
Wellington Management Company

EQUITY INCOME
Brandywine Asset Management, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation

QUANTITATIVE EQUITY
BZW Barclays Global Fund Advisors
Franklin Portfolio Associates Trust
J.P. Morgan Investment Management, Inc.

INTERNATIONAL SECURITIES
Grantham, Mayo, Van Otterloo & Co.
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited
Oechsle International Advisors
Rowe Price-Fleming International, Inc.

DIVERSIFIED BOND
Lincoln Capital Management Company
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.

VOLATILITY CONSTRAINED BOND
BlackRock Financial Management
Standish, Ayer & Wood, Inc.
STW Fixed Income Management Ltd.

MULTISTRATEGY BOND
BEA Associates
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.

53
<PAGE> 113

MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Co.
909 A Street
Tacoma, Washington 98402

CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402

DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 98402

INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109

LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 -- One Commerce Square
Philadelphia, Pennsylvania 19103-7098

OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (206) 627-7001

54
<PAGE> 114

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON, (206) 627-7001

Frank Russell Investment Management Company (the "Management Company")
operates and administers all of the Funds which comprise the Investment Company,
and manages the portfolio of the U.S. Government Money Market Fund. The
Management Company is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to the Management Company, and to the Investment
Company, one or more investment management organizations to manage the portfolio
of each of the individual Funds. There is no sales charge for investing in the
Class S Shares of the Funds.

<TABLE>
<S> <C>
Real Estate Securities Fund Limited Volatility Tax Free Fund
Emerging Markets Fund U.S. Government Money Market Fund
Equity T Fund Tax Free Money Market Fund
</TABLE>

INVESTMENTS IN MONEY MARKET FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE
US GOVERNMENT. THERE IS NO ASSURANCE THAT THE U.S. GOVERNMENT MONEY MARKET FUND
AND TAX FREE MONEY MARKET FUND (THE "MONEY MARKET FUNDS") WILL MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.

This Prospectus sets forth concisely information about the Investment
Company and the Class S Shares of six of its Funds that a prospective investor
ought to know before investing. The Investment Company has filed a Statement of
Additional Information dated July 8, 1996, with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated herein by
reference and may be obtained without charge by writing to the Secretary, Frank
Russell Investment Company, at the address shown above or by telephoning (800)
972-0700. This Prospectus should be read carefully and retained for future
reference.

This Prospectus relates only to the Class S Shares of the six Funds. Two of
the Funds -- Real Estate Securities Fund and Emerging Markets Fund -- also offer
shares of beneficial interest in another class of shares, the Class C Shares,
through a separate prospectus. For more information concerning Class C Shares of
the two Funds, contact the person or organization from which you obtained this
prospectus or write to the Secretary, Frank Russell Investment Company, at the
address shown above, or telephone (800) 972-0700.
PROSPECTUS DATED JULY 8, 1996
<PAGE> 115

Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:

REAL ESTATE SECURITIES FUND -- A high level of total return generated through
above-average current income, while maintaining the potential for capital
appreciation by investing primarily in the equity securities of companies in the
real estate industry.

EMERGING MARKETS FUND -- Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from developed market international portfolios, by investing primarily
in equity securities.

EQUITY T FUND -- Capital growth on an after-tax basis by investing primarily in
equity securities.

LIMITED VOLATILITY TAX FREE FUND -- A high level of federal tax-exempt income
consistent with the preservation of capital by investing primarily in municipal
obligations maturing in seven years or less from the date of acquisition.

U.S. GOVERNMENT MONEY MARKET FUND -- Maximum current income to the extent
consistent with the preservation of capital and liquidity, and the maintenance
of a stable $1.00 per share net asset value by investing exclusively in US
government obligations.

TAX FREE MONEY MARKET FUND -- Maximum current income exempt from federal income
tax consistent with the preservation of capital and liquidity, and the
maintenance of a stable $1.00 per share net asset value by investing in
short-term municipal obligations.

This Prospectus describes and offers Class S Shares of the Funds. The Real
Estate Securities, Limited Volatility Tax Free, U.S. Government Money Market and
Tax Free Money Market Funds are each an "Internal Fee Fund." The Emerging
Markets and Equity T Funds are each an "External Fee Fund." The principal
distinction between the External and the Internal Fee Funds is that a
shareholder of an External Fee Fund may pay a quarterly shareholder investment
services fee directly to the Management Company. The fee is computed on the
amount the shareholder has invested in an External Fee Fund. No shareholder of
the Internal Fee Funds pays such fees and, currently, no shareholder of the
Emerging Markets and Equity T Funds pays any such fees, although such fees may
be required in the future. The Investment Company's Funds had aggregate net
assets of $8.9 billion on April 30, 1996. The net assets of these Funds on April
30, 1996, except the Equity T Fund, which was not offered for public investment
as of that date, were as follows:

<TABLE>
<S> <C>
Real Estate Securities $318,828,870
Emerging Markets $224,128,123
Limited Volatility Tax
Free $ 61,122,035
U.S. Government Money Market $154,132,335
Tax Free Money Market $ 82,532,726
</TABLE>

2
<PAGE> 116

HIGHLIGHTS AND TABLE OF CONTENTS

ANNUAL FUND OPERATING EXPENSES summarizes the fees paid by shareholders and
provides an example showing the effect of these fees on a $1,000 investment over
time. PAGE 5.

FINANCIAL HIGHLIGHTS summarizes significant financial information concerning the
Funds for the period stated herein. Financial Highlights for the Equity T Fund
are not included because the Fund was not offered for public investment during
the period. PAGE 12.

FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS has been primarily engaged
since 1969 in providing asset management consulting services to large corporate
employee benefit funds. Major components of its consulting services are (i)
quantitative and qualitative research and evaluation aimed at identifying the
most appropriate investment management firms to invest large pools of assets in
accord with specific investment objectives and styles; and (ii) the development
of strategies for investing assets using "multi-style, multi-manager
diversification." PAGE 17.

ELIGIBLE INVESTORS are principally those institutional investors which invest
for their own account or in a fiduciary or agency capacity with investment
authority, and which have entered into an Asset Management Services Agreement
with the Management Company; and institutions or individuals who have acquired
shares through such institutions. PAGE 18.

EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management fee to
the Management Company, its expenses and its portion of the general expenses of
the Investment Company. The Management Company, as agent to the Fund, pays from
its fees, the investment advisory fees of the money managers of the Fund. The
remainder of the fee is retained by the Management Company, for conducting the
Fund's general operations and for providing investment supervision for the Fund.
Each Eligible Investor may pay to the Management Company directly a fee for
other services provided to that Eligible Investor. PAGE 21.

3
<PAGE> 117

PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains, except in the case of the
Limited Volatility Tax Free Fund. In addition, the Equity T Fund, which seeks to
minimize the impact of taxes on its shareholders, attempts to limit short-term
capital gains and to minimize the realization of net long-term capital gains and
subsequent distribution of such gains. PAGE 35.

DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or received
in cash. Dividends from net investment income are declared Daily, by U.S.
Government Money Market and Tax Free Money Market Funds; Monthly, by Limited
Volatility Tax Free Fund; Quarterly, by Real Estate Securities Fund; and
Annually, by Emerging Markets and Equity T Funds. All Funds declare at least
annually any distributions from net realized capital gains. PAGE 36.

INCOME TAXES PAID BY THE FUNDS should be nominal. Taxable shareholders of the
Funds other than the Limited Volatility Tax Free and Tax Free Money Market Funds
will be subject to federal taxes on dividends. Taxable shareholders of the
Limited Volatility Tax Free and Tax Free Money Market Funds should ordinarily
not be required to pay federal tax on dividends. Taxable shareholders of all
Funds will be required to pay federal taxes on capital gains distributions and
may also be subject to state or local taxes. PAGE 37.

FUND PERFORMANCE, including yields and total return information, is calculated
in accordance with formulas prescribed by the Securities and Exchange
Commission. PAGE 39.

VALUATION OF FUND SHARES occurs each business day (twice a day for the U.S.
Government Money Market and Tax Free Money Market Funds). The value of a Class S
share purchased or redeemed is based upon the next computed current market value
of the assets, less liabilities, of each Class S Fund. The U.S. Government Money
Market and Tax Free Money Market Funds utilize amortized cost pricing procedures
designed to maintain a stable $1.00 per share net asset value. Unless otherwise
indicated, "shares" in this Prospectus refers to the Class S Shares of the
Funds. PAGE 41.

PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and orders
to purchase are accepted on each business day. PAGE 42.

REDEMPTION OF FUND SHARES may be requested on any business day that shares are
offered. With the exception of the Equity T Fund, there is no redemption charge
assessed by the Funds, and the redemption price is determined by the net asset
value next computed after receipt of the redemption request. The Equity T Fund
charges a redemption fee of 1% of the value of the shares redeemed, which is
retained by the Fund as a reduction of the amount payable upon redemption. The
Funds reserve the right to redeem in kind that portion of a redemption request
which is in excess of $250,000. PAGE 44.

ADDITIONAL INFORMATION is also included in this Prospectus concerning:
Distributor, Custodian, Independent Accountants and Reports; Organization,
Capitalization and Voting; and Money Manager Profiles. PAGE 46.

TWO OF THE FUNDS -- The Real Estate Securities and Emerging Markets
Funds -- also offer a second class of shares, the Class C Shares, which are
designed to meet different investor needs. PAGE 47.

4
<PAGE> 118

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE REAL ESTATE SECURITIES FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .85%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .07%
Transfer Agent Fees................................................... .12
Other Fees............................................................ .04
---
Total Other Expenses.................................................. .23
----
Total Class S Shares Operating Expenses+................................. 1.08%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $11 $34 $60 $132
--- --- --- -----
--- --- --- -----
</TABLE>

- ------------------------------
+ Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required to
pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

5
<PAGE> 119

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE EMERGING MARKETS FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1).................................... 1.09%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .62%
Transfer Agent Fees................................................... .16
Other Fees............................................................ .08
---
Total Other Expenses.................................................. .86
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)+.......... 1.95%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $20 $61 $105 $227
--- --- ----- -----
--- --- ----- -----
</TABLE>

- ------------------------------
(1) The Manager has voluntarily agreed to waive a portion of its 1.20%
management fee, up to the full amount of that fee, equal to the amount by
which the Fund's total operating expenses, other than any 12b-1 fees,
shareholders servicing fees, and certain other class level expenses exceed
1.95% of the Fund's average daily net assets on an annual basis. The gross
annual total operating expenses absent the waiver would be 2.06% of average
net assets. This waiver is intended to be in effect for the current year,
but may be revised or eliminated at any time without notice to shareholders.
* Each shareholder or the financial intermediary through which the shareholder
purchases Class S Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
Currently, the Manager does not intend to impose a shareholder investment
services fee with respect to the Emerging Markets Fund. In addition, a
shareholder may pay additional fees, expressed as fixed dollar amounts for
the other services or reports provided by the Management Company to the
shareholder. Accordingly, the expense information does not reflect an amount
for fees paid directly by an investor to the Management Company.
+ Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

6
<PAGE> 120

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE EQUITY T FUND*

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... 1%
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1).................................... .65%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees (1).................................................... .10%
Transfer Agent Fees................................................... .12
Other Fees............................................................ .13
---
Total Other Expenses (2).............................................. .35
----
Total Class S Shares Operating Expenses (After Fee Waivers
and Reimbursement) (1)+............................................... 1.00%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS
<S> <C> <C>
----- ------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and
(2) redemption at the end of each time period......................... $21 $43
--- ---
--- ---
You would pay the following expenses on the same
investment, assuming no redemption.................................... $10 $32
--- ---
--- ---
</TABLE>

- ------------------------------
* Each shareholder or the financial intermediary through which the shareholder
purchases shares of the Investment Company enters into a written Asset
Management Services Agreement with the Management Company, and agrees to pay
an annual shareholder investment services fee calculated as a specified
percentage of the shareholder's average net assets in the Funds. Currently,
the Manager does not intend to impose a shareholder investment services fee
with respect to the Fund. In addition, a shareholder may pay additional
fees, expressed as fixed dollar amounts for the other services or reports
provided by the Management Company to the shareholder. Accordingly, the
expense information does not reflect an amount for fees paid directly by an
investor to the Management Company.
(1) The Manager has voluntarily agreed to waive a portion of its 0.75%
management fee, up to the full amount of that fee, equal to the amount by
which the Fund's total operating expenses exceed 1.00% of the

7
<PAGE> 121

Fund's average daily net assets on an annual basis and to reimburse the Fund
for any additional Fund operating expenses that exceed 1.00% of the Fund's
average daily net assets on an annual basis. The Custodian has voluntarily
agreed to waive a portion of its fees for the first three months after the
Fund becomes operational. Additionally, the Manager has voluntarily agreed
to reimburse the Fund for all remaining expenses after Manager and Custodian
waivers which exceed 1.00% of average daily net assets on an annual basis.
The gross annual Management Fees before the waivers and reimbursement would
be 0.75% of average daily net assets. The gross annual total operating
expenses absent the waiver and reimbursement would be 1.10% of average daily
net assets. The management waiver and reimbursement are intended to be in
effect for the current year, but may be revised or eliminated at any time
thereafter without notice to shareholders.
(2) The ratio for "other expenses" is based on estimated amounts with expected
annual average net assets of $100 million.
+ Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

8
<PAGE> 122

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE LIMITED VOLATILITY TAX FREE FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .50%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .06
Other Fees............................................................ .09
---
Total Other Expenses.................................................. .24
----
Total Class S Shares Operating Expenses+................................. .74%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $8 $24 $41 $92
--
--- --- ---
--
--- --- ---
</TABLE>

9
<PAGE> 123

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
U.S. GOVERNMENT MONEY MARKET FUND

The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class S
Shares of Fund will bear directly or indirectly. The example provided in the
table should not be considered a representation of past or future expenses.
Actual expenses may be greater or less than those shown.

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver)(1)..................................... .00%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .03%
Transfer Agent Fees................................................... .15
Other Fees............................................................ .08
---
Total Other Expenses.................................................. .26
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)+.......... .26%
----
----
</TABLE>

- ------------------------------
(1) The Management Company has voluntarily agreed to waive the full amount of
its .25% management fee. The total operating expenses of the Fund absent the
fee waiver would be .51% of average daily net assets on an annual basis.
This waiver may be revised or eliminated at any time without notice to
shareholders.
+ Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

10
<PAGE> 124

ANNUAL FUND OPERATING EXPENSES OF THE CLASS S SHARES
OF THE TAX FREE MONEY MARKET FUND

<TABLE>
<S> <C> <C>
CLASS S SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .25%
12b-1 Fees............................................................... None
Other Expenses:
Custodian Fees........................................................ .05%
Transfer Agent Fees................................................... .07
Other Fees............................................................ .11
---
Total Other Expenses.................................................. .23
----
Total Class S Shares Operating Expenses+................................. .48%
----
----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $5 $15 $27 $60
--
--- --- ---
--
--- --- ---
</TABLE>

- ------------------------------
+ Investors purchasing Class S of the Fund through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees to the intermediary for services provided by the intermediary.
Such investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.

11
<PAGE> 125

FINANCIAL HIGHLIGHTS OF THE REAL ESTATE SECURITIES FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Investment Company.

REAL ESTATE SECURITIES FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989++
<S> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR.................................. $22.53 $22.76 $21.50 $19.33 $14.99 $19.31 $20.00
------- ------- ------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................. 1.32 1.25 1.05 1.08 1.11 1.30 .42
Net realized and unrealized gain (loss) on investments............ 1.03 .40 2.68 2.16 4.36 (4.30) (.73 )
------- ------- ------- ------ ------ ------ ------
Total From Investment Operations................................ 2.35 1.65 3.73 3.24 5.47 (3.00) (.31 )
------- ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income............................................. (1.35) (1.23) (1.04) (1.07) (1.13) (1.32) (.38 )
Net realized gain on investments.................................. -- (.45) (1.43) -- -- -- --
In excess of net realized gain on investments..................... -- (.20) -- -- -- -- --
Tax return of capital............................................. (.02) -- -- -- -- -- --
------- ------- ------- ------ ------ ------ ------
Total Distributions............................................. (1.37) (1.88) (2.47) (1.07) (1.13) (1.32) (.38 )
------- ------- ------- ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR........................................ $23.51 $22.53 $22.76 $21.50 $19.33 $14.99 $19.31
======= ======= ======= ====== ====== ======
------
------
TOTAL RETURN (%)(A)................................................. 10.87 7.24 17.42 17.29 37.08 (15.92) (1.57 )
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)................ 1.04 1.05 1.11 1.20 1.26 .39 --
Operating expenses, gross, to average net assets (b).............. 1.04 1.05 1.11 1.20 1.31 1.60 .32
Net investment income to average net assets (b)................... 6.10 5.65 4.52 5.60 6.50 8.94 6.90
Portfolio turnover (b)............................................ 23.49 45.84 58.38 19.72 13.28 12.11 8.74
Net assets, end of year ($000 omitted)............................ 290,990 209,208 145,167 75,902 42,771 20,845 7,699
Per share amount of fees waived ($ omitted)....................... -- -- -- -- -- .0491 .0394
Per share amount of fees reimbursed ($ omitted)................... -- -- -- -- .0076 .1327 .1155
</TABLE>

- ------------------------------
++ For the period July 28, 1989 (commencement of operations) to December 31,
1989.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1989 are annualized.
* See notes to Financial Statements which appear in the Investment Company's
Annual Report to Shareholders and which are incorporated by reference into
the Statement of Additional Information.

12
<PAGE> 126

FINANCIAL HIGHLIGHTS OF THE EMERGING MARKETS FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Investment Company.

EMERGING MARKETS FUND

<TABLE>
<CAPTION>
1995 1994 1993++
<S> <C> <C> <C>
----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR........................................................... $12.25 $13.90 $10.00
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................................................................... .11 .15 .07
Net realized and unrealized gain (loss) on investments..................................... (1.12) (1.24) 4.09
------- ------- ------
Total From Investment Operations......................................................... (1.01) (1.09) 4.16
------- ------- ------
LESS DISTRIBUTIONS:
Net investment income...................................................................... (.03) (.10) (.07)
In excess of net investment income......................................................... (.02) (.10) (.01)
Net realized gain on investments........................................................... -- (.31) (.18)
In excess of net realized gain on investments.............................................. (.03) (.05) --
------- ------- ------
Total Distributions...................................................................... (.08) (.56) (.26)
------- ------- ------
NET ASSET VALUE, END OF YEAR................................................................. $11.16 $12.25 $13.90
======= ======= ======
TOTAL RETURN (%)(A)(C)....................................................................... (8.21) (5.83) 41.83
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)(c)...................................... 1.75 .80 .80
Operating expenses, gross, to average net assets (b)(c).................................... 1.80 .83 1.60
Net investment income to average net assets (b)(c)......................................... .88 1.10 1.33
Portfolio turnover (b)..................................................................... 71.16 57.47 89.99
Net assets, end of year ($000 omitted)..................................................... 172,673 127,271 65,457
Per share amount of fees waived ($ omitted)................................................ .0022 .0044 .0016
Per share amount of fees reimbursed ($ omitted)............................................ .0032 .0017 .0420
</TABLE>

- ------------------------------
++ For the period January 29, 1993 (commencement of operations) to December 31,
1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993, are annualized.
(c) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See notes to Financial Statements which appear in the Investment Company's
Annual Report to Shareholders and which are incorporated by reference into
the Statement of Additional Information.

13
<PAGE> 127

FINANCIAL HIGHLIGHTS OF THE LIMITED VOLATILITY TAX FREE FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Investment Company.

LIMITED VOLATILITY TAX FREE FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR................ $20.48 $21.45 $21.03 $20.85 $20.49 $20.51 $20.41 $20.46 $21.03 $20.09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................... .81 .86 .94 1.01 1.17 1.25 1.21 1.15 1.06 .99
Net realized and unrealized gain (loss)
on investments................................ .77 (.97) .42 .18 .35 (.03) .17 (.10) (.48) .85
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment Operations.............. 1.58 (.11) 1.36 1.19 1.52 1.22 1.38 1.05 .58 1.84
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income........................... (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10) (1.15) (.90)
In excess of net investment income.............. -- -- (.00) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions........................... (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10) (1.15) (.90)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR...................... $21.24 $20.48 $21.45 $21.03 $20.85 $20.49 $20.51 $20.41 $20.46 $21.03
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%).................................. 7.81 (0.54) 6.58 5.85 7.64 6.12 6.95 5.23 2.84 9.32
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net
assets........................................ .74 .72 .75 .80 .84 .86 .74 .65 .63 .51
Operating expenses, gross, to average net
assets........................................ .74 .72 .75 .80 .84 .86 .74 .65 .63 .78
Net investment income to average net assets..... 3.91 4.14 4.40 4.89 5.68 6.06 5.64 5.50 5.20 5.22
Portfolio turnover (a).......................... 73.91 71.71 24.05 18.21 129.12 99.00 89.93 67.24 75.73 91.19
Net assets, end of year ($000 omitted).......... 63,838 48,975 51,211 38,399 26,173 23,553 25,657 38,151 52,348 46,942
Per share amount of fees reimbursed ($
omitted)...................................... -- -- -- -- -- -- -- -- -- .0550
</TABLE>

- ------------------------------
(a) Beginning in 1992, variable rate daily demand securities were excluded from
the turnover calculation.
* See notes to Financial Statements which appear in the Investment Company's
Annual Report to Shareholders and which are incorporated by reference into
the Statement of Additional Information.

14
<PAGE> 128

FINANCIAL HIGHLIGHTS OF THE U.S. GOVERNMENT MONEY MARKET FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The information
in the table represents the Financial Highlights for the Fund's Class C Shares
for the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Investment Company.

U.S. GOVERNMENT MONEY MARKET FUND

- ------------------------------
* See notes to Financial Statements which appear in the Investment Company's
Annual Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.

15
<PAGE> 129

FINANCIAL HIGHLIGHTS OF THE TAX FREE MONEY MARKET FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Investment Company.

TAX FREE MONEY MARKET FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR............. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................ .0370 .0279 .0251 .0304 .0473 .0582 .0623 .0508 .0318
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income........................ (.0370) (.0279) (.0251) (.0304) (.0473) (.0582) (.0623) (.0508) (.0318)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)............................ 3.76 2.83 2.55 3.09 4.84 5.99 6.42 5.24 3.18
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
net assets (b)............................. .48 .40 .43 .45 .45 .45 .45 .43 .22
Operating expenses, gross, to average
net assets (b)............................. .48 .40 .43 .45 .46 .52 .61 .50 .45
Net investment income to average
daily net assets (b)....................... 3.69 2.84 2.52 3.03 4.73 5.82 6.28 5.36 4.83
Net assets, end of year ($000 omitted)....... 78,000 100,819 68,154 73,203 61,288 59,892 30,873 39,165 22,380
Per share amount of fees waived
($ omitted)................................ -- -- -- -- -- -- -- -- .0008
Per share amount of fees reimbursed
($ omitted)................................ -- -- -- -- .0001 .0007 .0016 .0007 .0015
</TABLE>

- ------------------------------
++ For the period May 8, 1987 (commencement of operations) to December 31,
1987.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1987 are annualized.
* See notes to Financial Statements which appear in the Investment Company's
Annual Report to Shareholders and which are incorporated by reference into
the Statement of Additional Information.

16
<PAGE> 130

THE PURPOSE OF THE FUNDS

FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS

Three functions are at the core of Frank Russell Company's consulting
service:

Objective Setting: Defining appropriate investment objectives and desired
investment returns based upon the client's unique situation and tolerance for
risk.

When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique with the objectives of
reducing risk and increasing returns.

MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION

Frank Russell Company believes capital market history shows that no one
particular asset class provides consistent and/or above-average total return
results, either on an absolute or relative basis, over extended periods of time.
For example, there are periods of time when equity securities outperform
fixed-income securities, and vice versa. Similarly, there are periods when
securities selected for particular characteristics or using particular
investment styles outperform other types of securities. For example, there are
periods of time when equity securities with growth characteristics outperform
equities with income characteristics, and vice versa. While these performance
cycles tend to repeat themselves, they do so with no regularity. The blending of
asset classes and investment styles on a complementary basis can obtain more
consistent returns over longer time periods with a reduction of risk
(volatility), although a particular asset class or investment style -- or a
particular Fund investing in one asset class or using a particular style -- may
not achieve above-average performance at any given point in the market.

17
<PAGE> 131

ELIGIBLE INVESTORS

Shares of the Funds are currently offered only to Eligible Investors. These
investors are principally institutional investors which invest for their own
account or in a fiduciary or agency capacity with investment authority and which
have entered into Asset Management Services Agreements (collectively, the
"Agreements," and each, an "Agreement") with the Management Company, and
institutions or individuals who have acquired shares through such institutions.
There is no specified minimum amount which must be invested. Institutions which
may have a particular interest in the Funds include:

- Bank trust departments managing discretionary institutional or personal
trust accounts

- Banks, other than through their trust departments

- Registered investment advisers

- Endowment funds and charitable foundations

- Employee welfare plans

- Broker-Dealers

- Pension or profit sharing plans

- Insurance companies

18
<PAGE> 132

In the case of the Emerging Markets and Equity T Funds, both of which are
External Fee Funds, the Agreement sets forth the shareholder investment services
fees to be paid to the Management Company and is ordinarily expressed as a
percentage of assets invested in the Funds. The shareholder investment services
fee may include a fixed-dollar fee for certain specified services. The
shareholder investment services fee is agreed upon by the client and the
Management Company and is at a rate which reflects the amount of assets expected
to be invested in the Funds, the nature and extent of individualized services to
be provided by the Management Company to the client with respect to such assets,
and other factors.

GENERAL MANAGEMENT OF THE FUNDS

The Management Company: (i) provides or oversees the provision of all
general management and administration, investment advisory and portfolio
management, and distribution services for the Funds; (ii) provides the Funds
with office space, equipment and personnel necessary to operate and administer
the Funds' business, and to supervise the provision of services by third parties
such as the money managers and Custodian; (iii) develops the investment
programs, selects money managers, allocates assets among money managers and
monitors the money managers' investment programs and results; and (iv) provides
the Funds with transfer agent, dividend disbursing and shareholder recordkeeping
services. The Management Company bears the expenses it incurs in providing these
services (other than transfer agent and shareholder recordkeeping) as well as
the costs of preparing and distributing explanatory materials concerning the
Funds.

- Randall P. Lert, who has been Chief Investment Officer, Frank Russell
Investment Management Company since 1989.

19
<PAGE> 133

- James M. Imhof, Investment Officer, Frank Russell Investment Management
Company, who has managed the day to day management of Frank Russell
Investment Management Company Funds and ongoing analysis and monitoring
of Fund money managers since 1989.

- Peter F. Apanovitch, who has been the Manager of Short-Term Investment
Funds for Frank Russell Investment Management Company and Frank Russell
Trust Company since 1991.

20
<PAGE> 134

compensation for the services as described above and to pay expenses. The annual
rate of the management fees, payable to the Management Company monthly on a pro
rata basis, are the following percentages of the average daily net assets of
each Fund:

Real Estate Securities Fund, 0.85%; Emerging Markets Fund, 1.20%; Equity T
Fund, 0.75%; Limited Volatility Tax Free Fund, 0.50%; U.S. Government Money
Market Fund, 0.25%; and Tax Free Money Market Fund, 0.25%. The fees for the Real
Estate Securities and Emerging Markets Funds may be higher than fees charged by
some mutual funds with similar objectives which use only a single money manager.

The Management Company has voluntarily agreed to waive all or a portion of
its management fee with respect to certain Funds. In addition to these
"voluntary limits," the Management Company has agreed to reimburse each Fund the
amount, if any, by which a Fund's expenses exceed state law expense limitations.
Currently, California has an expense limitation of 2.5% of a Fund's first $30
million in average net assets, 2.0% of the next $70 million in average net
assets, and 1.5% of the remaining average net assets for any fiscal year as
determined under the state's regulations. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or rescinded
at any time.

Frank Russell Company provides its Portfolio Verification System ("PVS") to
the Real Estate Securities and the Emerging Markets Funds pursuant to a written
Service Agreement. The PVS computerized data base system records detailed
transaction data for the Funds necessary to prepare various financial and
Internal Revenue Service accounting reports. For these services, the Real Estate
Securities Fund pays the following annual fees: base fee, $1,500; transaction
charge, $0.10; and holding charge, $1.80. Annual minimum charges for the Real
Estate Securities Fund are $5,000. For these services, the Emerging Markets Fund
pays the following annual fees: base fee, $14,800; transaction charge, $3.00;
and holding charge, $24.00. Annual minimum charges for the Investment Company's
international Funds are $290,000 in the aggregate.

EXPENSES OF THE FUNDS

The Funds, and when appropriate each class, will pay all their expenses
other than those expressly assumed by the Management Company. The Funds' Class S
Shares' expenses for the year ended December 31, 1995, as a percentage of
average net assets, are shown in the Financial Highlights tables. The Equity T
Fund was not offered for public investment during the period, and therefore,
Financial Highlights do not exist for the Fund. Principal expenses are: the
management, transfer agency and recordkeeping fees payable to the Management
Company; fees for custodial and portfolio accounting payable to State Street
Bank and Trust Company; bookkeeping service fees for preparing tax records
payable to Frank Russell Company; fees for independent auditing and legal
services; and fees for filing reports and registering shares with regulatory
bodies.

THE MONEY MANAGERS

The assets of each Fund currently are allocated among the money managers
listed in the section "Money Manager Profiles." THE ALLOCATION OF A FUND'S
ASSETS AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY THE MANAGEMENT
COMPANY. THE MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED
AT ANY TIME BY THE MANAGEMENT COMPANY, SUBJECT TO APPROVAL BY THE BOARD OF
TRUSTEES OF THE INVESTMENT COMPANY. The Funds will notify shareholders of the
Fund concerned within 60 days of when a money manager begins or stops providing
services.

21
<PAGE> 135

From its management fees, the Management Company, as agent for the
Investment Company, pays all fees to the money managers for their investment
selection services. Quarterly, each money manager is paid the pro rata portion
of an annual fee, based on the quarterly average of all the assets allocated to
the money manager. For the period, management fees paid to the money managers
were equivalent to the following annual rates expressed as a percentage of the
average daily net assets of each Fund: Real Estate Securities Fund, .32%;
Emerging Markets Fund, .68%; Limited Volatility Tax Free Fund, .25%; U.S.
Government Money Market Fund, .02%; and Tax Free Money Market Fund, .02%. The
Equity T Fund was not offered to Eligible Investors during the period. Fees paid
to the money managers are not affected by any voluntary or statutory expense
limitations. Some money managers may receive investment research prepared by
Frank Russell Company as additional compensation, or may receive brokerage
commissions for executing portfolio transactions for the Funds through
broker-dealer affiliates.

The Real Estate Securities Fund is managed by Cohen & Steers Capital
Management. The individuals responsible for the management of the Fund and their
principal occupations for the past five years are as follows: Robert H. Steers
has been the Chairman of Cohen & Steers since the founding of the company in
1986. Martin Cohen has been president of Cohen & Steers since the founding of
the company in 1986.

The Equity T Fund is managed by J.P. Morgan Investment Management Inc. The
individual responsible for the management of the Fund is James C. Weiss, who is
a Vice President and Portfolio Manager in the U.S. Structured Equity area. Mr.
Weiss joined J.P. Morgan Investment Management Inc. in 1992. Prior to that, Mr.
Weiss was a Stock Index Arbitrageur at Oppenheimer & Company.

The U.S. Government Money Market Fund is managed by Frank Russell
Investment Management Company. The individual responsible for the management of
the Fund and his principal occupation for the past five years is as follows:
Peter F. Apanovitch, who has been Manager of Short-Term Investment Funds for
Frank Russell Investment Management Company and Frank Russell Trust Company
since 1991.

The Tax Free Money Market Fund is managed by Weiss, Peck & Greer, L.L.C.
("WPG"). The individual responsible for the management of the Fund for the past
10 years is Janet A. Fiorenza. Ms. Fiorenza, Principal and Senior Portfolio
Manager, has been a member of WPG or its predecessor since 1980.

Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund within the Fund's investment objectives,
restrictions and policies, and the more specific strategies developed by Frank
Russell Company and the Management Company. Although the money managers'
activities are subject to general oversight by the Board of Trustees and
officers of the Investment Company, NEITHER THE BOARD, THE OFFICERS, THE
MANAGEMENT COMPANY NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF
THE MONEY MANAGERS' INDIVIDUAL SECURITY SELECTIONS.

22
<PAGE> 136

INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES, AND RISKS

INVESTMENT OBJECTIVES

Each Fund's objective is "fundamental," as are certain of the Fund's
policies with respect to the types of securities in which it will invest.
Ordinarily, each Fund will invest more than 65% of its total assets in the types
of securities identified in its statement of objectives. However, the Funds may
hold assets as cash reserves for temporary and defensive purposes when their
money managers deem that a more conservative approach is desirable or when
suitable purchase opportunities do not exist. (See, "Investment Policies -- Cash
Reserves.")

REAL ESTATE SECURITIES FUND

The Real Estate Securities Fund's objective is to generate a high level of
total return through above average current income, while maintaining the
potential for capital appreciation by investing primarily in the equity
securities of companies in the real estate industry.

Except for temporary defensive purposes, the Fund will only invest in real
estate related securities, which include securities of companies which generate
at least 50% of their revenues from the ownership, construction, financing,
management or sale of commercial, industrial or residential real estate. Under
normal circumstances, the Fund will invest at least 65% of its total assets in
income-oriented equity securities of real estate companies, which include shares
of real estate investment trusts, partnership units of master limited
partnerships, common and preferred stock, and convertible debt securities
believed to have attractive equity characteristics. Up to 35% of the Fund's
total assets may be invested in other debt securities of real estate companies.

The Fund will concentrate more than 25% of its total assets in the real
estate and real estate related industries. The Fund will therefore be subject to
the risks associated with the direct ownership of real estate. Additional risks
include declines in the value of real estate, risks related to general and local
economic conditions, over-building and increased competition, increases in
property taxes and operating expenses, changes in neighborhood values, the
appeal of properties to tenants and increases in interest rates. The value of
securities of companies that service the real estate industry may also be
affected by such risks.

In addition to the risks discussed above, equity real estate investment
trusts may be affected by changes in the value of the underlying property owned
by the trust, while mortgage real estate investment trusts may be affected by
the quality of any credit extended. Moreover, the underlying portfolios of
equity and mortgage real estate trusts may not be diversified, and therefore are
subject to the risk of financing a single or a limited number of projects. Such
trusts are also dependent upon management skills and are subject to heavy cash
flow dependency, defaults by borrowers, self-liquidation and the possibility of
failing either to qualify for tax-free

23
<PAGE> 137

pass-through of income under the Internal Revenue Code or to maintain their
exemption from the Investment Company Act of 1940, as amended ("1940 Act").

The Fund will attempt to be invested fully at all times. However, the Fund
reserves the right to hold up to 20% of the Fund's assets in liquid reserves for
redemption needs.

EMERGING MARKETS FUND

The Emerging Markets Fund's objective is to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from developed market international
portfolios, by investing primarily in equity securities.

Under normal circumstances, the Fund will invest at least 65% of its total
assets in equity securities of companies in countries having emerging markets.
For purposes of the Fund's operations, an "emerging market" country will be a
country having an economy and market that are or would be considered by the
World Bank or the United Nations to be emerging or developing. These countries
generally include every country in the world except the United States, Canada,
Japan, Australia and most countries located in Western Europe.

The Fund may not be invested in all such markets at all times. Investing in
some of the listed markets may not be feasible, due to lack of adequate custody
arrangements or current legal requirements. In the future, the Fund's money
managers may determine, based on information then available, to include
additional emerging market countries in which the Fund may invest. The assets of
the Fund ordinarily will be invested in the securities of issuers in at least
three different emerging market countries. The Fund does not currently
anticipate that it will invest more than 25% of its total assets in the
securities of any one emerging market country.

A company in an emerging market means (i) a company whose securities are
traded in the principal securities market of an emerging market country; (ii) a
company that (alone or on a consolidated basis) derives 50% or more of its total
revenue from either goods produced, sales made or services performed in emerging
market countries; or (iii) a company organized under the laws of, and with a
principal office in, an emerging market country.

The Fund may invest in common and preferred stocks of emerging market
companies, including companies involved in real estate development and gold
mining. The Fund may also invest in other types of equity securities and equity
derivative securities, such as convertible securities, rights, units, warrants,
American Depository Receipts (ADRs) and European Depository Receipts (EDRs). The
Fund's equity securities will primarily be denominated in foreign currencies and
may be held outside the United States.

The Fund may invest in fixed-income securities, including instruments
issued by emerging market companies, governments and their agencies, and in US
companies that derive, or are expected to derive, a substantial portion of their
revenues from operations outside the United States. The Fund's fixed-income
securities may be denominated in other than US dollars.

Certain emerging markets are closed in whole or in part to equity
investments by foreigners. The Fund may be able to invest in such markets solely
or primarily through governmentally authorized investment vehicles. To invest in
these markets, the Fund may invest up to 10% of its total assets in the shares
of other investment companies and up to 5% of its total assets in any one
investment company, as long as that investment does not represent more than 3%
of the voting stock of the acquired investment company at the

24
<PAGE> 138

time such shares are purchased. The risks associated with investment in
securities issued by foreign governments and companies are described under
"Investment Policies -- Investment in Foreign Securities."

EQUITY T FUND

The Equity T Fund's objective is to provide capital growth on an after-tax
basis by investing principally in equity securities.

The Fund may invest in common and preferred stocks, rights and warrants,
and securities convertible into common stocks. Generally, the Fund seeks to
invest primarily in domestic equity securities that the Fund's money manager
believes to be undervalued on a long-term basis.

Additionally, to maintain full exposure to the equity markets, the Fund may
purchase S&P 500 Index futures contracts, which may be considered to be
derivative securities, with respect to Fund assets that are held in cash.

The majority of stock mutual funds are managed to maximize pre-tax total
return, without regard to the tax consequences to shareholders of portfolio
activity that may result in taxable distributions. In contrast, the Fund seeks
to achieve its investment objective while minimizing the impact of taxes on
shareholders' returns in connection with the Fund's portfolio investment income
and realized capital gains.

The Fund is designed for taxable investors who seek to minimize the impact
of taxes on their investment returns by participating on a long-term basis in a
broadly-diversified investment portfolio of equity securities. The Fund is not
recommended for either short-term investors, or for investor assets that are
already tax-deferred (such as IRAs and 401(k) plans).

In pursuing the Fund's objective, the money manager utilizes distinct
investment strategies and tax-efficient management techniques in an effort to
minimize the impact of taxes on the Fund's shareholders.

The Fund will attempt to limit short-term capital gains, and to minimize
the realization of net long-term capital gains and subsequent distribution of
such gains, to shareholders. While the Fund is free to sell securities in its
portfolio whenever the money manager deems it appropriate, the Fund will
typically buy stocks with the intention of holding for a period of time to
qualify for the more favorable tax treatment (i.e., a long-term capital gain).

When the money manager decides to sell a particular appreciated security,
the manager will generally select for sale those share lots with the highest
cost basis to minimize capital gains. The money manager will also sell
securities in order to realize capital losses. Such losses can be used to offset
realized capital gains (whether long- or short-term), thereby reducing capital
gains distributions to Fund shareholders.

The Fund intends to remain as fully invested as possible, in order to
enhance the potential for attractive total returns. While the Fund is permitted
to invest its cash reserves in money market instruments, US government
securities and high-quality debt securities, the money manager will seek to be
fully invested in equity securities.

A redemption fee equal to 1% of the value of the Shares redeemed is
retained by the Fund from all redemptions other than redemptions-in-kind. This
fee is intended to offset the potentially negative impact that redemptions can
have on the Fund's portfolio strategy and to contain costs. The redemption fee
will indirectly help to offset tax costs that investors bear when the Fund is
forced to realize capital gains as a result of

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shareholder redemptions or investment activity. By being paid directly to the
Fund, the fees tend to be advantageous to long-term investors and
disadvantageous to short-term investors.

LIMITED VOLATILITY TAX FREE FUND

The Limited Volatility Tax Free Fund's objective is to provide a high level
of federal tax-exempt income consistent with the preservation of capital by
investing primarily in municipal obligations maturing in seven years or less
from the date of acquisition. The Fund intends to invest 100% and will always
invest 80% of its net assets in municipal obligations.

The Fund will invest principally in municipal obligations which, at the
time of purchase, are rated no less than A or A-2 by Standard & Poor's Ratings
Group ("S&P"); A, Prime-2 or MIG-2 by Moody's Investors Service, Inc.
("Moody's"); or, if unrated, judged by the money manager to be of at least equal
credit quality to those designations, or backed by the full faith and credit of
the United States. The Fund may also invest up to 15% of its net assets in
securities subject to legal or contractual restrictions on disposition or for
which no readily available market exists.

"Municipal obligations" are debt obligations issued by states, territories
and possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, or multi-state agencies
or authorities the interest from which is exempt from federal income tax,
including the alternative minimum tax, in the opinion of bond counsel to the
issuer. Municipal obligations include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities.

Municipal obligations may include project, tax anticipation, revenue
anticipation, bond anticipation, and construction loan notes; tax-exempt
commercial paper; fixed and variable rate notes; obligations whose interest and
principal are guaranteed or insured by the US government or fully collateralized
by US government securities; industrial development bonds; and floating or
variable rate obligations. (Floating or variable rate obligations are municipal
obligations with a demand feature, which, when exercised, usually becomes
effective within 30 days. The rate of return on the obligations is readjusted
periodically according to some objective standard such as changes in a
commercial bank's prime rate.)

The Fund may purchase from financial institutions (such as banks and
insurance companies) participation interests in floating or variable rate
obligations. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank or insurance policy of an insurance company that
the money manager has determined meets the prescribed quality standards for the
Fund. The Fund has the right to sell the participation certificate back to the
institution and draw on the letter of credit or insurance on demand after 30
days' notice, for all or any part of the full principal amount of the Fund's
participation interest in the security plus accrued interest. The Fund intends
to exercise its right to demand payment only upon a default under the terms of
the documents of the municipal obligations, when needed to provide liquidity to
meet redemptions, or to maintain the required quality of the Fund's investment
portfolio.

The Fund may purchase municipal obligations with a "put" or "stand-by
commitment." A "put" or "stand-by commitment" obligates the seller to buy the
underlying municipal obligation at an agreed upon price and time when exercised
by the Fund. In the event the seller does not honor the put or stand-by
commitment for financial reasons, the Fund may be a general creditor of the
seller.

Municipal obligations, like all investments, involve possible risks.
Municipal obligations: might be affected by economic, business or political
developments; may be subject to the provisions of litigation,

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<PAGE> 140

bankruptcy, and other laws affecting the rights and remedies of creditors; or
may become subject to future laws extending the time for payment of principal
and/or interest, or limiting the rights of municipalities to levy taxes. For
instance, legislative proposals are introduced, from time to time, to restrict
or eliminate the federal income tax exemption for municipal obligations
interest. If such legislation is adopted, the Board of Trustees will reevaluate
the Fund's investment objective and may submit possible changes in the structure
of the Fund to its shareholders.

U.S. GOVERNMENT MONEY MARKET FUND

The U.S. Government Money Market Fund's objective is to provide the maximum
current income that is consistent with the preservation of capital and liquidity
and the maintenance of a stable $1.00 per share net asset value by investing
exclusively in US government obligations.

The types of US government obligations the Fund may purchase include: (1) a
variety of US Treasury obligations, which differ only in their interest rates,
maturities and times of issuance: (a) US Treasury bills have a maturity of one
year or less; (b) US Treasury notes have original maturities of one to ten
years; and (c) US Treasury bonds have original maturities of greater than ten
years; (2) obligations issued or guaranteed by US government agencies and
instrumentalities and supported by any of the following: (a) the full faith and
credit of the US Treasury (such as Government National Mortgage Association
participation certificates); (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the US Treasury; (c) discretionary
authority of the US government agency or instrumentality; or (d) the credit of
the instrumentality (examples of agencies and instrumentalities are Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association). No assurance can be given that the US government will provide
financial support to such US government agencies or instrumentalities described
in (2)(b), (2)(c) and (2)(d) in the future, other than as set forth above, since
it is not obligated to do so by law. The Fund may purchase US government
obligations on a forward commitment basis.

TAX FREE MONEY MARKET FUND

The Tax Free Money Market Fund's objective is to provide the maximum
current income exempt from federal income tax that is consistent with the
preservation of capital and liquidity, and the maintenance of a $1.00 per share
net asset value by investing in short-term municipal obligations. The Fund
intends to invest 100% and will always invest 80% of its total assets in
municipal obligations.

The Fund will invest in municipal obligations which at the time of purchase
have or are deemed to have remaining maturities of 397 days or less and (i) have
received a rating in one of the two highest rating categories by two nationally
recognized statistical rating agencies ("NRSROs"), including, but not limited
to, S&P and Moody's (or, if only one NRSRO has rated the obligation, one of the
two highest ratings of that NRSRO); (ii) backed by the full faith and credit of
the United States; or (iii) if unrated, determined by the Investment Company's
Board of Trustees to be of at least equal credit quality to obligations having
the ratings described in (i) above. (See, the Statement of Additional
Information for a description of the rating systems of NRSROs.) The Fund may
invest up to 10% of its net assets in securities subject to legal or contractual
restrictions on disposition or for which no readily available market exists.

Municipal obligations in which the Fund may invest are described under
"Limited Volatility Tax Free Fund." The Fund will purchase municipal obligations
with demand features only when the demand instrument

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<PAGE> 141

and the underlying municipal obligations meet the prescribed quality standards
for the Fund. The Fund may purchase municipal obligations with a "put" or
"stand-by commitment."

U.S. Government Money Market and Tax Free Money Market Funds. The U.S.
Government Money Market and Tax Free Money Market Funds (collectively, the
"Money Market Funds") expect to maintain, but do not guarantee, a net asset
value of $1.00 per share for purposes of purchases and redemptions by valuing
their portfolio securities at "amortized cost." The Funds will maintain a
dollar-weighted average maturity of 90 days or less, invest only in securities
with a remaining maturity at the time of purchase, or time of next interest rate
reset of 397 days or less, and follow procedures reasonably designed to assure
that the prices so determined approximate the current market value of the
portfolio securities.

INVESTMENT RESTRICTIONS

1. Invest in any security if, as a result of such investment, less than
75% of its total assets would be represented by cash; cash items;
securities of the US government, its agencies, or instrumentalities;
securities of other investment companies; and other securities limited
in respect of each issuer to an amount not greater in value than 5% of
the total assets of such Fund. A Fund's investment in "cash reserves"
(see the next section) in shares of the Investment Company's Money
Market Fund is not subject to this restriction or to restrictions 2 or
3.

2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other
than the US government, its agencies and instrumentalities). This
restriction does not apply to the Real Estate Securities Fund, which
may invest 25% or more of its total assets in the securities of
companies directly or indirectly engaged in the real estate industry.

3. Acquire more than 5% of the outstanding voting securities, or 10% of
all of the securities, of any one issuer.

INVESTMENT POLICIES

The Funds use certain investment instruments and techniques commonly used
by institutional investors. The principal policies are the following:

Cash Reserves. The Real Estate Securities, Emerging Markets, Equity T and
Limited Volatility Tax Free Funds are authorized to invest their cash reserves
(i.e., funds awaiting investment in the specific types of securities to be
acquired by a Fund) in money market instruments and in debt securities which are
at least comparable in quality to each Fund's permitted investments. In lieu of
having each Fund make separate, direct investments in money market instruments,
the Funds and their money managers may elect to invest the Funds' cash reserves
in the Investment Company's Money Market Fund.

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<PAGE> 142

The Investment Company's Money Market Fund, described in a separate
prospectus, seeks to maximize current income to the extent consistent with the
preservation of capital and liquidity, and the maintenance of a stable $1.00 per
share net asset value by investing solely in short-term money market
instruments. The Management Company currently does not collect a management or
advisory fee from the Investment Company's Money Market Fund, thereby
eliminating any duplication of fees. The Funds will use this procedure only so
long as doing so does not adversely affect the portfolio management and
operations of the Investment Company's Money Market Fund and the Investment
Company's other Funds.

Repurchase Agreements. Each Fund may enter into repurchase agreements with
a bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day). If
the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at the time of agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Investment Policies -- Illiquid Securities," a Fund
will not invest more than 15% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days. The Money Market
Funds will not invest more than 10% of their respective net assets (taken at
current market value) in repurchase agreements and other illiquid securities
maturing in more than seven days.

Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements to meet redemption requests where the liquidation of portfolio
securities is deemed by a money manager to be inconvenient or disadvantageous. A
reverse repurchase agreement is a transaction whereby a Fund transfers
possession of a portfolio security to a bank or broker-dealer in return for a
percentage of the portfolio security's market value. The Fund retains record
ownership of the security involved, including the right to receive interest and
principal payments. At an agreed upon future date, the Fund repurchases the
security by paying an agreed upon purchase price plus interest. Cash or liquid
high-grade debt obligations of the Fund equal in value to the repurchase price,
including any accrued interest, will be segregated on the Fund's records while a
reverse repurchase agreement is in effect, subject to the limitation described
in "Investment Policies -- Illiquid Securities."

Lending Portfolio Securities. The Real Estate Securities, the Emerging
Markets, the Equity T and the U.S. Government Money Market Funds may lend
portfolio securities with a value of up to 50% of each Fund's total assets. Such
loans may be terminated at any time. A Fund will receive either cash (and agree
to pay a "rebate" interest rate), US government or US government agency
securities as collateral in an amount equal to at least 100% of the current
market value of the loaned securities plus accrued interest. The collateral is
"marked-to-market" on a daily basis, and the borrower will furnish additional
collateral in the event that the value of the collateral drops below 100% of the
market value of the loaned securities.

Cash collateral is invested in high-quality short-term instruments,
short-term bank collective investment and money market mutual funds (including
funds advised by State Street Bank and Trust Company, the Funds' Custodian, for
which it may receive an asset-based fee), and other investments meeting certain
quality and maturity requirements established by the Funds. Income generated
from the investment of the cash

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<PAGE> 143

collateral is first used to pay the rebate interest cost to the borrower of the
securities and the remainder is then divided between the Fund and the Fund's
Custodian.

Should the borrower of the securities fail financially, there is a risk of
delay in recovery of the securities or loss of rights in the collateral.
Consequently, loans are made only to borrowers which are deemed to be of good
financial standing. The Investment Company may incur costs or possible losses in
excess of the interest and fees received in connection with securities lending
transactions. Some securities purchased with cash collateral are subject to
market fluctuations while a loan is outstanding. To the extent that the value of
the cash collateral as invested is insufficient to return the full amount of the
collateral plus rebate interest to the borrower upon termination of the loan, a
Fund must immediately pay the amount of the shortfall to the borrower.

Illiquid Securities. The Real Estate Securities, the Emerging Markets, the
Equity T and the Limited Volatility Tax Free Funds will not purchase or
otherwise acquire any security if, as a result, more than 15% of a Fund's net
assets (taken at current value) would be invested in securities, including
repurchase agreements of more than seven days' duration, that are illiquid by
virtue of the absence of a readily available market or because of legal or
contractual restrictions on resale. In the case of the Money Market Funds, this
restriction is 10% of each Fund's net assets. In addition, the Funds will not
invest more than 10% of their respective net assets (taken at current value) in
securities of issuers which may not be sold to the public without registration
under the Securities Act of 1933 (the "1933 Act"). These policies do not include
(1) commercial paper issued under Section 4(2) of the 1933 Act, or (2)
restricted securities eligible for resale to qualified institutional purchasers
pursuant to Rule 144A under the 1933 Act that are determined to be liquid by the
money managers in accordance with Board approved guidelines. Such guidelines
take into account trading activity for such securities and the availability of
reliable pricing information, among other factors. If there is a lack of trading
interest in a particular Rule 144A security, a Fund's holding of that security
may be illiquid. There may be undesirable delays in selling illiquid securities
at prices representing their fair value.

Investment in Foreign Securities. The Funds, other than the Money Market
Funds, may invest in foreign securities traded on US or foreign exchanges or in
the over-the-counter market. Investing in securities issued by foreign
governments and corporations involves considerations and possible risks not
typically associated with investing in obligations issued by the US government
and domestic corporations. Less information may be available about foreign
companies than about domestic companies, and foreign companies generally are not
subject to the same uniform accounting, auditing and financial reporting
standards or other regulatory practices and requirements comparable to those
applicable to domestic companies. The values of foreign investments are affected
by changes in currency rates or exchange control regulations, application of
foreign tax laws, including withholding taxes, changes in governmental
administration or economic or monetary policy (in the United States or abroad)
or changed circumstances in dealings between nations. Costs are often incurred
in connection with conversions between various currencies. In addition, foreign
brokerage commissions are generally higher than in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including nationalization, expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards and potential difficulties in enforcing
contractual obligations, and could be subject to extended settlement periods or
restrictions affecting the prompt return of capital to the United States.

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<PAGE> 144

The risks associated with investing in foreign securities are often
heightened for investments in developing or emerging markets.

Investments in emerging or developing markets involve exposure to economic
structures that are generally less diverse and mature, and to political systems
which can be expected to have less stability than those of more developed
countries. Moreover, the economies of individual emerging market countries may
differ favorably or unfavorably from the US economy in such respects as the rate
of growth in gross domestic product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Because each Fund's foreign securities will generally be denominated in foreign
currencies, the value of such securities to the Fund will be affected by changes
in currency exchange rates and in exchange control regulations. A change in the
value of a foreign currency against the US dollar will result in a corresponding
change in the US dollar value of a Fund's foreign securities. In addition, some
emerging market countries may have fixed or managed currencies which are not
free-floating against the US dollar. Further, certain emerging market currencies
may not be internationally traded. Certain of these currencies have experienced
a steady devaluation relative to the US dollar. Many emerging market countries
have experienced substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in inflation rates
have had, and may continue to have, negative effects on the economies and
securities markets of certain emerging market counties.

Forward Foreign Currency Exchange Contracts ("forward currency
contracts"). The Emerging Markets Fund may enter into forward currency
contracts, which are agreements to exchange one currency for another -- for
example, to exchange a certain amount of US dollars for a certain amount of
Japanese yen -- at a future date. The date (which may be any agreed upon fixed
number of days in the future), the amount of currency to be exchanged and the
price at which the exchange will take place will be negotiated and fixed for the
term of the contract at the time that the Fund enters into the contract. The
Emerging Markets Fund may engage in forward currency contracts that involve a
currency whose changes in value are considered to be linked (a proxy) to a
currency or currencies in which some or all of the Fund's portfolio securities
are denominated. Forward currency contracts are (a) traded in an interbank
market conducted directly between currency traders (typically, commercial banks
or other financial institutions) and their customers, (b) generally have no
deposit requirements and (c) are consummated without payment of any commissions.
The Fund may, however, enter into forward currency contracts containing either
or both deposit requirements and commissions. In order to assure that the Fund's
forward currency contracts are not used to achieve investment leverage, the Fund
will segregate cash or readily marketable high-quality securities in an amount
at all times equal to or exceeding the Fund's commitments with respect to these
contracts.

Upon maturity of a forward currency contract, the Emerging Markets Fund may
(a) pay for and receive, or deliver and be paid for, the underlying currency,
(b) negotiate with the dealer to roll over the contract into a new forward
currency contract with a new future settlement date or (c) negotiate with the
dealer to terminate the forward currency contract by entering into an offset
with the currency trader whereby the parties agree to pay for and receive the
difference between the exchange rate fixed in the contract and the then current
exchange rate. The Fund also may be able to negotiate such an offset prior to
maturity of the original forward currency contract. There can be no assurance
that new forward currency contracts or offsets will always be available to the
Fund.

Forward currency contracts will be used only to hedge against anticipated
future changes in exchange rates which otherwise might either adversely affect
the value of the Emerging Markets Fund's portfolio securities or adversely
affect the price of securities which the Fund intends to purchase at a later
date. The

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amount the Fund may invest in forward currency contracts is limited to the
amount of the Fund's aggregate investments in foreign currencies.

The market for forward currency contracts may be limited with respect to
certain currencies. These factors will restrict the Emerging Markets Fund's
ability to hedge against the risk of devaluation of currencies in which the Fund
holds a substantial quantity of securities and are unrelated to the qualitative
rating that may be assigned to any particular portfolio security. Where
available, the successful use of forward currency contracts draws upon a money
manager's special skills and experience with respect to such instruments and
usually depends on the money manager's ability to forecast interest rate and
currency exchange rate movements correctly. Should interest or exchange rates
move in an unexpected manner, the Fund may not achieve the anticipated benefits
of forward currency contracts or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to forward currency contracts, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. In addition, the correlation between movements in the prices of such
instruments and movements in the price of the securities and currencies hedged
or used for cover will not be perfect. In the case of proxy hedging, there is
also a risk that the perceived linkage between various currencies may not be
present or may not be present during the particular time the Fund is engaged in
that strategy.

The Emerging Markets Fund's ability to dispose of its positions in forward
currency contracts will depend on the availability of active markets in such
instruments. It is impossible to predict the amount of trading interest that may
exist in various types of forward currency contracts. Forward currency contracts
may be closed out only by the parties entering into an offsetting contract.
Therefore, no assurance can be given that the Fund will be able to utilize these
instruments effectively for the purposes set forth above.

Options. The Funds, other than the Money Market Funds, may purchase and
sell (write) call and put options on securities and securities indexes provided
such options are traded on a national securities exchange or in an
over-the-counter market. The Funds, other than the Money Market Funds, may also
purchase and sell put and call options on foreign currencies.

A Fund may write a call or a put option only if the option is covered by
the Fund by holding a position in the underlying securities or by other means
which would permit immediate satisfaction of the Fund's obligations as the
writer of the option.

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<PAGE> 147

There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position.

Futures Contracts and Options on Futures Contracts. The Real Estate
Securities, the Emerging Markets, the Equity T and the Limited Volatility Tax
Free Funds may invest in interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts and options thereon that are
traded on a United States or foreign exchange or board of trade.

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<PAGE> 148

contract (less any margin or deposit). A Fund will write a call or put option on
a futures contract only if the option is "covered." For a discussion of how to
cover a written call or put option, see "Options" above.

A Fund may enter into contracts and options on futures contracts for "bona
fide hedging" purposes, as defined under the rules of the Commodity Futures
Trading Commission. A Fund may also enter into futures contracts and options on
futures contracts for non-hedging purposes, provided the aggregate initial
margin and premiums required to establish these positions will not exceed 5% of
the Fund's net assets.

High Risk Bonds. The Funds, with the exception of the Emerging Markets
Fund, do not invest assets in securities rated less than BBB by S&P or Baa by
Moody's, or in unrated securities judged by the money managers to be of a lesser
credit quality than those designations. Securities rated BBB by S&P or Baa by
Moody's and above are considered by those rating agencies to be "investment
grade" securities, although Moody's and S&P consider securities rated Baa and
BBB, respectively, to have some speculative characteristics. The Funds, other
than the Emerging Markets Fund, will dispose of, in a prudent and orderly
fashion, securities whose ratings drop below these minimum ratings. The market
value of debt securities generally varies inversely in relation to interests
rates.

The Emerging Markets Fund may invest up to 5% of its total assets in debt
securities rated less than BBB by S&P or Baa by Moody's, or in unrated
securities judged by the Fund's money managers to be of comparable quality.
Lower rated debt securities generally offer a higher yield than that available
from higher grade issues. However, lower rated debt securities involve higher
risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuation in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial stress
which could adversely affect their ability to make payments of principal and
interest and increase the possibility of default. In addition, the market for
lower rated debt securities has expanded rapidly in recent years, and its growth
paralleled a long economic expansion. The market for lower rated debt securities
is generally thinner and less active than that for higher quality securities,
which would limit the Fund's ability to sell such securities at fair value in
response to changes in the economy or the financial markets. While such debt may
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions. The Emerging Markets
Fund's money managers will seek to reduce the risks associated with investing in
such securities by limiting the Fund's holding in such securities and by the
depth of their own credit analysis. For additional information, please refer to
the Statement of Additional Information.

Credit and Liquidity Enhancements. The Money Market Funds may invest in
securities supported by credit and liquidity enhancements from third parties,
generally letters of credit from foreign or domestic banks. Adverse changes in
the credit quality of these institutions could cause losses to Money Market
Funds that invest in these securities and may affect their share prices.

PORTFOLIO TRANSACTION POLICIES

Decisions to buy and sell securities are made by the money managers for the
assets assigned to them, and by the Management Company as to other assets. The
Limited Volatility Tax Free Fund gives significant weight to attempting to
realize long-term, rather than short-term, capital gains when making portfolio
management decisions, and the Equity T Fund seeks to minimize the impact of
taxes on the Fund's shareholders' returns. The money managers make decisions to
buy or sell securities independently from other managers. Thus, one money
manager for a Fund could be selling a security when another money manager for

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the same Fund (or for another series of the Investment Company) is purchasing
the same security. In addition, when a money manager's services are terminated
and another retained, the new manager may significantly restructure the
portfolio. These practices may increase the Funds' portfolio turnover rates,
realization of gains or losses, brokerage commissions and other transactions
based costs. The strategy of minimizing the impact of taxes on shareholders'
investment returns and avoiding the recognition of capital gains may constrain
the ability of the Management Company to change money managers of the Equity T
Fund. The annual portfolio turnover rates for the Funds (other than the Equity T
Fund, which was not offered during the periods, and the Money Market Funds) are
shown in the Financial Highlights tables.

The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc., an affiliate of the Management Company, when the money manager
determines that the Funds will receive competitive execution, price and
commissions. Frank Russell Securities, Inc. refunds to the Fund up to 70% of the
commissions paid by that Fund when it effects such transactions, after
reimbursement for research services provided to the Management Company. The
Funds may also effect portfolio transactions through and pay brokerage
commissions to the money managers (or their affiliates).

DIVIDENDS AND DISTRIBUTIONS

INCOME DIVIDENDS

The Board of Trustees presently intends to declare dividends from net
investment income and (for the Money Market Funds only) net short-term capital
gains, if any, for payment on the following schedule:

<TABLE>
<CAPTION>
DECLARED PAYABLE
- ------------------------------------------------
<S> <C> <C>
Daily 1st business day of following U.S. Government Money Market and
month Tax Free Money Market Funds
Monthly Early in the following month Limited Volatility Tax Free Fund
Quarterly Mid: April, July, October and Real Estate Securities Fund
December
Annually Mid-December Emerging Markets and Equity T
Funds
</TABLE>

The Money Market Funds determine net investment income immediately prior to
the determination of the net asset value per share at the close of the New York
Stock Exchange (currently 4:00 p.m. Eastern time) on each business day. Net
investment income will be credited daily to the accounts of shareholders of
record prior to the net asset value calculation and paid monthly.

CAPITAL GAINS DISTRIBUTIONS

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<PAGE> 150

Investors should be aware that by purchasing shares shortly before the
record date of a dividend or capital gains distribution, they will pay the full
price for the shares and then receive some portion of the price back as a
taxable dividend or capital gains distribution. Investors should also be aware
that all shareholders will share in and be taxed on distributions of gain
realized by a Fund on the sale of securities that have increased in value.

AUTOMATIC REINVESTMENT

TAXES

For taxable shareholders: Dividends (except those of Limited Volatility
Tax Free and Tax Free Money Market Funds) from net investment income and
short-term capital gains will be taxable as ordinary dividends, whether paid in
cash or reinvested in additional shares. However, depending upon the state tax
rules pertaining to a shareholder, a portion of the dividends paid by the U.S.
Government Money Market Fund attributable to direct US Treasury and agency
obligations may be exempt from state and local taxes. Long-term capital gains
distributions declared by the Investment Company's Board are taxed as long-term
gains regardless of the length of time a shareholder has held such shares.
Distributions paid in excess of a Fund's earnings will be treated as a
non-taxable return of capital. Dividends and distributions may otherwise also be
subject to state or local taxes.

While the Equity T Fund is managed to minimize the amount of capital gains
realized during a particular year, the realization of capital gains is not
entirely within the Fund's or the money manager's control, and is impacted by
shareholder purchase and redemption activity as well as by the performance of
securities in which the Funds invest. Capital gains distributions by the Equity
T Fund may vary considerably from year to year.

For corporate investors, dividends from net investment income paid by the
Real Estate Securities or Equity T Funds will generally qualify in part for the
corporate dividends-received deduction. However, the portion of the dividends so
qualified depends on the aggregate qualifying dividend income received by such a
Fund from domestic (US) sources. Certain holding period and debt financing
restrictions may apply to corporate investors seeking to claim the deduction.

The sale of shares of a Fund is a taxable event and may result in capital
gain or loss. A capital gain or loss may be realized from an ordinary redemption
of shares or an exchange of shares between two mutual funds (or two series or
portfolios of a mutual fund). Except for shareholders of the Limited Volatility
Tax Free or Tax Free Money Fund, any loss incurred on sale or exchange of a
Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such

37
<PAGE> 151

shares. Any loss incurred on sale or exchange of a Fund's shares, held for six
months or less, will be treated as long-term capital loss to the extent of
capital gain dividends received with respect to such shares. For shareholders of
the Limited Volatility Tax Free or Tax Free Money Funds, any loss incurred on
sale or exchange of such a Fund's shares, held for six months or less, will be
disallowed to the extent of exempt-interest dividends paid with respect to such
shares, and any loss not so disallowed will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.

The Emerging Markets Fund will receive dividends and interest paid by
non-US issuers which will frequently be subject to withholding taxes by non-US
governments. The Management Company expects the Emerging Markets Fund to invest
more than 50% of its total assets in non-US securities and to file specified
elections with the Internal Revenue Service which will permit its shareholders
either to deduct (as an itemized deduction in the case of an individual) such
foreign taxes in computing taxable income, or to use these withheld foreign
taxes as credits against US income taxes. The Fund's taxable shareholders must
include their pro rata portion of the taxes withheld in their gross income for
federal income tax purposes.

The Emerging Markets Fund may invest up to 10% of its total assets in the
stock of foreign investment companies that may be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that the Fund derives may be
subject to a non-deductible federal income tax at the Fund level. In some cases,
the Emerging Markets Fund may be able to avoid this tax by electing to be taxed
currently on its share of the PFIC's income, whether or not such income is
actually distributed by the PFIC. The Fund will endeavor to limit its exposure
to the PFIC tax by investing in PFICs only where the election to be taxed
currently will be made. Because it is not always possible to identify a foreign
issuer as a PFIC in advance of making the investment, the Fund may incur the
PFIC tax in some instances.

Shareholders of the Emerging Markets Fund should also be aware that for
federal income tax purposes, foreign exchange losses realized by the Fund are
treated as ordinary losses. This treatment may have the effect of reducing the
Fund's income available for distribution to shareholders.

The Limited Volatility Tax Free and Tax Free Money Market Funds anticipate
that all dividends paid by the Funds will be exempt from federal income tax.
However, to the extent dividends are derived from taxable income from temporary
investments, short-term capital gains, or income derived from the sale of bonds
purchased with market discount after April 30, 1993, they are treated as
ordinary income, whether paid in cash or reinvested in additional shares. The
Limited Volatility Tax Free and Tax Free Money Market Funds do not intend to
purchase any municipal obligations required, in the opinion of bond counsel, to
be treated as a tax preference item by shareholders when determining their
alternative minimum tax liability. Exempt income paid by the Funds is includable
in the tax base for determining the extent to which a shareholder's Social
Security or railroad retirement benefits will be subject to federal income tax.
Shareholders are required to disclose their receipt of tax-exempt interest on
their federal income tax returns. The Code also provides that interest on
indebtedness incurred, or continued, to purchase or carry Limited Volatility Tax
Free and Tax Free Money Market Funds shares is not deductible; and that persons
who are "substantial users" (or persons related thereto) of facilities financed
by industrial development bonds may not be able to treat the dividends paid by
either Fund as tax free. Such persons should consult their tax advisers before
purchasing shares of the Limited Volatility Tax Free or Tax Free Money Market
Funds.

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<PAGE> 152

paid on December 31 of the prior year; of the dividends which qualify for the
70% dividends-received deduction available to corporations; of the Emerging
Markets Fund's foreign taxes withheld; of the Limited Volatility Tax Free and
Tax Free Money Market Funds' dividends subject to federal tax (if any) and
attributable to each state; of income which is a tax preference item (if any)
for alternative minimum tax purposes; and of the percentages of the U.S.
Government Money Market Fund's income attributable to US government, Treasury
and agency securities.

Each Fund is required to withhold 31% of all taxable dividends,
distributions, and redemption proceeds payable to any non-corporate shareholder
which does not provide the Fund with the shareholder's certified taxpayer
identification number or required certifications or which is subject to backup
withholding.

Shareholders who are not US persons for purposes of federal income taxation
should consult with their tax advisers regarding the applicability of income,
estate or other taxes (including income tax withholding) on their investment in
a Fund or on dividends and distributions received by them from a Fund and the
application of foreign tax laws.

Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the
Statement of Additional Information.

CALCULATION OF FUND PERFORMANCE

From time to time, the Funds may advertise their performance in terms of
average annual total return, which is computed by finding the average annual
compounded rates of return over a period that would equate the initial amount
invested to the ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested on the reinvestment dates during the
relevant time period, and includes all recurring fees that are charged to all
shareholder accounts. The average annual total returns for Class S shares of
each of the Funds, with the exception of the Equity T Fund (which was not
offered for public investment during the periods shown) are as follows:

<TABLE>
<CAPTION>
5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
1 YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1995 1995 1995 INCEPTION
1995 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
------------ ------------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Real Estate Securities 10.87% 17.55% --% 10.13% 07/28/89
Emerging Markets* (8.21) -- -- 7.23 01/29/93
Limited Volatility Tax Free 7.81 5.42 5.74 5.78 09/05/85
U.S. Government Money Market 5.98 4.42 5.92 5.97 09/05/85
Tax Free Money Market 3.76 3.41 -- 4.37 05/08/87
</TABLE>

- ------------------------------
* The performance for the Emerging Markets Fund prior to April 1, 1995 is
reported gross of investment advisory fees. For periods thereafter,
performance results are reported net of investment advisory fees, but
gross of any investment services fees. Descriptions of these services can
be obtained from the investment manager upon request.

39
<PAGE> 153

The Limited Volatility Tax Free Fund also may from time to time advertise
its yield. Yield, which is based on historical earnings and is not intended to
indicate future performance, is calculated by dividing the net investment income
per share earned during the most recent 30-day (or one month) period by the
maximum offering price per share on the last day of the month. This income is
then annualized. That is, the amount of income generated by the investment
during that 30-day (or one month) period is assumed to be generated each month
over a 12-month period and is shown as a percentage of the investment. For
purposes of the yield calculation, interest income is computed based on the
yield to maturity of each debt obligation and dividend income is computed based
upon the stated dividend rate of each security in the Fund's portfolio. The
calculation includes all recurring fees that are charged to all shareholder
accounts. The 30-day yield for the year ended December 31, 1995 for the shares
of Limited Volatility Tax Free Fund was 3.90%.

The Limited Volatility Tax Free Fund may also utilize tax equivalent yields
computed in the same manner as yield above, with adjustment for a stated income
tax rate. The 30-day tax equivalent yield for shares of the Fund for the year
ended December 31, 1995, based on a tax rate of 39.6%, was 6.46%.

The Money Market Funds also may advertise their yields and effective
yields. Both yield figures are based on historical earnings and are not intended
to indicate future performance. The yield of the Money Market Funds refers to
the income generated by an investment in the Money Market Funds over a seven-day
period (which period will be stated in the advertisement). This yield is
calculated by determining the net change, exclusive of capital changes, in the
value of a hypothetical preexisting account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base return. This
income is then annualized. That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The effective yield is
calculated similarly but, when annualized, the income earned by an investment in
a Money Market Fund is assumed to be reinvested. The effective yield will be
slightly higher than the current yield because of the compounding effect of this
assumed reinvestment. The following are the current and effective yields for
shares of the Money Market Funds during 1995 for the seven-day (and thirty-day,
in the case of Tax Free Money Market) periods ended:

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------- ------------------- ------------------- -------------------
CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Money
Market 5.80% 5.97% 5.98% 6.16% 5.77% 5.93% 5.76% 5.93%
Tax Free Money Market
7 day period 3.97% 4.05% 3.93% 4.01% 3.71% 3.78% 4.10% 4.18%
30 day period 3.83% 3.90% 3.66% 3.72% 3.57% 3.63% 3.74% 3.80%
</TABLE>

The Tax Free Money Market Fund may also utilize tax equivalent yields
computed in the same manner as yield above, with adjustment for a stated income
tax rate. The following are the current and effective tax

40
<PAGE> 154

equivalent yields for shares of the Tax Free Money Market Fund, based on a tax
rate of 39.6%, during 1995 for the seven-day and thirty-day periods ended:

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------- ------------------- ------------------- -------------------
CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE CURRENT EFFECTIVE
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax Free Money Market
7 day period 6.57% 6.71% 6.51% 6.64% 6.15% 6.25% 6.78% 6.92%
30 day period 6.35% 6.46% 6.06% 6.17% 5.92% 6.02% 6.19% 6.29%
</TABLE>

Each Fund may also advertise non-standardized performance information that
is for periods in addition to those required to be presented.

VALUATION OF FUND SHARES

NET ASSET VALUE PER SHARE

The net asset value per share is calculated for shares of each class of
each Fund on each business day on which shares are offered or orders to redeem
are tendered. (Unless otherwise indicated, "shares" refers to the Class S Shares
of the Funds.) For the Real Estate Securities, the Emerging Markets, the Equity
T and the Limited Volatility Tax Free Funds, a business day is one on which the
New York Stock Exchange is open for trading. A business day for the Money Market
Funds includes any day on which the New York Stock Exchange is open for trading
and the Boston Federal Reserve Bank is open. Net asset value per share is
computed for a Fund's Class S Shares by dividing the current value of the Fund's
assets attributable to the Class S Shares, less liabilities attributable to the
Class S Shares, by the number of Class S Shares of the Fund outstanding, and
rounding to the nearest cent. All Funds determine net asset value as of the
close of the regular session of the New York Stock Exchange (currently 4:00 p.m.
Eastern time). The U.S. Government Money Market Fund also determines its net
asset value as of 1:00 p.m. Eastern time, and the Tax Free Money Market Fund as
of 12:00 noon Eastern time.

VALUATION OF PORTFOLIO SECURITIES

With the exceptions noted below, the Funds value portfolio securities at
"fair market value." This generally means that equity securities and
fixed-income securities listed and traded principally on any national securities
exchange are valued on the basis of the last sale price or, lacking any sale, at
the closing bid price, on the primary exchange on which the security is traded.
United States over-the-counter equity and fixed-income securities and options
are valued on the basis of the closing bid price and futures contracts are
valued on the basis of the last sale price.

41
<PAGE> 155

The Money Market Funds' portfolio investments are valued on the basis of
amortized cost, a method by which each portfolio instrument is initially valued
at cost, and thereafter a constant accretion/amortization to maturity of any
discount or premium is assumed. Both Funds utilize the amortized cost valuation
method in accordance with Rule 2a-7 of the 1940 Act. Money market instruments
maturing within 60 days of the valuation date held by Funds other than the Money
Market Funds are also valued at "amortized cost," unless the Board determines
that amortized cost does not represent fair value. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Funds would
receive if they sold the instrument.

The municipal investments of the Limited Volatility Tax Free Fund are
appraised or priced by an independent pricing source, approved by the Trustees,
which utilizes information with respect to bond transactions, quotations from
bond dealers, market transactions in comparable securities and various
relationships between securities.

The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith pursuant to procedures
established by the Board of Trustees.

PURCHASE OF FUND SHARES

ORDER PROCEDURES

Orders by all investors (except for participants in the Three Day
Settlement Program described below) to purchase Investment Company Fund shares
must be received by the Transfer Agent, either by telephone, mail or entry into
the shareholder recordkeeping system on a day when shares of the Fund are
offered and orders in proper form accepted prior to:

<TABLE>
<S> <C>
Close of the New York Stock Exchange Real Estate Securities, Emerging Markets,
(currently 4:00 p.m. Eastern Time) Equity T and Limited Volatility Tax Free
Funds
11:45 a.m. Eastern time Tax Free Money Market Fund
12:15 p.m. Eastern time U.S. Government Money Market Fund
</TABLE>

Orders for the Money Market Funds' shares placed prior to the above time
and in the proper form can be accepted for pricing and investment, and will
begin to earn income, on that day. Money Market Fund orders received after that
time will not be accepted for pricing and investment until the next business
day. Orders for shares of any Fund that are not accepted before the respective
time for that Fund can not be invested in the particular Fund nor begin to earn
income until the next day on which shares of that Fund are offered.

Federal Funds Wire. Payment for orders may be made by wiring federal funds
to the Funds' Custodian, State Street Bank and Trust Company.

42
<PAGE> 156

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to the Transfer
Agent, P.O. Box 1591, Tacoma, WA 98401-1591. Certified checks are not necessary,
but checks are accepted subject to collection at full face value in US funds and
must be drawn in US dollars on a US bank. Investments in the Money Market Funds
will be effected only when the check or draft is converted to federal funds. The
investment will not begin to earn dividend income until the receipt of federal
funds by the relevant Fund. Investments in the non-Money Market Funds will be
effected upon receipt of the check or draft by the Transfer Agent, when the
check or draft is received prior to the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern time). When the check or draft is received by the
Transfer Agent after the close of the New York Stock Exchange, the order will be
effected on the following business day.

IN-KIND EXCHANGE OF SECURITIES

THREE DAY SETTLEMENT PROGRAM

The Investment Company will accept orders from financial institutions to
purchase shares of the Funds, other than the Money Market Funds, for settlement
on the third business day following the receipt of an order to be paid by a
federal wire if the investor has agreed in writing to indemnify the Fund against
any losses as a result of nonreceipt of payment. For further information on this
program, contact the Investment Company.

THIRD PARTY TRANSACTIONS

Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary, such as a bank, broker-dealer, investment advisor or
others, may be required to pay additional fees by such Intermediary. Investors
should contact the Financial Intermediary for information concerning what
additional fees, if any, may be charged.

43
<PAGE> 157

EXCHANGE PRIVILEGE

Shareholders may exchange shares of any Fund offered by this Prospectus for
shares of any other Fund included in the Investment Company's other prospectuses
on the basis of current net asset value per share at the time of the exchange.
Shares of a Fund offered by this Prospectus may only be exchanged for shares of
a Fund offered by the Investment Company through another prospectus under
certain conditions and only in states where the exchange may be legally made.
For additional information, including prospectuses of other Investment Company
Funds, contact a Financial Intermediary or the Investment Company. Exchanges may
be made (i) by telephone if the registrations of the two accounts are identical;
or (ii) in writing addressed to the Investment Company.

An exchange is a redemption of shares and is treated as a sale for income
tax purposes, and a short or long-term capital gain or loss may be realized. The
Fund shares to be acquired will be purchased when the proceeds from the
redemption become available (up to seven days from the receipt of the request).
Each investor is encouraged to consult with his or her tax adviser. Exchanges
from Equity T Fund will be considered to be redemptions and will be subject to a
redemption fee. (See "Redemption of Fund Shares" in this Prospectus).

REDEMPTION OF FUND SHARES

SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE
FUNDS AT (800) 972-0700; IN WASHINGTON (206) 627-7001.

For each Fund, Fund shares may be redeemed on any business day at the net
asset value next determined after the receipt of a redemption request in proper
form as described below. In the case of the Equity T Fund, a redemption fee,
calculated as a 1% discount of net asset value of the shares redeemed will be
imposed. The redemption fee is retained by the Equity T Fund. See "Investment
Objectives, Restrictions and Policies -- Equity T Fund" in this Prospectus for
more information. As with the other Funds, shares of the Equity T Fund may be
redeemed on any business day after the receipt of a redemption requests in
proper form, described below.

Request Procedures. Requests by all investors to redeem Investment Company
Fund shares must be received by the Transfer Agent, either by telephone, mail,
entry into the shareholder recordkeeping system, or through the Systematic
Withdrawal Payment Program, on the days requests to redeem are tendered, prior
to:

<TABLE>
<S> <C>
Close of the New York Stock Exchange Real Estate Securities, Emerging Markets,
(currently 4:00 p.m. Eastern time) Equity T and Limited Volatility Tax Free
Funds
11:45 a.m. Eastern time Tax Free Money Market Fund
12:15 p.m. Eastern time U.S. Government Money Market Fund
</TABLE>

44
<PAGE> 158

Redemption requests placed for the Money Market Funds prior to the above
time will be tendered that day. Requests for these Funds after the above time
will be taken until 4:00 p.m. Eastern time, but will not be tendered until the
next business day.

Mail. Redemption requests may be made in writing directly to Frank Russell
Investment Management Company, Attention: Frank Russell Investment Company,
Operations Department, P.O. Box 1591, Tacoma, WA 98401. For all Funds the
redemption price will be the net asset value next determined after receipt by
the Management Company of all required documents in good order. In the case of
the Equity T Fund, a redemption fee of 1% will be deducted from the amount of
your redemption. "Good order" means that the request must include the following:

B. Such other supporting legal documents, if required by applicable law,
in the case of estates, trusts, guardianships, custodianships,
corporations and pension and profit sharing plans.

Systematic Withdrawal Payment. The Systematic Withdrawal Payment ("SWP")
program is an automated method for redeeming a predetermined dollar amount from
a Fund shareholder account to meet a standing request. The program can be used
to meet any request for periodic distributions of assets from Fund shareholder
accounts. In view of its investment objective and management strategies,
shareholders of the Equity T Fund are not able to participate in the SWP
program.

SWP Offering Date and Payment Procedures. SWP distributions occur once a
month and are paid by wire or check, according to the instructions provided on
the SWP form. If a client has more than one Fund from which a SWP is to be
received, the client will receive one wire or check for each SWP Fund. SWP
transactions are recorded on the twenty-fifth day of each month. If the
twenty-fifth day falls on a weekend or holiday, the transaction will be recorded
on the preceding business day. SWP payment dates are the first business day
after the trade date. If the SWP is coming out of one of the Money Market Funds
and the trade date falls on a Friday or the day before a holiday, income will be
earned until the payment date.

Distribution Frequency. Payments can be scheduled as monthly, quarterly,
semiannual or annual distributions.

SWP Distribution by Wire. Federal Funds Wire payments will be sent to
designated bank on the payment date.

SWP Distribution by Check. Checks will be sent by US Postal Service first
class mail, from Boston, Massachusetts, to the requested address on the payment
date.

A Systematic Withdrawal Payment form must be completed and mailed to Frank
Russell Investment Management Company, Attention: Frank Russell Investment
Company, Operations Department, P.O. Box

45
<PAGE> 159

1591, Tacoma, WA 98401-1591. The Systematic Withdrawal Payment form must be
received by Frank Russell Investment Management Company five business days
before the initial distribution date.

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

ORGANIZATION, CAPITALIZATION, AND VOTING

46
<PAGE> 160

In addition to offering Class S Shares, the Emerging Markets and the Real
Estate Securities Funds also offer beneficial interests in Class C Shares, which
are described in a separate prospectus relating to that class. Class C Shares of
the Emerging Markets and Real Estate Securities Funds are designed to meet
different investor needs and are subject to a Rule 12b-1 distribution fee and to
a shareholder servicing fee, which may effect the performance of the Class C
Shares. To obtain more information concerning Class C Shares, contact the
Financial Intermediary from whom you obtained this prospectus or write to the
Secretary, Frank Russell Investment Company, at the address listed on the cover
of this Prospectus, or call (800) 972-0700.

The Trustees hold office for the life of the Investment Company. A Trustee
may resign or retire, and a Trustee may be removed at any time by, in substance,
a vote of two-thirds of Investment Company shares. A vacancy in the Board of
Trustees shall be filled by the vote of a majority of the remaining Trustees so
long as, in substance, two-thirds of the Trustees have been elected by
shareholders.

At April 30, 1996, the following shareholder may be deemed by the 1940 Act
to "control" the Funds listed after its name because it owns more than 25% of
the voting shares of the indicated Fund: Second National Bank (Saginaw) -- Tax
Free Money Market Fund.

MONEY MANAGER PROFILES

The money managers identified below have no other affiliations with the
Funds or with Frank Russell Company. Each money manager has been in business for
at least three years and is principally engaged in managing institutional
investment accounts. These managers may also serve as managers or advisers to
other Investment Company Funds, or to other clients of Frank Russell Company,
including its wholly owned subsidiary, Frank Russell Trust Company.

REAL ESTATE SECURITIES FUND

Cohen & Steers Capital Management, 757 Third Avenue, New York, NY 10017, is
a corporation whose two principals, Robert H. Steers and Martin Cohen, control
the corporation within the meaning of the 1940 Act.

EMERGING MARKETS FUND

Genesis Asset Managers, Ltd., Bermuda House, St. Julian's Ave., St. Peter
Port, Guernsey, Channel Islands, is a limited liability company organized under
the laws of the state of Guernsey, the Channel Islands, and has been engaged in
the investment advisory business since 1990. Genesis Asset Managers, Ltd., is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. Genesis Asset Managers Ltd. is affiliated with and has common
investment executives with the Genesis Group of fund management companies. The
Genesis Group, whose holding company is Genesis Holdings Ltd. is controlled
32.58% by management and 67.42% by 12 outside shareholders, with the largest
single holding being 19.68%.

J.P. Morgan Investment Management Inc., 522 Fifth Avenue, New York, NY
10036, is a wholly owned subsidiary of J.P. Morgan and Co. Incorporated, a
publicly held bank holding company.

Montgomery Asset Management L.P., 600 Montgomery Street, 17th Floor, San
Francisco, CA 94111, is a California limited partnership and a registered
investment adviser. Montgomery Asset Management, Inc. is the general partner of
Montgomery Asset Management, L.P. and Montgomery Securities is the sole limited

47
<PAGE> 161

partner. Montgomery Asset Management, Inc. and Montgomery Securities may be
deemed control persons of Montgomery Asset Management, L.P.

EQUITY T FUND

J.P. Morgan Investment Management Inc. See: Emerging Markets Fund.

LIMITED VOLATILITY TAX FREE FUND

MFS Asset Management, Inc., 500 Boylston Street, Boston, MA 02116, is a
wholly owned, indirect subsidiary of Sun Life Assurance Company of Canada (US),
a mutual insurance company.

T. Rowe Price Associates, Inc., 100 E. Pratt Street, Baltimore, MD 21202,
is a Company whose stock is publicly traded, and a large portion of its stock is
held by active employees.

U.S. GOVERNMENT MONEY MARKET FUND

Frank Russell Investment Management Company, 909 A Street, Tacoma, WA
98402, is a registered investment adviser wholly owned by Frank Russell Company.

TAX FREE MONEY MARKET FUND

Weiss, Peck & Greer, L.L.C., One New York Plaza, 30th Floor, New York, NY
10004, is a registered investment adviser which is wholly owned by its
principals.

48
<PAGE> 162

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON, (206) 627-7001

MONEY MANAGERS

REAL ESTATE SECURITIES FUND
Cohen & Steers Capital Management

EMERGING MARKETS FUND
Genesis Asset Managers, Ltd.
J.P. Morgan Investment Management Inc.
Montgomery Asset Management, L.P.

EQUITY T FUND
J.P. Morgan Investment Management Inc.

LIMITED VOLATILITY TAX FREE FUND
MFS Asset Management, Inc.
T. Rowe Price Associates, Inc.

U.S. GOVERNMENT MONEY MARKET FUND
Frank Russell Investment Management Company

TAX FREE MONEY MARKET FUND
Weiss, Peck & Greer, L.L.C.

49
<PAGE> 163

MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Co.
909 A Street
Tacoma, Washington 98402

CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402

DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 98402

INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109

LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600-One Commerce Square
Philadelphia, PA 19103-7098

OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington, (206) 627-7001

50
<PAGE> 164

PROSPECTUS

CLASS C SHARES

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (206) 627-7001

<TABLE>
<S> <C>
Diversified Equity Fund Emerging Markets Fund
Special Growth Fund Real Estate Securities Fund
Equity Income Fund Diversified Bond Fund
Quantitative Equity Fund Volatility Constrained Bond Fund
International Securities Fund Multistrategy Bond Fund
</TABLE>

ALL CLASSES OF SHARES OF THE FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC") OR BY ANY OTHER GOVERNMENT AGENCY; ARE NOT
OBLIGATIONS OF THE FDIC OR ANY OTHER GOVERNMENT AGENCY; ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK; ARE NOT ENDORSED OR GUARANTEED BY ANY BANK; ARE SUBJECT
TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED;
AND MAY FLUCTUATE IN VALUE, SO THAT WHEN THEY ARE SOLD, THEY MAY BE WORTH MORE
OR LESS THAN WHEN THEY WERE PURCHASED.

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

This Prospectus sets forth concisely information about the Investment
Company and the Class C Shares of ten of its Funds that a prospective investor
ought to know before investing. The Investment Company has filed a Statement of
Additional Information dated July 8, 1996, with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated herein by
reference and may be obtained without charge by writing to the Secretary, Frank
Russell Investment Company, at the address shown above or by telephoning (800)
972-0700. This Prospectus should be read carefully and retained for future
reference.

This Prospectus relates only to the Class C Shares of the ten Funds. The
Funds also offer shares of beneficial interest in another class of shares, the
Class S Shares, through separate prospectuses. For more information concerning
Class S Shares of a Fund, contact the person or organization from which you
obtained this Prospectus, or write to the Secretary, Frank Russell Investment
Company, at the address shown above, or telephone (800) 972-0700.

PROSPECTUS DATED JULY 8, 1996
<PAGE> 165

Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:

DIVERSIFIED EQUITY FUND -- Income and capital growth by investing principally in
equity securities.

EQUITY INCOME FUND -- A high level of current income, while maintaining the
potential for capital appreciation by investing primarily in income-producing
equity securities.

DIVERSIFIED BOND FUND -- Effective diversification against equities and a stable
level of cash flow by investing in fixed-income securities.

This Prospectus describes and offers Class C Shares of nine Internal Fee Funds
and of the Emerging Markets Fund, which is an External Fee Fund. Three
additional prospectuses describe and offer, respectively, Class S Shares of:
nine External Fee Funds; eight Internal Fee Funds; and four Internal Fee Funds
and two External Fee Funds. The principal distinction between the External and
the Internal Fee Funds is that a shareholder of an External Fee Fund may pay a
quarterly shareholder investment services fee directly to the Management
Company. The fee is computed on the amount the shareholder has invested in an
External Fee Fund. Each shareholder of the Internal Fee Funds pays no such fees.
The Investment Company Funds had aggregate net assets of $8.9 billion on April
30, 1996. The net assets of these ten Funds on April 30, 1996, were:

<TABLE>
<S> <C>
Diversified Equity $577,931,555
Special Growth $350,341,011
Equity Income $186,614,025
Quantitative Equity $540,085,935
International Securities $690,786,268
Emerging Markets $224,128,123
Real Estate Securities $318,828,870
Diversified Bond $509,958,358
Volatility Constrained Bond $168,731,410
Multistrategy Bond $240,888,854
</TABLE>

2
<PAGE> 166

HIGHLIGHTS AND TABLE OF CONTENTS

ANNUAL FUND OPERATING EXPENSES summarizes the fees paid by shareholders and
provides an example showing the effect of these fees on a $1,000 investment over
time. PAGE 5.

FINANCIAL HIGHLIGHTS summarizes significant financial information concerning the
Funds for the period stated herein. PAGE 17.

EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management fee to
the Management Company, its expenses and its portion of the general expenses of
the Investment Company. The Management Company, as agent for the Fund, pays from
its fees, the investment advisory fees of the Money Managers of the Fund. The
remainder of the fee is retained by the Management Company, for conducting the
Fund's general operations and for providing investment supervision for the Fund.
Each Eligible Investor may pay to the Management Company directly a fee for
other services provided to that Eligible Investor. PAGE 22.

3
<PAGE> 167

PORTFOLIO TRANSACTION POLICIES do not give significant weight to realizing
long-term, rather than short-term, capital gains. PAGE 39.

DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or received
in cash. Dividends from net investment income are declared Monthly, by the
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds;
Quarterly, by the Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and Real Estate Securities Funds; and Annually, by
International Securities and Emerging Markets Funds. All Funds declare
distributions from net realized capital gains, if any, at least annually. PAGE
39.

INCOME TAXES PAID BY THE FUNDS themselves should be nominal. Taxable
shareholders of the Funds will be subject to federal taxes on dividends. Taxable
shareholders of the Funds will be subject to federal taxes on capital gains
distributions and may also be subject to state or local taxes. PAGE 40.

FUND PERFORMANCE, including yields and total return information, is calculated
in accordance with formulas prescribed by the Securities and Exchange
Commission. PAGE 42.

VALUATION OF FUND SHARES occurs each business day. The value of a Class C share
purchased or redeemed is based upon the next computed current market value of
the assets, less liabilities, of each Class C Fund. Unless otherwise indicated,
"shares" in this Prospectus refers to the Class C Shares of the Funds. PAGE 43.

PURCHASE OF FUND SHARES may be accomplished on each business day that shares are
offered. The shares are subject to a Rule 12b-1 distribution fee, and to a
shareholder services fee. PAGE 44.

REDEMPTION OF FUND SHARES may be requested on any business day. There is no
redemption charge. The redemption price is determined by the net asset value
next computed after receipt of the redemption request. The Funds reserve the
right to redeem in kind that portion of a redemption request which is in excess
of $250,000. PAGE 46.

THE FUNDS also offer a second class of shares, the Class S Shares, which are
designed to meet different investor needs. PAGE 48.

4
<PAGE> 168

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE DIVERSIFIED EQUITY FUND

The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class C
Shares of the Fund will bear directly or indirectly. The example provided in the
table should not be considered a representation of past or future expenses.
Actual expenses may be greater or less than those shown.

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .78%
12b-1 Fees (1)(2)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .06
Other Fees (2)(3) (including shareholder servicing fee of up to
0.25%)............................................................... .35
---
Total Other Expenses.................................................. .50
----
Total Class C Shares Operating Expenses+................................. 1.68%
====
</TABLE>

- ------------------------------
(1) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently, the Trustees have limited 12b-1 Fee payments to 0.40%
of average daily net assets. The 12b-1 Fee payments may be increased only
when the Trustees believe it is in the best interests of the shareholders of
Class C Shares to do so. Long-term shareholders of the Class C Shares of the
Diversified Equity Fund may pay more in Rule 12b-1 fees than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
(2) Other expenses and 12b-1 fees are based on estimated amounts for the current
year since there were no Class C operations prior to the date of this
Prospectus.
(3) For purposes of this table, "Other Fees" includes a shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

5
<PAGE> 169

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE SPECIAL GROWTH FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .95%
12b-1 Fees (1)(2)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .15%
Transfer Agent Fees................................................... .10
Other Fees (2)(3) (including a shareholder servicing fee of up to
0.25%)............................................................... .36
---
Total Other Expenses.................................................. .61
----
Total Class C Shares Operating Expenses+................................. 1.96%
====
</TABLE>

- ------------------------------
(1) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently, the Trustees have limited the Fund's Class C 12b-1 Fee
payments to 0.40% of average daily net assets. The 12b-1 Fee payments may be
increased only when the Trustees believe it is in the best interests of the
shareholders of Class C Shares to do so. Long-term shareholders of the Class
C shares of the Special Growth Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
(2) "Other expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there was no Class C operations prior to the date of this
Prospectus.
(3) For purposes of this table, "Other Fees" includes a shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

6
<PAGE> 170

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE EQUITY INCOME FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .80%
12b-1 Fees (1)(2)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .15%
Transfer Agent Fees................................................... .12
Other Fees (2)(3) (including a shareholder servicing fee of up to
0.25%)............................................................... .37
---
Total Other Expenses.................................................. .64
----
Total Class C Shares Operating Expenses+................................. 1.84%
====
</TABLE>

- ------------------------------
(1) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently, the Trustees have limited the Fund's Class C 12b-1 Fee
payments to 0.40% of average daily net assets. The 12b-1 Fee payments may be
increased only when the Trustees believe it is in the best interests of
shareholders of the Class C Shares to do so. Long-term shareholders of the
Class C shares of the Equity Income Fund may pay more in Rule 12b-1 fees
than the economic equivalent of the maximum front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
(2) "Other expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there was no Class C operations prior to the date of this
prospectus.
(3) For purposes of this table, "Other Fees" includes a shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

7
<PAGE> 171

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE QUANTITATIVE EQUITY FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .78%
12b-1 Fees (1)(2)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .06
Other Fees (2)(3) (including a shareholder servicing fee of up to
0.25%)............................................................... .35
---
Total Other Expenses.................................................. .50
----
Total Class C Shares Operating Expenses+................................. 1.68%
====
</TABLE>

- ------------------------------
(1) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently, the Trustees have limited the Fund's Class C 12b-1 Fee
payments to 0.40% of average daily net assets. The 12b-1 Fee payments may be
increased only when the Trustees believe it is in the best interests of the
shareholders of Class C Shares to do so. Long-term shareholders of the Class
C shares of the Quantitative Equity Fund may pay more in Rule 12b-1 fees
than the economic equivalent of the maximum front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
(2) "Other expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there were no Class C operations prior to the date of
this prospectus.
(3) For purposes of this table, "Other Fees" includes a servicing fee of up to
0.25% of the average daily net assets of the Fund's Class C Shares. The
Investment Company may make payments to the distributor or any investment
advisers, banks, broker-dealers, financial planners or other financial
institutions ("Servicing Agents") for any activities or expenses primarily
intended to assist, support or service the Servicing Agents' clients who
beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

8
<PAGE> 172

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE INTERNATIONAL SECURITIES FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .95%
12b-1 Fees (1)(2)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .29%
Transfer Agent Fees................................................... .05
Other Fees (2)(3) (including a shareholder servicing fee of up to
0.25%)............................................................... .35
---
Total Other Expenses.................................................. .69
----
Total Class C Shares Operating Expenses+................................. 2.04%
====
</TABLE>

- ------------------------------
(1) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently, the Trustees have limited the Fund's Class C 12b-1 Fee
payments to 0.40% of average daily net assets. The 12b-1 Fee payments may be
increased only when the Trustees believe it is in the best interests of the
shareholders of Class C Shares to do so. Long-term shareholders of the Class
C shares of the International Securities Fund may pay more in Rule 12b-1
fees than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
(2) "Other expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there were no Class C operations prior to the date of
this prospectus.
(3) For purposes of this table, "Other Fees" includes a shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

9
<PAGE> 173

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE EMERGING MARKETS FUND*

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1).................................... 1.09%
12b-1 Fees (2)(3)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .62%
Transfer Agent Fees................................................... .16
Other Fees (2)(4) (including a shareholder servicing fee of up to
0.25%)*.............................................................. .40
---
Total Other Expenses.................................................. 1.18
----
Total Class C Shares Operating Expenses (After Fee Waiver) (1)+.......... 2.67%
====
</TABLE>

- ------------------------------
(1) The Manager has voluntarily agreed to waive a portion of its 1.20%
management fee, up to the full amount of that fee, equal to the amount by
which the Fund's total operating expenses other than any 12b-1 fees,
shareholder service fees and other class level expenses exceed 1.95% of the
Fund's average net assets on an annual basis. The gross annual total
operating expenses absent waiver would be 2.78% of average net assets. This
waiver is intended to be in effect for the current fiscal year, but
thereafter may be revised or eliminated at any time without notice to
shareholders.
(2) "Other Expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there were no Class C operations prior to the date of
this prospectus.
(3) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently, the Trustees have limited the Fund's Class C 12b-1 Fee
payments to 0.40% of average daily net assets. The 12b-1 Fee payments may be
increased only when the Trustees believe it is in the best interests of the
shareholders of Class C Shares to do so. Long-term shareholders of the Class
C shares of the Emerging Markets Fund may pay more in Rule 12b-1 fees than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.

10
<PAGE> 174

(4) For purposes of this table, "Other Fees" includes a shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
* Each shareholder or the financial intermediary through which the shareholder
purchases Class C Shares of the Investment Company enters into a written
Asset Management Services Agreement with the Management Company, and agrees
to pay an annual shareholder investment services fee calculated as a
specified percentage of the shareholder's average net assets in the Fund.
Currently, the Manager does not intend to impose a shareholder investment
services fee with respect to the Fund. In addition, a shareholder may pay
additional fees, expressed as fixed dollar amounts for the other services or
reports provided by the Management Company to the shareholder. Accordingly,
the expense information does not reflect an amount for fees paid directly by
an investor to the Management Company.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

11
<PAGE> 175

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE REAL ESTATE SECURITIES FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .85%
12b-1 Fees (1)(2)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .07%
Transfer Agent Fees................................................... .12
Other Fees (2)(3) (including a shareholder servicing fee of up to
0.25%)............................................................... .35
---
Total Other Expenses.................................................. .54
----
Total Class C Shares Operating Expenses+................................. 1.79%
====

</TABLE>

- ------------------------------
(1) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently, the Trustees have limited the Fund's Class C 12b-1 Fee
payments to 0.40% of average daily net assets. The 12b-1 Fee payments may be
increased only when the Trustees believe it is in the best interests of the
shareholders of Class C Shares to do so. Long-term shareholders of the Class
C shares of the Real Estate Securities Fund may pay more in Rule 12b-1 fees
than the economic equivalent of the maximum front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
(2) "Other expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there were no Class C operations prior to the date of
this prospectus.
(3) For purposes of this table, "Other Fees" includes a Shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

12
<PAGE> 176

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE DIVERSIFIED BOND FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .45%
12b-1 Fees (1)(2)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .06%
Transfer Agent Fees................................................... .05
Other Fees (2)(3) (including a shareholder servicing fee of up to
0.25%)............................................................... .35
---
Total Other Expenses.................................................. .46
----
Total Class C Shares Operating Expenses+................................. 1.31%
====
</TABLE>

- ------------------------------
(1) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently, the Trustees have limited the Fund's Class C 12b-1 Fee
payments to 0.40% of average daily net assets. The 12b-1 Fee payments may be
increased only when the Trustees believe it is in the best interests of the
shareholders of Class C Shares to do so. Long-term shareholders of the Class
C shares of the Diversified Bond Fund may pay more in Rule 12b-1 fees than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
(2) "Other expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there were no Class C operations prior to the date of
this prospectus.
(3) For purposes of this table, "Other Fees" includes a Shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

13
<PAGE> 177

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE VOLATILITY CONSTRAINED BOND FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee........................................................... .50%
12b-1 Fees (1)(2)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .18%
Transfer Agent Fees................................................... .09
Other Fees (2)(3) (including a shareholder servicing fee of up to
0.25%)............................................................... .37
---
Total Other Expenses.................................................. .64
----
Total Class C Shares Operating Expenses+................................. 1.54%
====
</TABLE>

- ------------------------------
(1) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. Currently the Trustees have limited the Fund's Class C 12b-1 fee
payments to 0.40% of average daily net assets. The 12b-1 Fee payments may be
increased only when the Trustees believe it is in the best interests of the
shareholders of Class C Shares to do so. Long-term shareholders of the Class
C shares of the Volatility Constrained Bond Fund may pay more in Rule 12b-1
fees than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
(2) "Other expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there were no Class C operations prior to the date of
this prospectus.
(3) For purposes of this table, "Other Fees" includes a shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

14
<PAGE> 178

ANNUAL FUND OPERATING EXPENSES OF THE CLASS C SHARES
OF THE MULTISTRATEGY BOND FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Deferred Sales Load...................................................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1).................................... .57%
12b-1 Fees (2)(3)........................................................ .40
Other Expenses:
Custodian Fees........................................................ .09%
Transfer Agent Fees................................................... .09
Other Fees (2)(4) (including a shareholder servicing fee of up to
0.25%)............................................................... .37
---
Total Other Expenses.................................................. .55
----
Total Class C Shares Operating Expenses (After Fee Waiver) (1)+.......... 1.52%
====
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
----- ------ ------ -------
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and
(2) redemption at the end of each time period...... $15 $48 $83 $181
=== === === ====
</TABLE>

- ------------------------------
(1) The Manager has voluntarily agreed to waive a portion of its 0.65%
management fee, up to the full amount of that fee, equal to the amount by
which the Fund's total operating expenses, other than 12b-1 fees,
Shareholder Servicing Fees and certain other class-level expenses exceed
0.80% of the Fund's average net assets on an annual basis. The gross annual
total operating expenses absent the waiver would be 1.60% of average net
assets. This waiver is intended to be in effect for the current fiscal year,
but thereafter may be revised or eliminated at any time without notice to
shareholders.
(2) "Other expenses" and 12b-1 Fees are based on estimated amounts for the
current year since there were no Class C operations prior to the date of
this prospectus.
(3) For purposes of this table, "12b-1 Fees" are comprised of an asset-based
sales charge of up to 0.75% of average daily net assets, or such lesser
amount as the Trustees may determine from time to time, of Class C Shares of
the Fund. The Trustees have limited the Funds Class C 12b-1 Fee payments to
0.40% of average daily net assets. The 12b-1 Fee payments may be increased
only when the Trustees believe it is in the best interests of the
shareholders of the Class C Shares to do so. Long-term shareholders of the
Class C shares of the Multistrategy Bond Fund may pay more in Rule 12b-1
fees than the economic

15
<PAGE> 179

equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
(4) For purposes of this table, "Other Fees" includes a shareholder servicing
fee of up to 0.25% of the average daily net assets of the Fund's Class C
Shares. The Investment Company may make payments to the distributor or any
investment advisers, banks, broker-dealers, financial planners or other
financial institutions ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents'
clients who beneficially own Class C Shares of the Fund.
+ Investors purchasing Class C Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.

16
<PAGE> 180

FINANCIAL HIGHLIGHTS

Class C Shares were not offered or issued prior to the date of this
prospectus, and the financial highlights tables of the Funds do not reflect
performance of Class C Shares prior to that date. The Funds' financial
statements and related notes thereto are incorporated herein by reference to the
Statement of Additional Information and appear, along with the report of Coopers
& Lybrand L.L.P., in the Funds' Annual Reports to shareholders. The Funds'
Annual Reports may be obtained without charge by writing to or calling the
Investment Company as described on the first page of this prospectus. Financial
Highlights' pages for the Funds described herein are included in the Statement
of Additional Information. Such Financial Highlights do not reflect the 12b-1
Fee and Shareholder Service Fee imposed with respect to Class C Shares.

17
<PAGE> 181

THE PURPOSE OF THE FUNDS

FRANK RUSSELL COMPANY -- CONSULTANT TO THE FUNDS

Three functions are at the core of Frank Russell Company's consulting
service:

Objective Setting: Defining appropriate investment objectives and desired
investment returns based upon the client's unique situation and tolerance for
risk.

When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique with the objectives of
reducing risk and increasing returns.

MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION

18
<PAGE> 182

Substantial pools of investment assets are required to achieve the cost
effective and efficient allocation of assets among various asset classes and
investment styles, to use multiple money managers, and to support the research
and evaluation efforts required to select appropriate money managers. By pooling
the assets of institutions and individuals with smaller to medium-sized accounts
in a series of Funds with different objectives and policies, Frank Russell
Company believes that it is able to provide its multi-style, multi-manager
diversification techniques and money manager evaluation services to Eligible
Investors on a basis which is both efficient and cost effective for the investor
and Frank Russell Company.

ELIGIBLE INVESTORS

- Bank trust departments managing discretionary institutional or personal
trust accounts

- Banks, other than through their Trust departments

- Registered investment advisers

- Endowment funds and charitable foundations

- Broker-Dealers

- Employee welfare plans

- Pension or profit sharing plans

- Insurance companies

19
<PAGE> 183

Either the client or the Management Company may terminate the Agreement
upon written notice as provided for in the Agreement. The Management Company
does not expect to exercise its right to terminate the Agreement unless a client
does not invest sufficient assets in the Funds to compensate the Management
Company for providing services to the client. Upon termination of an Agreement
by the client or the Management Company, the Management Company will no longer
provide asset-allocation, objective-setting or other services.

GENERAL MANAGEMENT OF THE FUNDS

- Randall P. Lert, who has been Chief Investment Officer, Frank Russell
Investment Management Company since 1989.

- Peter F. Apanovitch, who has been the Manager of Short-Term Investment
Funds for Frank Russell Investment Management Company and Frank Russell
Trust Company since 1991.

20
<PAGE> 184

Frank Russell Company provides to the Funds and the Management Company the
asset management consulting services -- including the objective-setting and
asset-allocation technology, and the money manager research and evaluation
assistance which Frank Russell Company provides to its other consulting clients.
Frank Russell Company receives no compensation from the Funds or the Management
Company for its consulting services. Frank Russell Company and the Management
Company as affiliated companies may establish certain intercompany cost
allocations for budgeting and product profitability purposes which may reflect
Frank Russell Company's consulting services supplied to the Management Company.

For its services, the Management Company receives a management fee from
each Fund. From this fee, the Management Company, acting as agent for the
Investment Company, is responsible for paying the money managers for their
investment selection services. The remainder is retained by the Management
Company as compensation for the services described above and to pay expenses.
The annual rate of the management fees, payable to the Management Company
monthly on a pro rata basis, are the following percentages of the average daily
net assets of each Fund: Diversified Equity Fund, 0.78%; Special Growth Fund,
0.95%; Equity Income Fund, 0.80%; Quantitative Equity Fund, 0.78%; International
Securities Fund, 0.95%; Emerging Markets Fund, 1.20%; Real Estate Securities
Fund, 0.85%; Diversified Bond Fund, 0.45%; Volatility Constrained Bond Fund,
0.50%; and Multistrategy Bond Fund, 0.65%. The fees of the Funds, other than the

21
<PAGE> 185

Diversified Bond and Volatility Constrained Bond Funds, may be higher than the
fees charged by some mutual funds with similar objectives which use only a
single money manager.

<TABLE>
<CAPTION>
ANALYSIS OF
TRANSACTION INTERNATIONAL
BASE FEE CHARGE HOLDING CHARGE MANAGEMENT REPORT
--------- ----------- --------------- ------------------
<S> <C> <C> <C> <C>
Equity Manager Portfolios $ 1,500 $ 0.10 $ 1.80 --
Fixed Income Manager Portfolios 2,500 2.00 12.00 --
Master Holding Portfolios 500 0.10-3.00 1.80-24.00 --
Multi-Currency Portfolios 14,000 3.00 24.00 $2,500
</TABLE>

Annual minimum charges are: Diversified Equity -- $25,000; Special
Growth -- $15,000; Equity Income -- $12,000; Quantitative Equity -- $23,000;
Real Estate Securities -- $5,000; Diversified Bond -- $31,000; Volatility
Constrained Bond -- $22,000; Multistrategy Bond -- $25,000; and $290,000 in the
aggregate for all international portfolios. Any additional domestic equity or
fixed-income funds will be billed using the same fee schedule, with an annual
minimum fee of $20,000 and $25,000, respectively.

EXPENSES OF THE FUNDS

The Funds, and when appropriate each class, will pay their own expenses
other than those expressly assumed by the Management Company. Principal expenses
are: the management, transfer agency and recordkeeping fees payable to the
Management Company; fees for custodial and portfolio accounting payable to State
Street Bank and Trust Company; bookkeeping service fees for preparing tax
records payable to Frank Russell Company; fees for independent auditing and
legal services; and fees for filing reports and registering shares with
regulatory bodies. In addition, Class C shares will pay 12b-1 and shareholder
servicing fees.

THE MONEY MANAGERS

The assets of each Fund are allocated currently among the money managers
listed in the section "Money Manager Profiles." THE ALLOCATION OF A FUND'S
ASSETS AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY THE MANAGEMENT
COMPANY. THE MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED
AT ANY TIME BY THE MANAGEMENT COMPANY, SUBJECT TO APPROVAL BY THE BOARD OF
TRUSTEES OF THE INVESTMENT COMPANY. The Funds will notify shareholders of the
Fund concerned within 60 days when a money manager begins or stops providing
services.

22
<PAGE> 186

From its management fees, the Management Company, as agent for the
Investment Company, pays all fees to the money managers for their investment
selection services. Quarterly, each money manager is paid the pro rata portion
of an annual fee, based on the quarterly average of all the assets allocated to
the money manager. For the period, management fees paid to the money managers
were equivalent to the following annual rates expressed as a percentage of the
average daily net assets of each Fund: Diversified Equity Fund, .24%; Special
Growth Fund, .41%; Equity Income Fund, .20%; Quantitative Equity Fund, .21%;
International Securities Fund, .44%; Emerging Markets Fund, 0.68%; Real Estate
Securities Fund, .32%; Diversified Bond Fund, .09%; Volatility Constrained Bond
Fund, .19%; and Multistrategy Bond Fund, .22%. Fees paid to the money managers
are not affected by any voluntary or statutory expense limitations. Some money
managers may receive investment research prepared by Frank Russell Company as
additional compensation, or may receive brokerage commissions for executing
portfolio transactions for the Funds through broker-dealer affiliates.

The money managers are selected for the Funds based primarily upon the
research and recommendations of Frank Russell Company, which evaluates
quantitatively and qualitatively the manager's skills and results in managing
assets for specific asset classes, investment styles and strategies. Short-term
investment performance, by itself, is not a controlling factor in selecting or
terminating a money manager.

Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund within the Fund's investment objectives,
restrictions and policies, and the more specific strategies developed by Frank
Russell Company and the Management Company. Although the money managers'
activities are subject to general oversight by the Board of Trustees and
officers of the Investment Company, NEITHER THE BOARD, THE OFFICERS, THE
MANAGEMENT COMPANY, NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF
THE MONEY MANAGERS' INDIVIDUAL SECURITY SELECTIONS.

INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES, AND RISKS

INVESTMENT OBJECTIVES

23
<PAGE> 187

objectives. However, the Funds may hold assets as cash reserves for temporary
and defensive purposes when their money managers deem that a more conservative
approach is desirable or when suitable purchase opportunities do not exist.
(See, "Investment Policies -- Cash Reserves.")

DIVERSIFIED EQUITY FUND

The Diversified Equity Fund's objective is to provide income and capital
growth by investing principally in equity securities.

The Fund may invest in common and preferred stocks, securities convertible
into common stocks, rights and warrants.

SPECIAL GROWTH FUND

Current income is a secondary consideration in selecting securities. The
Fund may invest in common and preferred stock, convertible securities, rights
and warrants. The Fund's investments may include companies whose securities have
been publicly traded for less than five years and smaller companies, such as
companies not listed in the Russell 1000(R) Index. A substantial portion of the
Fund's portfolio will generally consist of equity securities of "emerging
growth-type" companies which tend to reinvest most of their earnings, rather
than pay significant cash dividends; or companies characterized as "special
situations" where the money manager believes that cyclical developments in the
securities markets, the industry, or the issuer itself present opportunities for
capital growth.

EQUITY INCOME FUND

The income objective of the Fund is to exceed the yield on the S&P 500
Index. The Index yield will change from year to year due to changes in prices
and dividends of stocks in the Index. Income streams will be considered in light
of their current level and the opportunity for future growth. Capital
appreciation may not be comparable to that achieved by Funds such as the Special
Growth Fund whose major objective is appreciation, although the Management
Company believes that a high and growing stream of income is conducive to higher
capital values. The Fund may also invest in preferred stock, convertible
securities, rights and warrants.

QUANTITATIVE EQUITY FUND

24
<PAGE> 188

the averages for the Index. However, the Fund's money managers may temporarily
deviate from Index characteristics based upon the managers' investment judgment
that this will increase the Fund's total return. The money managers of the Fund
generally make stock selections from the set of stocks comprising the Russell
1000(R) Index.

The Fund will attempt to be fully invested in common stock at all times.
However, the Fund reserves the right to hold up to 20% of Fund assets in liquid
reserve for redemption needs.

INTERNATIONAL SECURITIES FUND

EMERGING MARKETS FUND

25
<PAGE> 189

country in the world except the United States, Canada, Japan, Australia and most
countries located in Western Europe.

REAL ESTATE SECURITIES FUND

26
<PAGE> 190

characteristics. Up to 35% of the Fund's total assets may be invested in other
debt securities of real estate companies.

The Fund will attempt to be invested fully at all times. However, the Fund
reserves the right to hold up to 20% of the Fund's assets in liquid reserves for
redemption needs.

DIVERSIFIED BOND FUND

The Diversified Bond Fund's objectives are to provide effective
diversification against equities and a stable level of cash flow by investing in
fixed-income securities.

The Fund's portfolio will consist primarily of conventional debt
instruments, including bonds, debentures, US government and US government agency
securities, preferred and convertible preferred stocks, and variable amount
demand master notes. (These notes represent a borrowing arrangement under a
letter agreement between a commercial paper issuer and an institutional lender,
such as the Fund.) Investment selections will be based on fundamental economic,
market, and other factors leading to valuation by sector, maturity, quality and
such other criteria as are appropriate to meet the stated objectives. The Fund
will ordinarily invest at least 65% of its net assets in securities rated no
less than A or A-2 by Standard & Poor's Ratings Group ("S&P") or A or Prime-2 by
Moody's Investors Service, Inc. ("Moody's"), or judged by the money manager to
be of at least equal credit quality to those designations.

VOLATILITY CONSTRAINED BOND FUND

27
<PAGE> 191

quality debt securities denominated in the US dollar and a range of foreign
currencies. Under normal circumstances, the Fund will invest in securities of
issuers domiciled in at least three different countries.

Although the Fund will invest primarily in debt securities denominated in
the US dollar, the money managers will actively manage the Fund's portfolio in
accordance with a multi-market investment strategy, allocating investments among
securities denominated in the US dollar and the currencies of a number of
foreign countries and, where consistent with its policy of investing only in
high-quality securities, within each such country, among different types of debt
securities. The money managers which invest in foreign denominated securities
will maintain a substantially neutral currency exposure relative to the US
dollar, and will establish and adjust cross currency hedges based on their
perception of the most favorable markets and issuers. In this regard, the
percentage of assets invested in securities of a particular country or
denominated in a particular currency will vary in accordance with a money
manager's assessment of the relative yield of such securities and the
relationship of a country's currency to the US dollar. Fundamental economic
strength, credit quality and interest rate trends will be the principal factors
considered by the money managers in determining whether to increase or decrease
the emphasis placed upon a particular type of security or industry sector within
the Fund's investment portfolio. The Fund will not invest more than 10% of its
total assets in debt securities denominated in a single currency other than the
US dollar. At this time, the Management Company intends to limit total non-US
dollar investments to no more than 25% of total Funds assets.

In selecting particular investments for the Fund, the money managers will
seek to minimize investment risk by limiting their portfolio investments to debt
securities of high-quality. Accordingly, the Fund's portfolio will consist only
of: (a) debt securities issued or guaranteed by the US government, its agencies
or instrumentalities ("US Government Securities"); (b) obligations issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, or instrumentalities, or by supranational entities, all
of which are rated AAA or AA by S&P or Aaa or Aa by Moody's or, if unrated,
determined by the money managers to be of equivalent quality; (c) investment
grade corporate debt securities or, if unrated, determined by the money managers
to be of equivalent quality; (d) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, banks
(including foreign branches of US banks or US or foreign branches of foreign
banks) having total assets of more than $500 million and determined by the money
managers to be of high-quality; and (e) commercial paper rated A-1 or A-2 by
S&P, Prime-1 or Prime-2 by Moody's, Fitch-1 or Fitch-2 by Fitch Investors
Service, Inc., Duff 1 or Duff 2 by Duff & Phelps, Inc., TBW-1 or TBW-2 by
Thomson Bank Watch, Inc., or, if not rated, issued by US or foreign companies
having outstanding debt securities rated AAA, AA or A by S&P, or Aaa, Aa or A by
Moody's and determined by the money managers to be of high-quality.

28
<PAGE> 192

economic activities; the European Coal and Steel Community, which is an economic
union of various European nations' steel and coal industries; and the Asian
Development Bank, which is an international development bank established to lend
funds, promote investment and provide technical assistance to member nations in
the Asian and Pacific regions.

MULTISTRATEGY BOND FUND

The Fund may also invest in convertible securities and derivatives
including warrants and interest rate swaps. Interest rate swaps are described
under "Volatility Constrained Bond Fund." The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio to protect against any increase in the price of
securities it anticipates purchasing at a later date. The Fund intends to use
these transactions as a hedge and not as a speculative investment.

As described above, the Fund may invest in debt securities issued by
supranational organizations. Supranational organizations are described under
"Volatility Constrained Bond Fund."

29
<PAGE> 193

The variable and floating rate securities the Fund may invest in provide
for a periodic adjustment in the interest rate paid on the obligations. The
terms of such obligations must provide that interest rates are adjusted
periodically based upon some appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be regular,
and range from daily up to annually, or may be event based, such as a change in
the prime rate. The Fund may also invest in zero coupon US Treasury, foreign
government and US and foreign corporate debt securities, which are bills, notes
and bonds that have been stripped of their unmatured interest coupons and
receipts or certificates representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its holder
prior to maturity. Accordingly, such securities usually trade at a deep discount
from their face or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest.

30
<PAGE> 194

INVESTMENT RESTRICTIONS

1. Invest in any security if, as a result of such investment, less than
75% of its total assets would be represented by cash; cash items;
securities of the US government, its agencies, or instrumentalities;
securities of other investment companies; and other securities limited
in respect of each issuer to an amount not greater in value than 5% of
the total assets of such Fund. A Fund's investment in "cash reserves"
(see the next section) in shares of the Investment Company's Money
Market Fund are not subject to this restriction or to restrictions 2 or
3.

2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other
than the US government, its agencies and instrumentalities). This
restriction does not apply to the Real Estate Securities Fund, which
may invest 25% or more of its total assets in the securities of
companies directly or indirectly engaged in the real estate industry.

3. Acquire more than 5% of the outstanding voting securities, or 10% of
all of the securities, of any one issuer.

INVESTMENT POLICIES

The Funds use certain investment instruments and techniques commonly used
by institutional investors. The principal policies are the following:

31
<PAGE> 195

20% of Intel, only 80% of the total shares outstanding of Intel were used to
determine Intel's capitalization. Also not included in the Index are closed-end
investment companies, companies that do not file a Form 10-K report with the
SEC, foreign securities, and ADRs.

Repurchase Agreements. Each Fund may enter into repurchase agreements with
a bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day). If
the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at time of the agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Investment Policies -- Illiquid Securities," no Fund
will invest more than 15% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days.

32
<PAGE> 196

collateral is "marked-to-market" on a daily basis, and the borrower will furnish
additional collateral in the event that the value of the collateral drops below
100% of the market value of the loaned securities.

33
<PAGE> 197

ments comparable to those applicable to domestic companies. The values of
foreign investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic or monetary policy (in
the United States or abroad) or changed circumstances in dealings between
nations. Costs are often incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions are generally higher than
in the United States, and foreign securities markets may be less liquid, more
volatile and less subject to governmental supervision than in the United States.
Investments in foreign countries could be affected by other factors not present
in the United States, including nationalization, expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods or restrictions affecting the prompt return of
capital to the United States.

The risks associated with investing in foreign securities are often
heightened for investments in developing or emerging markets. Investments in
emerging or developing markets involve exposure to economic structures that are
generally less diverse and mature, and to political systems which can be
expected to have less stability, than those of more developed countries.
Moreover, the economies of individual emerging market countries may differ
favorably or unfavorably from the US economy in such respects as the rate of
growth in gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Because the Funds'
foreign securities will generally be denominated in foreign currencies, the
value of such securities to the Funds will be affected by changes in currency
exchange rates and in exchange control regulations. A change in the value of a
foreign currency against the US dollar will result in a corresponding change in
the US dollar value of the Funds' foreign securities. In addition, some emerging
market countries may have fixed or managed currencies which are not
free-floating against the US dollar. Further, certain emerging market countries'
currencies may not be internationally traded. Certain of these currencies have
experienced a steady devaluation relative to the US dollar. Many emerging
markets countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates have had, and may continue to have, negative effects on the
economies and securities markets of certain emerging market countries.

Forward Foreign Currency Exchange Contracts ("forward currency
contracts"). The International Securities, the Emerging Markets, Diversified
Bond, Volatility Constrained Bond and Multistrategy Bond Funds may enter into
forward currency contracts, which are agreements to exchange one currency for
another -- for example, to exchange a certain amount of US dollars for a certain
amount of Japanese yen -- at a future date. The date (which may be any agreed
upon fixed number of days in the future), the amount of currency to be exchanged
and the price at which the exchange will take place will be negotiated and fixed
for the term of the contract at the time that a Fund enters into a contract. The
Funds may engage in forward contracts that involve a currency whose changes in
value are considered to be linked (a proxy) to a currency or currencies in which
some or all of the Funds' portfolio securities are denominated. Forward currency
contracts are (a) traded in an interbank market conducted directly between
currency traders (typically, commercial banks or other financial institutions)
and their customers, (b) generally have no deposit requirements and (c) are
consummated without payment of any commissions. The Funds may, however, enter
into forward currency contracts containing either or both deposit requirements
and commissions. In order to assure that the Funds' forward currency contracts
are not used to achieve investment leverage, the Funds will segregate cash or
readily marketable high-quality securities in an amount at all times equal to or
exceeding the Fund's commitment with respect to these contracts.

34
<PAGE> 198

The market for forward currency contracts may be limited with respect to
certain currencies. These factors will restrict a Fund's ability to hedge
against the risk of devaluation of currencies in which the Fund holds a
substantial quantity of securities and are unrelated to the qualitative rating
that may be assigned to any particular portfolio security. Where available, the
successful use of forward contracts draws upon a money manager's special skills
and experience with respect to such instruments and usually depends on the money
manager's ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
Fund may not achieve the anticipated benefits of forward contracts or may
realize losses and thus be in a worse position than if such strategies had not
been used. Unlike many exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with respect to forward
contracts, and adverse market movements could therefore continue to an unlimited
extent over a period of time. In addition, the correlation between movements in
the prices of such instruments and movements in the price of the securities and
currencies hedged or used for cover will not be perfect. In the case of proxy
hedging, there is also a risk that the perceived linkage between various
currencies may not be present or may not be present during the particular time
the Funds are engaged in that strategy.

A Fund's ability to dispose of its positions in forward contracts will
depend on the availability of active markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of forward contracts. Forward currency contracts may be closed out only by
the parties entering into an offsetting contract. Therefore, no assurance can be
given that a Fund will be able to utilize these instruments effectively for the
purposes set forth above.

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<PAGE> 199

Securities Index Options. An option on a securities index is a contract
which gives the purchaser of the option, in return for the premium paid, the
right to receive from the writer of the option cash equal to the difference
between the closing price of the index and the exercise price of the option
times a multiplier established by the exchange on which the stock index is
traded. It is similar to an option on a specific security except that settlement
is in cash and gains and losses depend on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
price movements in the specific security. None of the Funds, other than the
Diversified Equity, Special Growth, Equity Income, Quantitative Equity,
International Securities, Emerging Markets and Real Estate Securities Funds,
currently intends to purchase and write call and put options on securities
indexes.

Options on Foreign Currency. The Funds may purchase and write call and put
options on foreign currencies for the purpose of hedging against changes in
future currency exchange rates. Call options convey the right to buy the
underlying currency at a price which is expected to be lower than the spot price
of the currency at the time the option expires. Put options convey the right to
sell the underlying currency at a price which is anticipated to be higher than
the spot price of the currency at the time the option expires. Currency options
traded on US or other exchanges may be subject to position limits which may
limit the ability of a Fund to reduce foreign currency risk using such options.
Over-the-counter options differ from traded options in that they are two-party
contracts with price and other terms negotiated between buyer and seller and
generally do not have as much market liquidity as exchange-traded options. (See
also "Call and Put Options on Securities" above.) None of the Funds, other than
the Multistrategy Bond Fund, currently intends to write or purchase such
options.

36
<PAGE> 200

37
<PAGE> 201

High Risk Bonds. The Funds, other than the Emerging Markets and
Multistrategy Bond Funds, do not invest assets in securities rated less than BBB
by S&P or Baa by Moody's, or in unrated securities judged by the money managers
to be of a lesser credit quality than those designations. Securities rated BBB
by S&P or Baa by Moody's and above are considered by those rating agencies to be
"investment grade" securities, although Moody's considers securities rated Baa,
and S&P considers bonds rated BBB, to have some speculative characteristics. The
Funds, other than the Emerging Markets and Multistrategy Bond Funds, will
dispose of, in a prudent and orderly fashion, securities whose ratings drop
below these minimum ratings. The market value of debt securities generally
varies inversely in relation to interest rates.

The Multistrategy Bond Fund will invest in "investment grade" securities
and may invest up to 25% of its total assets in debt securities rated less than
BBB by S&P or Baa by Moody's, or in unrated securities judged by the money
managers of the Fund to be of comparable quality. In addition, the Emerging
Markets Fund may invest up to 5% of its total assets in securities rated less
than BBB by S&P or Baa by Moody's, or in unrated securities judged by the Fund's
money managers to be of comparable quality. Lower rated debt securities
generally offer a higher yield than that available from higher grade issues.
However, lower rated debt securities involve higher risks, in that they are
especially subject to adverse changes in general economic conditions and in the
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of principal and interest and increase the
possibility of default. In addition, the market for lower rated debt securities
has expanded rapidly in recent years, and its growth paralleled a long economic
expansion. The market for lower rated debt securities is generally thinner and
less active than that for higher quality securities, which would limit the
Funds' ability to sell such securities at fair value in response to changes in
the economy or the financial markets. While such debt may have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions. The money managers of the Funds will seek
to reduce the risks associated with investing in such

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<PAGE> 202

securities by limiting the Funds' holdings in such securities and by the depth
of their own credit analysis. For additional information, please refer to the
Statement of Additional Information.

PORTFOLIO TRANSACTION POLICIES

Decisions to buy and sell securities are made by the money managers for the
assets assigned to them, and by the Management Company or the money manager for
the Liquidity Portfolios. The Funds do not give significant weight to attempting
to realize long-term, rather than short-term, capital gains while making
portfolio investment decisions. The money managers make decisions to buy or sell
securities independently from other money managers. Thus, one money manager
could be selling a security when another money manager for the same Fund (or for
another series of the Investment Company) is purchasing the same security. In
addition, when a money manager's services are terminated and another retained,
the new manager may significantly restructure the portfolio. These practices may
increase the Funds' portfolio turnover rates, realization of gains or losses,
brokerage commissions and other transaction based costs. The annual portfolio
turnover rates for each of the Funds are shown in the Financial Highlights
tables.

The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc., an affiliate of the Management Company, when the money manager
determines that the Funds will receive competitive execution, price and
commissions. Frank Russell Securities, Inc. refunds to the Fund up to 70% of the
commissions paid by that Fund when it effects such transactions, after
reimbursement for research services provided to the Management Company. This
arrangement is used by the Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and International Securities Funds. All Funds may also
effect portfolio transactions through and pay brokerage commissions to the money
managers (or their affiliates).

DIVIDENDS AND DISTRIBUTIONS

INCOME DIVIDENDS

The Board of Trustees presently intends to declare dividends from net
investment income and net short-term capital gains, if any, for payment on the
following schedule:

<TABLE>
<CAPTION>
DECLARED PAYABLE
- ------------------------------------------------
<S> <C> <C>
Monthly Early in the following month Diversified Bond, Volatility
Constrained Bond and
Multistrategy Bond Funds
Quarterly Mid: April, July, October and Diversified Equity, Special
December Growth, Equity Income,
Quantitative Equity and Real
Estate Securities Funds
Annually Mid-December International Securities and
Emerging Markets Fund
</TABLE>

CAPITAL GAINS DISTRIBUTIONS

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<PAGE> 203

November or December to shareholders of record in such month. Such
distributions, if received by shareholders by January 31, are deemed to have
been paid by a Fund and received by shareholders on December 31 of the prior
year. Capital gains realized during November and December will be distributed
during the month of February of the following year.

AUTOMATIC REINVESTMENT

TAXES

For taxable shareholders: Dividends from net investment income and
short-term capital gains will be taxable as ordinary dividends, whether paid in
cash or reinvested in additional shares. However, depending upon the state tax
rules pertaining to a shareholder, a portion of the dividends paid by the
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
attributable to direct US Treasury and agency obligations may be exempt from
state and local taxes. Long-term capital gains distributions declared by the
Investment Company's Board are taxed as long-term gains regardless of the length
of time a shareholder has held such shares. Distributions paid in excess of a
Fund's earnings will be treated as a non-taxable return of capital. Dividends
and distributions may otherwise also be subject to state or local taxes.

For corporate investors, dividends from net investment income paid by the
Diversified Equity, Special Growth, Equity Income, Quantitative Equity and Real
Estate Securities Funds will generally qualify in part for the corporate
dividends-received deduction. However, the portion of the dividends so qualified
depends on the aggregate qualifying dividend income received by such a Fund from
domestic (US) sources. Certain holding period and debt financing restrictions
may apply to the corporate investor seeking to claim the deduction.

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<PAGE> 204

The International Securities, Emerging Markets, Diversified Bond,
Volatility Constrained Bond and Multistrategy Bond Funds will receive dividends
and interest paid by non-US issuers which will frequently be subject to
withholding taxes by non-US governments. The Management Company expects the
International Securities and Emerging Markets Funds to invest more than 50% of
their total assets in non-US securities and to file specified elections with the
Internal Revenue Service which will permit its shareholders either to deduct (as
an itemized deduction in the case of an individual) such foreign taxes in
computing taxable income, or to use these withheld foreign taxes as credits
against US income taxes. The Fund's taxable shareholders must include their pro
rata portion of the taxes withheld on their gross income for federal income tax
purposes.

Shareholders of the same Funds holding non-US holdings should also be aware
that for federal income tax purposes, foreign exchange losses realized by a Fund
are treated as ordinary losses. This treatment may have the effect of reducing a
Fund's income available for distribution to shareholders.

The Emerging Markets Fund may invest up to 10% of its total assets in the
stock of foreign investment companies that may be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that the Fund derives may be
subject to a non-deductible federal income tax at the Fund level. In some cases,
the Emerging Markets Fund may be able to avoid this tax by electing to be taxed
currently on its share of PFIC's income, whether or not such income is actually
distributed by the PFIC. The Fund will endeavor to limit its exposure to the
PFIC tax by investing in PFICs only where the election to be taxed currently
will be made. Because it is not always possible to identify a foreign issuer as
a PFIC in advance of making the investment, the Fund may incur the PFIC tax in
some instances.

Shareholders of the appropriate Funds will be notified after each calendar
year of the amounts: of ordinary income dividends and long-term capital gains
distributions, including any amounts which are deemed paid on December 31 of the
prior year; of the dividends which qualify for the 70% dividends-received
deduction available to corporations; of income which is a tax preference item
(if any) for alternative minimum tax purposes; of the International Securities
and Emerging Markets Funds' foreign taxes withheld; and of the percentages of
the Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds'
income attributable to US government, Treasury and agency securities.

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<PAGE> 205

Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the
Statement of Additional Information.

CALCULATION OF FUND PERFORMANCE

<TABLE>
<CAPTION>
5 YEARS ENDED 10 YEARS ENDED INCEPTION TO
1 YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1995 1995 1995 INCEPTION
1995 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
------------ ------------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Diversified Equity 35.16% 16.22% 13.76% 15.06% 09/05/85
Special Growth 28.51 18.13 12.34 13.69 09/05/85
Equity Income 34.76 16.91 12.93 13.79 09/05/85
Quantitative Equity 37.68 17.31 -- 12.55 05/15/87
International Securities 10.20 9.95 13.33 14.36 09/05/85
Emerging Markets* (8.20) -- -- 7.23 01/29/93
Real Estate Securities 10.87 17.55 -- 10.13 07/28/89
Diversified Bond 17.75 9.01 8.90 9.37 09/05/85
Volatility Constrained
Bond 9.88 6.06 7.04 7.10 09/05/85
Multistrategy Bond 17.92 -- -- 7.24 01/29/93
</TABLE>

The returns shown above represent results of the Funds' Class S Shares for
the periods shown. The Class C Shares were not offered prior to the date of this
Prospectus, and the deduction of their 12b-1 Fee and Shareholder Servicing Fee
are not related in the returns shown above. Had such fees been related in the
returns above, the returns would have been lower.

* The performance for the Emerging Markets Fund prior to April 1, 1995 is
reported gross of investment advisory fees. For periods thereafter, performance
results are reported net of investment advisory fees, but gross of any
investment services fees. Descriptions of these services can be obtained from
the investment manager upon request.

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<PAGE> 206

of each security in a Fund's portfolio. The calculation includes all recurring
fees that are charged to all shareholder accounts. The 30-day yields for the
year ended December 31, 1995 for the Class S Shares of the Diversified Bond,
Volatility Constrained Bond and Multistrategy Bond Funds were, respectively,
5.96%, 5.94% and 6.23%.

Each Fund may also advertise non-standardized performance information which
is for periods in addition to those required to be presented.

VALUATION OF FUND SHARES

NET ASSET VALUE PER SHARE

The net asset value per share is calculated for shares of each class of
each Fund on each business day on which shares are offered or orders to redeem
are tendered. (Unless otherwise indicated, "shares" refers to the Class C Shares
of the Funds.) For all Funds, a business day is one on which the New York Stock
Exchange is open for trading. Net asset value per share is computed for a Fund
by dividing the current value of the Fund's assets attributable to the Class C
Shares, less liabilities attributable to the Class C Shares, by the number of
Class C Shares of the Fund outstanding, and rounding to the nearest cent. All
Funds determine net asset value as of the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern time).

VALUATION OF PORTFOLIO SECURITIES

Money market instruments maturing within 60 days of the valuation date held
by Funds are valued on the basis of amortized cost, a method by which each
portfolio instrument is initially valued at cost, and thereafter a constant
accretion/amortization to maturity of any discount or premium is assumed. The
Funds utilize the amortized cost valuation method in accordance with Rule 2a-7
of the 1940 Act. Such money market instruments are valued at "amortized cost"
unless the Board determines that amortized cost does not represent fair value.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Funds would receive if they sold the instrument.

The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith pursuant to procedures
established by the Board of Trustees.

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<PAGE> 207

PURCHASE OF FUND SHARES

DISTRIBUTION AND SHAREHOLDER SERVICES PLANS

Under a distribution plan adopted in accordance with the 1940 Act's Rule
12b-1 (the "Distribution Plan"), the Investment Company may pay to the
distributor, or any investment advisors, banks, broker-dealers or other
financial institutions that have entered into sales support agreements within
the distributor ("Selling Agents"), an amount (the "12b-1 Fee") for the Selling
Agents' activities or expenses primarily intended to result in the sale of the
Class C Shares subject to the Distribution Plan. The 12b-1 Fee payments are
calculated daily and paid quarterly by the Investment Company, at an annual rate
of up to .75% of the average daily net assets of a Fund's Class C Shares.
Currently the Board of Trustees has determined to assess a 12b-1 Fee equal to
.40% of average daily net assets. The 12b-1 Fee may only be increased when the
Trustees determine that it is in the best interests of shareholders of Class C
Shares to do so.

The 12b-1 Fees may be used to compensate (a) Selling Agents for sales
support services provided, and related expenses incurred with respect to Class C
Shares, by such Selling Agents, and (b) the distributor for distribution
services provided by it, and related expenses incurred, including payments by
the distributor to compensate Selling Agents for providing support services.
Selling Agents are compensated on a uniform basis under the Distribution Plan.
The Distribution Plan is a compensation-type plan. As such, the Investment
Company makes no payments to the distributor except as described above.
Therefore, the Investment Company does not pay for unreimbursed expenses of the
distributor, including amounts expended by the distributor in excess of amounts
received by it from the Investment Company, interest, carrying or other
financing charges in connection with excess amounts expended, or the
distributor's overhead expenses. However, the distributor may be able to recover
such amount or more from future payments made by the Investment Company under
the Distribution Plan.

The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings and loan association) from being an underwriter or
distributor of most securities. In the event that the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the administrative
capacities described above or should Congress relax current restrictions on
depository institutions, the Company's Board of Trustees will consider
appropriate changes in the services.

State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to state
law. In addition, some state securities laws may require administrators to
register as brokers and dealers.

In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments to the distributor or any
investment advisors, banks, broker-dealers, financial planners or other
financial institutions that have entered into a Shareholder Services Agreement
with the distributor ("Servicing Agents") for any activities or expenses
primarily intended to assist, support or service the Servicing Agents' clients
who beneficially own Class C Shares of the Funds. Payments under the Services
Plan are calculated daily and paid quarterly by the Investment Company, at an
annual rate of up to .25% of the average daily net assets of a Fund's Class C
Shares.

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<PAGE> 208

ORDER PROCEDURES

Federal Funds Wire. Payment for orders may be made by wiring federal funds
to the Funds' Custodian, State Street Bank and Trust Company.

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to the Transfer
Agent, P.O. Box 1591, Tacoma, WA 98401-1591. Certified checks are not necessary,
but checks are accepted subject to collection at full face value in US funds and
must be drawn in US dollars on a US bank. Investments in the Funds will be
effected upon receipt of the check or draft by the Transfer Agent when the check
or draft is received prior to the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern time). When the check or draft is received by the
Transfer Agent after the close of the New York Stock Exchange, the order will be
effected on the following business day.

IN-KIND EXCHANGE OF SECURITIES

45
<PAGE> 209

THREE DAY SETTLEMENT PROGRAM

THIRD PARTY TRANSACTIONS

Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary, such as a bank, broker-dealer, investment adviser or
others, may be required to pay additional fees by such Intermediary. Investors
should contact such Financial Intermediary for information concerning what
additional fees, if any, may be charged.

EXCHANGE PRIVILEGE

REDEMPTION OF FUND SHARES

SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE
FUNDS AT (800) 972-0700; IN WASHINGTON (206) 627-7001.

Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below.

46
<PAGE> 210

system, or through the Systematic Withdrawal Payment Program on the days
requests to redeem are tendered prior to the close of the New York Stock
Exchange (currently 4:00 p.m. Eastern time).

B. Such other supporting legal documents, if required by applicable law,
in the case of estates, trusts, guardianships, custodianships,
corporations, and pension and profit sharing plans.

Distribution Frequency. Payments can be scheduled as monthly, quarterly,
semiannual or annual distributions.

SWP Distribution by Wire. Federal Funds Wire payments will be sent to the
designated bank on the payment date.

SWP Distribution by Check. Checks will be sent by US Postal Service first
class mail, to the requested address on the payment date.

47
<PAGE> 211

charges on the sale of these portfolio securities. The Funds reserve the right
to suspend the right of redemption or postpone the date of payment if any
unlikely emergency conditions, as specified in the 1940 Act or determined by the
SEC, should develop.

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

ORGANIZATION, CAPITALIZATION, AND VOTING

In addition to offering a Class C Shares, the Funds also offer Class S
Shares, which are described in a separate prospectus. Class S Shares are
designed to meet different investor needs and are not subject to a Rule 12b-1
Fee nor to a shareholder servicing fee. To obtain more information concerning
Class S Shares contact the Financial Intermediary from whom you obtained this
prospectus or write to the Secretary, Frank Russell Investment Company, at the
address listed on the cover of this Prospectus, or call (800) 972-0700.

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<PAGE> 212

MONEY MANAGER PROFILES

The money managers identified below have no other affiliations with the
Funds or with Frank Russell Company. Each money manager has been in business for
at least three years, and is principally engaged in managing institutional
investment accounts. These managers may also serve as managers or advisers to
other Investment Company Funds, or to other clients of Frank Russell Company,
including its wholly owned subsidiary, Frank Russell Trust Company.

DIVERSIFIED EQUITY FUND

BZW Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San
Francisco, CA 94105, is an indirect, wholly owned subsidiary of Barclays Bank
PLC.

Equinox Capital Management, Inc., 399 Park Ave., 28th Floor, New York, NY
10022. Equinox is a registered investment adviser with majority ownership held
by Ron Ulrich.

INVESCO Capital Management, Inc., 1315 Peachtree Street N.E., Suite 300,
Atlanta, GA 30309, is a corporation whose indirect parent is INVESCO, PLC, a
London-based financial services holding company.

Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116,
is a corporation with seven shareholders, with Stanford M. Calderwood holding
majority ownership.

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<PAGE> 213

SPECIAL GROWTH FUND

Delphi Management, Inc., 50 Rowes Wharf, Suite 440, Boston, MA 02110, is
100% owned by Scott Black.

Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth Levy.

Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.

Wellington Management Company, See: Diversified Equity Fund.

EQUITY INCOME FUND

Equinox Capital Management, Inc., See: Diversified Equity Fund.

Trinity Investment Management Corporation, See: Diversified Equity Fund.

QUANTITATIVE EQUITY FUND

BZW Barclays Global Fund Advisors, See: Diversified Equity Fund.

J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 14th Floor, New
York, NY 10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a
publicly held bank holding company.

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<PAGE> 214

INTERNATIONAL SECURITIES FUND

Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, MA 02110, whose
majority ownership is held by the four senior partners: Jeremy Grantham, Richard
Mayo, Eyk De Mol Van Otterloo, and Kingsley Durant.

J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.

Marathon Asset Management Limited, 115 Shaftesbury Ave., London, England
WC2H 8AD, is a corporation 33.3% owned by each of the following: Jeremy Hosking,
William Arah and Neil Ostrer.

EMERGING MARKETS FUND

Genesis Asset Managers, Ltd., Bermuda House, St. Julian's Ave., St. Peter
Port, Guernsey, Channel Islands, is a limited liability company organized under
the laws of the state of Guernsey, the Channel Islands, and has been engaged in
the investment advisory business since 1990. Genesis Asset Managers, Ltd. is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. Genesis Asset Managers Ltd. is affiliated with and has common
investment executives with the Genesis Group of fund management companies. The
Genesis Group, whose holding company is Genesis Holdings Ltd., is controlled
32.58% by management and 67.42% by 12 outside shareholders, with the largest
single holding being 19.68%.

J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.

Montgomery Asset Management, L.P., 600 Montgomery Street, 17th Floor, San
Francisco, CA 94111, is a California limited partnership and a registered
investment adviser. Montgomery Asset Management, Inc. is the general partner of
Montgomery Asset Management, L.P. and Montgomery Securities is the sole limited
partner. Montgomery Asset Management, Inc. and Montgomery Securities may be
deemed control persons of Montgomery Asset Management, L.P.

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<PAGE> 215

REAL ESTATE SECURITIES FUND

DIVERSIFIED BOND FUND

Lincoln Capital Management Company, See: Diversified Equity Fund.

Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, whose
ownership is divided among seventeen directors, with no director having more
than a 25% ownership interest.

VOLATILITY CONSTRAINED BOND FUND

BlackRock Financial Management, 345 Park Ave., 31st Floor, New York, NY
10154, a wholly owned indirect subsidiary of PNC Bank.

Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.

STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue, Hamilton
HM LX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.

MULTISTRATEGY BOND FUND

BEA Associates, 153 East 53rd Street, New York, NY 10022, is a general
partnership of Credit Suisse Capital Corporation ("CS Capital") and Basic
Appraisals, Inc. ("Basic"). CS Capital is an 80% partner, and is a wholly owned
subsidiary of Credit Suisse Investment Corporation, which is in turn a
wholly-owned subsidiary of Credit Suisse, a Swiss bank, which is in turn a
subsidiary of CS Holding, a Swiss corporation. No one person or entity possesses
a controlling interest in Basic, the 20% partner. BEA Associates is a registered
investment adviser.

Pacific Investment Management Company, See: Diversified Bond Fund.

Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.

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<PAGE> 216

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (206) 627-7001

MONEY MANAGERS

SPECIAL GROWTH
Delphi Management, Inc.
Fiduciary International, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc.
Sirach Capital Management, Inc.
Wellington Management Company

EQUITY INCOME
Brandywine Asset Management, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation

QUANTITATIVE EQUITY
BZW Barclays Global Fund Advisors
Franklin Portfolio Associates Trust
J.P. Morgan Investment Management, Inc.

EMERGING MARKETS
Genesis Asset Managers, Ltd.
J.P. Morgan Investment Management, Inc.
Montgomery Asset Management, L.P.

REAL ESTATE SECURITIES
Cohen & Steers Capital Management

DIVERSIFIED BOND
Lincoln Capital Management Company
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.

VOLATILITY CONSTRAINED BOND
BlackRock Financial Management
Standish, Ayer & Wood, Inc.
STW Fixed Income Management Ltd.

MULTISTRATEGY BOND
BEA Associates
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.

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<PAGE> 217

MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Co.
909 A Street
Tacoma, Washington 98402

CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402

DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 98402

INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109

LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600-One Commerce Square
Philadelphia, Pennsylvania 19103-7098

OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (206) 627-7001

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<PAGE> 218
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001

STATEMENT OF ADDITIONAL INFORMATION

July 8, 1996

Frank Russell Investment Company is a single legal entity organized as a
Massachusetts business trust. The Investment Company operates investment
portfolios referred to as "Funds." The Investment Company offers shares of
beneficial interest in the Funds in four separate Prospectuses, each dated July
8, 1996. The Funds are divided into two groupings: the External Fee Funds and
the Internal Fee Funds.

As of the date of this Statement of Additional Information, the Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the Fund's name:

<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C>
Equity I Fund External Fee Fund October 15, 1981
- --------------------------------------------------------------------------------
Equity II Fund External Fee Fund December 28, 1981
- --------------------------------------------------------------------------------
Equity III Fund External Fee Fund November 27, 1981
- --------------------------------------------------------------------------------
Equity Q Fund External Fee Fund May 29, 1987
- --------------------------------------------------------------------------------
Equity T Fund External Fee Fund May 1, 1996
- --------------------------------------------------------------------------------
International Fund External Fee Fund January 31, 1983
- --------------------------------------------------------------------------------
Emerging Markets Fund External Fee Fund January 29, 1993
- --------------------------------------------------------------------------------
Fixed Income I Fund External Fee Fund October 15, 1981
- --------------------------------------------------------------------------------
Fixed Income II Fund External Fee Fund October 30, 1981
- --------------------------------------------------------------------------------
Fixed Income III Fund External Fee Fund January 29, 1993
- --------------------------------------------------------------------------------
Money Market Fund External Fee Fund October 15, 1981
- --------------------------------------------------------------------------------
Diversified Equity Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Special Growth Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Equity Income Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Quantitative Equity Fund Internal Fee Fund May 15, 1987
- --------------------------------------------------------------------------------
International Securities Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Real Estate Securities Fund Internal Fee Fund July 28, 1989
- --------------------------------------------------------------------------------
Diversified Bond Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Volatility Constrained Bond Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Multistrategy Bond Fund Internal Fee Fund January 29, 1993
- --------------------------------------------------------------------------------
Limited Volatility Tax Free Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
U.S. Government Money Market Fund Internal Fee Fund September 5, 1985
- --------------------------------------------------------------------------------
Tax Free Money Market Fund Internal Fee Fund May 8, 1987
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 219
The eleven External Fee Funds had aggregate net assets of $5,014,728,756 on
April 30, 1996. The twelve Internal Fee Funds had aggregate net assets of
$3,881,453,381 on April 30, 1996.

The principal distinction between the External Fee Funds and the Internal Fee
Funds is that a shareholder of the External Fee Funds may enter into a separate
agreement with the Management Company to obtain certain services from, and pay a
separate quarterly individual shareholder investment services fee directly to,
the Management Company. The amount of the fee is based upon the assets subject
to the agreement and the services obtained under that agreement. A shareholder
of the Internal Fee Funds does not execute such an agreement to acquire such
services and pays no such fees. In each case, the Management Company may charge
fees to a shareholder for non-investment services provided directly to that
shareholder.

Each of the External Fee and Internal Fee Funds presently offers interests in
Class S Shares. Nine of the Internal Fee Funds--Diversified Equity, Special
Growth, Equity Income, Quantitative Equity, International Securities, Real
Estate Securities, Diversified Bond, Volatility Constrained Bond and
Multistrategy Bond--and one of the External Fee Funds--Emerging
Markets--presently offer interests in another class of shares, the Class C
Shares. This Statement of Additional Information relates to both the Class S
Shares and the Class C Shares of the Funds.

This Statement of Additional Information supplements or describes in greater
detail information concerning the Investment Company, the Funds and the classes
contained in the Prospectuses of the Funds dated July 8, 1996. Nine of the
eleven External Fee Funds are described in the Class S Shares' External Fee
Funds' Prospectus, and eight of the Internal Fee Funds are described in the
Class S Shares' Internal Fee Funds' Prospectus. Real Estate Securities, Emerging
Markets, Equity T, Limited Volatility Tax Free, U.S. Government Money Market and
Tax Free Money Market are described in the Class S Shares' Specialty Funds'
Prospectus. Finally, Diversified Equity, Special Growth, Equity Income,
Quantitative Equity, International Securities, Real Estate Securities,
Diversified Bond, Volatility Constrained Bond, Multistrategy Bond and Emerging
Markets (the "Multiple Class Funds") are described in the Class C Shares'
Prospectus.

This Statement is not a Prospectus; the Statement should be read in conjunction
with the Funds' Prospectuses. Prospectuses may be obtained without charge by
telephoning or writing the Investment Company at the number or address shown
above.

Capitalized terms not otherwise defined in this Statement shall have the
meanings assigned to them in the Prospectuses.

This Statement incorporates by reference the Investment Company's Annual Reports
to Shareholders for the year ended December 31, 1995. Copies of the Funds'
Annual Reports accompany this Statement.

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<PAGE> 220
TABLE OF CONTENTS

Page

STRUCTURE AND GOVERNANCE
Organization and Business History
Shareholder Meetings
Controlling Shareholders
Trustees and Officers

OPERATION OF THE INVESTMENT COMPANY
Service Providers
Consultant
Manager
Money Managers
Distributor
Custodian
Transfer and Dividend Disbursing Agent
Independent Accountants
Fund Expenses
Valuation of Fund Shares
Portfolio Transaction Policies
Portfolio Turnover Rate
Brokerage Allocations
Brokerage Commissions
Yield and Total Return Quotations

INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS
Investment Restrictions
Investment Policies
Certain Investments

TAXES

RATINGS OF DEBT INSTRUMENTS

FINANCIAL STATEMENTS

FINANCIAL HIGHLIGHTS

-3-
<PAGE> 221
STRUCTURE AND GOVERNANCE

Organization and Business History. The Investment Company commenced business
operations as a Maryland corporation in October, 1981 and on January 2, 1985
reorganized as a Massachusetts business trust.

The Investment Company is currently organized and operates under an amended
Master Trust Agreement dated July 26, 1984 and the provisions of Massachusetts
law governing the operation of a Massachusetts business trust. The Board of
Trustees may amend the Master Trust Agreement from time to time; provided,
however, that any amendment which would materially and adversely affect
shareholders of the Investment Company as a whole, or shareholders of a
particular Fund, must be approved by the holders of a majority of the shares of
the Investment Company or Fund, respectively.

The Investment Company is authorized to issue shares of beneficial interest, and
may divide the shares into two or more series, each of which evidences a pro
rata ownership interest in a different investment portfolio -- a "Fund." The
Trustees may, without seeking shareholder approval, create additional Funds at
any time. The amended Master Trust Agreement provides that a shareholder may be
required to redeem shares in a Fund under circumstances set forth in the Master
Trust Agreement.

The Investment Company's Funds are authorized to issue shares of beneficial
interest in one or more classes. Each of the Funds presently offers interests in
the Class S Shares, and the ten Multiple Class Funds, offer interests in another
class of shares, the Class C Shares. The Funds did not offer interests in
multiple classes of shares prior to the date of this Statement of Additional
Information. The Class C Shares and the Class S Shares are designed to meet
different investor needs. The Class C Shares are subject to a Rule 12b-1 Fee of
up to 0.75%, presently limited to .40%, and a shareholder services fee of up to
.25% and the Class S Shares are not subject to either a Rule 12b-1 Fee or a
shareholder services fee. Unless otherwise indicated, "shares" in this Statement
of Additional Information refers to the Class C Shares and the Class S Shares of
the Funds.

Under certain unlikely circumstances, as is the case with any Massachusetts
business trust, a shareholder of a Fund may be held personally liable for the
obligations of the Fund. The Master Trust Agreement provides that shareholders
shall not be subject to any personal liability for the acts or obligations of a
Fund and that every written agreement, obligation or other undertaking of the
Funds shall contain a provision to the effect that the shareholders are not
personally liable thereunder. The amended Master Trust Agreement also provides
that the Investment Company shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of a Fund and satisfy any
judgment thereon. Thus, the risk of any shareholder incurring financial loss
beyond his investment on account of shareholder liability is limited to
circumstances in which a Fund itself would be unable to meet its obligations.

Shareholder Meetings. The Investment Company will not have an annual meeting of
shareholders, but special meetings may be held. Special meetings may be convened
by (i) the Board of Trustees, (ii) upon written request to the Board by
shareholders holding at least 10% of the outstanding shares, or (iii) upon the
Board's failure to honor the shareholders' request described above, by

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<PAGE> 222
shareholders holding at least 10% of the outstanding shares by giving notice of
the special meeting to shareholders.

Controlling Shareholders. The Trustees have the authority and responsibility to
manage the business of the Investment Company, and hold office for life unless
they resign or are removed by, in substance, a vote of two-thirds of the
Investment Company shares outstanding. Under these circumstances, no one person,
entity or shareholder "controls" the Investment Company.

The following shareholders owned 5% or more of the voting shares of the
Investment Company or of the Funds at April 30, 1996:

Frank Russell Investment Company: U.S. National Bank of Oregon, Bancorp Tower
Building, 111 S.W. Fifth Avenue, Suite 1, Portland, OR 97204, 10.26%, record;
Second National Bank (Saginaw), 101 North Washington Avenue, Saginaw, MI 48607,
9.97%, record; Ronald Blue & Company, 1100 Johnson Ferry Road N.E., Suite 600,
Atlanta, GA 30342, 9.74%, record; FMB Trust, One Financial Plaza, 10717 Adams
Street, Holland, MI 49423 6.08%, record; Miller/Russell and Associates, Inc.,
2929 E. Camelback Road, Suite 223, Phoenix, AZ 85016, 5.01%, record.

Equity I: U.S. National Bank of Oregon, 36.23%, record; Ronald Blue & Company,
10.03%, record; First Fidelity Bank, N.A., 765 Broad Street, Newark, NJ 07102,
8.51%, record; National City Bank of Minneapolis, Sixth on the Mall, 651
Nicollet Mall, Minneapolis, MN 55402, 7.09%, record.

Equity II: National City Bank of Minneapolis, 15.97%, record; Ronald Blue &
Company, 13.41%, record; U.S. National Bank of Oregon, 12.05%, record; First
Fidelity Bank, N.A., 7.97%, record; Anchor/Russell Capital Advisors, Inc., One
Post Office Square, 38th Floor, Boston, MA 02109, 5.44%, record; Reber/Russell
Company, 1225 Seventeenth Street, Suite 1400, Denver, CO 80202, 5.02%, record.

Equity III: U.S. National Bank of Oregon, 21.51%, record; Firstar Bank
Sheboygan, N.A., 605 North Eight Street, Sheboygan, WI 53081, 12.22%, record;
First Fidelity Bank, N.A., 11.90%, record; National City Bank of Minneapolis,
10.16%, record; Ingham/Russell Investment Advisors, Inc., 1570 Madruga Avenue,
4th Floor, Coral Gables, FL 33146, 6.43%, record; Anchor/Russell Capital
Advisors, Inc., 5.23%, record.

Equity Q: U.S. National Bank of Oregon, 42.26%, record; Ronald Blue & Company,
12.01%, record; First Fidelity Bank, N.A., 7.94%, record; National City Bank of
Minneapolis, 7.71%, record; Anchor/Russell Capital Advisors, Inc., 5.43%,
record.

International: U.S. National Bank of Oregon, 36.68%, record; Ronald Blue &
Company, 10.81%, record; National City Bank of Minneapolis, 7.54%, record.

Emerging Markets: U.S. National Bank of Oregon, 22.95%, record; Ronald Blue &
Company, 11.07%, record; Atlantic Capital Management, LLC, 7404-B Chapel Hill
Road, Raleigh, NC 27607, 5.40%, record.

Fixed Income I: U.S. National Bank of Oregon, 19.90%, record; First Fidelity
Bank, N.A., 17.95%, record; National City Bank of Minneapolis, 17.60%, record;
Ronald Blue & Company, 9.61%, record; Anchor/Russell Capital Advisors, Inc.,
6.26%, record.

Fixed Income II: Ronald Blue & Company, 24.04%, record; U.S. National Bank of
Oregon, 10.51%, record; Anchor/Russell Capital Advisors, Inc., 10.38%, record;
First Tennessee Bank, N.A. FBO Knox County, Plaza Tower 5th Floor, 800 South Gay
Street, Knoxville TN 37995, 9.41%, record; National City Bank of Minneapolis,
8.25%, record; Boys Republic, 3493

-5-
<PAGE> 223
Grand Avenue, Chino, CA 91709, 7.78%, record; Reber/Russell Company, 1225
Seventeenth Street, Suite 1400, Denver, CO 80202, 6.62%, record; First Fidelity
Bank, N.A., 5.52%, record.

Fixed Income III: U.S. National Bank of Oregon, 39.36%, record; Ronald Blue &
Company, 19.80%, record, Miller/Russell and Associates, Inc., 5.71%, record;
Savant/Russell, Inc., 461 Second Street, Suite 151, San Francisco, CA 94107,
5.11%, record.

Diversified Equity: FMB Trust, 6.70%, record.

Special Growth: FMB Trust, 10.73%, record; Hawaiian Trust Investment Services,
130 Merchant Street, 10th Floor Tower, Honolulu, HI 96813, 7.79%, record.

Equity Income: FMB Trust, 10.32%, record; Hawaiian Trust Investment Services,
7.84%, record; Second National Bank (Saginaw), 6.71%, record.

Quantitative Equity: FMB Trust, 10.96%, record.

International Securities: FMB Trust, 6.71%, record; First Tennessee Bank N.A.
FBO Knox County, 6.32%, record; Hawaiian Trust Investment Services, 6.10%,
record.

Real Estate Securities: U.S. National Bank of Oregon, 20.00%, record; Ronald
Blue & Company, 17.43%, record.

Diversified Bond: Second National Bank (Saginaw), 14.09%, record; FMB Trust,
10.44%, record; Hawaiian Trust Investment Services, 6.60%, record; Society
Bank, Michigan, 100 South Main Street, Ann Arbor, MI 48104, 6.01%, record.

Volatility Constrained Bond: Commerce Bank, 416 Main Street 2nd Floor, Peoria,
IL 61602, 6.41%, record; CP&S/Russell, 1508 Elizabeth Avenue, Charlotte, NC
28204, 6.06%, record; First Tennessee Bank N.A. FBO Knox County, 5.03%, record.

Multistrategy Bond: Halbert, Hargrove/Russell, 111 West Ocean Boulevard, Suite
1240, Long Beach, CA 90802, 8.47%, record; Empire National Bank, 1227 East Front
Street, Traverse City, MI 49684, 6.60%, record; IFG/Russell Advisors, Inc., 1205
Westlakes Drive, Suite 365, Berwyn, PA 19312, 5.89%, record; Ronald Blue &
Company, 5.42%, record; Anchor/Russell Capital Advisors, Inc., 5.33%, record;
National Bank of Alaska, 301 West Northern Lights Boulevard, Anchorage AK
99503, 5.30%, record; Indiana Trust & Investment Management Company, 3930
Edison Lakes Parkway, Suite 250, Mishawaka, IN 46545, 5.08%, record.

Limited Volatility Tax Free: Ronald Blue & Company, 20.86%, record; Halbert,
Hargrove/Russell, 11.79%, record; Branson Fowlkes/Russell Inc., 2603 Augusta,
Suite 711, Houston, TX 77057, 9.63%, record; Zions First National Bank, One
South Main Street, Salt Lake City, UT 84111, 6.89%, record; Norwest Bank Iowa,
N.A., 666 Walnut Street, 3rd Floor, Des Moines, IA 50309, 6.26%, record.

U.S. Government Money Market: Ronald Blue & Company, 13.27%, record;
Miller/Russell and Associates, Inc., 6.35%, record; FMB Trust, 5.98%, record;
Second National Bank (Saginaw), 5.08%, record.

Tax Free Money Market: Second National Bank (Saginaw), 48.65%, record; FMB
Trust, 18.88%, record; Miller/Russell and Associates, Inc., 12.11%, record;
Branson Fowlkes/Russell, 5.16%, record.

Trustees and Officers. The Board of Trustees is responsible for overseeing
generally the operation of the Funds. The officers, all of whom are employed by
and are officers of Frank Russell

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<PAGE> 224
Investment Management Company or its affiliates, are responsible for the
day-to-day management and administration of the Funds' operations.

The Investment Company paid $98,977 for the year ended December 31, 1995 to the
Trustees as a group who are not officers or employees of the Management Company
or its affiliates. Trustees are paid an annual fee plus travel and other
expenses incurred in attending Board meetings. The Investment Company's officers
and employees are paid by Frank Russell Investment Management Company or its
affiliates.

The following lists the Trustees and officers and their positions with the
Investment Company, their ages, their present and principal occupations during
the past five years and the mailing addresses of Trustees who are not affiliated
with the Investment Company. The mailing address for all Trustees and officers
affiliated with the Investment Company is Frank Russell Investment Company, 909
A Street, Tacoma, WA 98402.

An asterisk (*) indicates that the Trustee or officer is an "interested person"
of the Investment Company as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). As used in the table, "Frank Russell Company" includes
its corporate predecessor, Frank Russell Co., Inc.

*George F. Russell, Jr.--63 years old--Trustee and Chairman of the Board.
Director and Chairman of the Board, Frank Russell Company; Director, Chief
Executive Officer and Chairman of the Board, Russell Building Management
Company, Inc., Director and Chairman of the Board, Frank Russell Securities,
Inc. and Frank Russell Trust Company, Director, Frank Russell Investment
Management Company; Director, Chairman of the Board and President of Russell
20-20 Association. March 1988 to April 1992, Director of Russell-Zisler, Inc.
(real estate consulting); January 1957 to March 1993, Chief Executive Officer of
Frank Russell Company; March 1982 to November 1995, Chairman of the Board of
Frank Russell Investment Management Company.

*Lynn L. Anderson--57 years old--Trustee, President and Chief Executive Officer.
Director, Chief Executive Officer and Chairman of the Board, Russell Fund
Distributors, Inc. Director and President, Russell Insurance Funds, Inc.;
Trustee and President, The Seven Seas Series Fund (investment company);
Director, Chief Executive Officer and Chairman of the Board, Frank Russell
Investment Management Company; Director, Chief Executive Officer and President,
Frank Russell Trust Company; Director and Chairman, Frank Russell Investment
Company Public Limited Company; Director and Chairman of the Board, Frank
Russell Company (Delaware); March 1989 to June 1993, Director, Frank Russell
Company, Director of Frank Russell Investments (Ireland) Limited; Director and
Chairman, Frank Russell Investment Company Public Limited Company. Until
September 1994, Director and President, The Laurel Funds, Inc. (investment
company).

Paul E. Anderson--64 years old--Trustee. 23 Forest Glen Lane, Tacoma, Washington
98409. President, Vancouver Door Company, Inc.

Paul Anton, Ph.D.--76 years old--Trustee. 2218 55th Street, N.W., Gig Harbor,
Washington 98335. President, Paul Anton and Associates (Marketing Consultant on
emerging international markets for small corporations). From 1986 to 1991,
Visiting Associate Professor, International Marketing School of Business
Administration and International Trade Institute, Portland State University,

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<PAGE> 225
Portland, Oregon; 1991-1994, Adjunct Professor, International Marketing,
University of Washington, Tacoma, Washington.

William E. Baxter--60 years old--Trustee. 800 North C Street, Tacoma, Washington
98403. Retired.

Lee C. Gingrich--65 years old--Trustee. 1730 North Jackson, Tacoma, Washington
98406. President, Gingrich Enterprises, Inc. (Business and Property Management).

Eleanor W. Palmer--69 years old--Trustee. 2025 Narrows View Circle, P. O. Box
1057, Gig Harbor, Washington 98335. Retired. Until August 1981, Director, Vice
President and Treasurer of Frank Russell Company; since October 1980, Director
of Frank Russell Trust Company.

*George W. Weber--44 years old--Treasurer and Chief Accounting Officer. Director
of Finance and Operations, Frank Russell Trust Company; Director, Fund
Administration and Operations of Frank Russell Investment Management Company and
Russell Fund Distributors, Inc.; Director, Treasurer and Chief Accounting
Officer of Russell Insurance Funds; Senior Vice President and Fund Treasurer of
Seven Seas Series Fund (Investment Company); March 1993 to January 1996, Vice
President, Operations, Funds Management, J.P. Morgan; December 1985 to March
1993, Senior Vice President, Operations, Frank Russell Investment Company, The
Laurel Funds, Inc. and The Seven Seas Series Fund (investment companies);
Director of Operations, Frank Russell Investment Management Company and Frank
Russell Trust Company; Director, Russell Fund Distributors, Inc.

*Randall P. Lert--42 years old--Director of Investments. Senior Investment
Officer and Director of Investment Services, Frank Russell Trust Company;
Director and Chief Investment Officer, Frank Russell Investment Management
Company; Director and Chief Investment Officer, Russell Fund Distributors, Inc.
April 1990 to November 1995, Director of Investments of Frank Russell Investment
Management Company.

*Karl J. Ege--54 years old--Secretary and General Counsel. Director, Secretary
and General Counsel of Frank Russell Company; Director and Secretary of Russell
Insurance Funds; Secretary and General Counsel of Frank Russell Investment
Management Company, Frank Russell Trust Company and Russell Fund Distributors,
Inc.; Director and Secretary of Russell Building Management Company; Director
and Assistant Secretary of Frank Russell Company Limited and Russell Systems
Ltd. Director, Frank Russell Investment Company LLC, Frank Russell Investments
(Cayman) Ltd., Frank Russell Investment Company Public Limited Company and Frank
Russell Investments (Ireland) Limited; Director and Secretary, Frank Russell
Company (Delaware) and Frank Russell International Services, Co., Inc.;
Director, Secretary and General Counsel, Russell Fiduciary Services Company and
Frank Russell Capital Inc.; Director of Frank Russell Company, S.A., Frank
Russell Japan, Frank Russell Company (N.Z.) Limited and Russell Investment
Nominee Co. PTY Ltd., Director and Secretary, Russell 20-20 Association. From
July 1992 to June 1994, Director, President and Secretary of Frank Russell Shelf
Corporation. From 1972 to 1991, Partner, Bogle and Gates (law firm).

*Peter Apanovitch--51 years old--Manager of Short-Term Investment Funds. Manager
of Short-Term Investment Funds, Frank Russell Investment Management Company and
Frank Russell Trust Company.

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<PAGE> 226
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------

TRUSTEE COMPENSATION TABLE*

- ------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From the
Trustee from the Benefits Accrued Retirement Investment Company
Investment as Part of the Paid to Trustees
Company Investment Company
Expenses
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- ------------------------------------------------------------------------------------------------
Paul E. Anderson $18,600 $0 $0 $18,600
- ------------------------------------------------------------------------------------------------
Paul Anton, PhD. $18,600 $0 $0 $18,600
- ------------------------------------------------------------------------------------------------
William E. Baxter $18,600 $0 $0 $18,600
- ------------------------------------------------------------------------------------------------
Lee C. Gingrich $18,600 $0 $0 $18,600
- ------------------------------------------------------------------------------------------------
Eleanor W. Palmer $18,600 $0 $0 $18,600
- ------------------------------------------------------------------------------------------------
George F. Russell $0 $0 $0 $0
- ------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF THE INVESTMENT COMPANY

Service Providers. Most of the Investment Company's necessary day-to-day
operations are performed by separate business organizations under contract to
the Investment Company. The principal service providers are:

Consultant Frank Russell Company
Manager, Transfer and Dividend Frank Russell Investment Management
Disbursing Agent Company
Money Managers Multiple professional discretionary
investment management organizations
Custodian and Portfolio State Street Bank and Trust Company
Accountant

Consultant. Frank Russell Company, the corporate parent of the Management
Company, was responsible for organizing the Investment Company and provides
ongoing consulting services, described in the Prospectuses, to the Investment
Company and the Management Company. Frank Russell Company provides (i) Portfolio
Verification Services ("PVS"), which are based upon a transactional verification
of securities purchases and sales, cash transactions and other investment
portfolio operations of each money manager's portfolio except money managers for
the Equity T, Money Market, Limited Volatility Tax Free, U.S. Government Money
Market and Tax Free Money Market Funds, and (ii) Analysis of International
Management Reports ("AIM") by country on each International, Emerging

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<PAGE> 227
Markets and International Securities Funds' money manager's portfolio. The
reports are paid for by the Funds and provide certain of the financial and tax
accounting information required by the Investment Company.

The Management Company does not pay Frank Russell Company an annual fee for
consulting services.

For the years ended December 31, 1995, 1994 and 1993, respectively, the Funds
accrued fees for PVS and AIM Reports from Frank Russell Company as follows:

<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
12/31/95 12/31/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Equity I $25,946 $25,182 $25,000
Equity II 20,268 21,186 17,859
Equity III 12,000 12,000 11,255
Equity Q 23,375 23,631 23,000
International 167,632 62,137 61,334
Emerging Markets* 73,250 47,431 29,062
Fixed Income I 52,174 41,500 34,725
Fixed Income II 21,739 23,372 20,160
Fixed Income III* 25,990 26,752 18,750
Diversified Equity 25,080 25,000 25,000
Special Growth 18,212 23,613 20,875
Equity Income 12,000 12,000 11,593
Quantitative Equity 23,062 23,299 23,000
International Securities 165,549 62,137 61,333
Real Estate Securities 5,231 5,000 5,000
Diversified Bond 56,280 39,173 31,274
Volatility Constrained Bond 22,829 24,982 20,098
Multistrategy Bond* 26,872 27,022 18,750
</TABLE>

- ------------
* The Emerging Markets, Fixed Income III and Multistrategy Bond
Funds commenced operations on January 29, 1993.

Equity T Fund was not offered for public investment during these periods.

Frank Russell Company provides comprehensive consulting and money manager
evaluation services to institutional clients, including the Management Company
and Frank Russell Trust Company, and to high net worth individuals and families
($100 million) through its Russell Private Investment Division. Frank Russell
Company also provides: (i) consulting services for international investment to
these and other clients through its International Division and its wholly owned
subsidiaries, Frank Russell Company London (Frank Russell

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<PAGE> 228
Company Limited), Frank Russell Canada (Frank Russell Canada Limited/Limitee),
Frank Russell Australia (Frank Russell Company Pty., Limited), Frank Russell
Japan, Frank Russell AG (Zurich), Frank Russell Company S.A. (Paris) and Frank
Russell Company (N.Z.) Limited (Auckland), and (ii) investment account and
portfolio evaluation services to corporate pension plan sponsors and
institutional money managers through its Russell Data Services Division. Frank
Russell Securities, Inc., a wholly owned subsidiary of Frank Russell Company,
carries on an institutional brokerage business as a member of the New York Stock
Exchange. Frank Russell Capital Inc., a wholly owned subsidiary of Frank Russell
Company, carries on an investment banking business as a registered
broker-dealer. Frank Russell Trust Company, a wholly-owned subsidiary of Frank
Russell Company, provides comprehensive trust and investment management services
to corporate pension and profit-sharing plans. Frank Russell Investments
(Cayman) Ltd., a wholly owned subsidiary of Frank Russell Company, provides
investment advice and other services. Frank Russell Investment (Ireland) Ltd., a
wholly owned subsidiary of Frank Russell Company, provides investment advice and
other services. Frank Russell International Services Co., Inc., a wholly owned
subsidiary of Frank Russell Company, provides services to U.S. personnel
secunded to overseas enterprises. Russell Fiduciary Services Company, a wholly
owned subsidiary of Frank Russell Company, provides fiduciary services to
pension and welfare benefit plans and other institutional investors. The mailing
address of Frank Russell Company is 909 A Street, Tacoma, WA 98402.

Manager. Frank Russell Investment Management Company provides or oversees the
provision of all general management and administration, investment advisory and
portfolio management, and distribution services for the Funds. The Management
Company provides the Funds with office space, equipment and the personnel
necessary to operate and administer the Funds' business and to supervise the
provision of services by third parties such as the money managers and custodian.
The Management Company also develops the investment programs for each of the
Funds, selects money managers for the Funds (subject to approval by the Board of
Trustees), allocates assets among money managers, monitors the money managers'
investment programs and results, and may exercise investment discretion over
assets invested in the Funds' Liquidity Portfolios. (See, "Investment Policies
- -- Liquidity Portfolios.") The Management Company also acts as the Investment
Company's transfer agent, dividend disbursing agent and as the money manager for
the Money Market and U.S. Government Money Market Funds. The Management Company,
as agent for the Investment Company, pays the money managers' fees for the
Funds, as a fiduciary for the Funds.

Prior to April 1, 1995, the External Fee Funds paid no management fee to the
Management Company. Each shareholder entered into a written Asset Management
Services Agreement with the Management Company and agreed to pay annual fees,
billed quarterly on a pro rata basis and calculated as a specified percentage of
the average assets which the shareholder had invested at each month end in any
of the Funds. Beginning April 1, 1995, the Investment Company's Management
Agreement was amended to provide that each External

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<PAGE> 229
Fee Fund will pay an annual management fee directly to the Management Company,
billed monthly on a pro rata basis and calculated as a specified percentage of
the average daily net assets of each of the External Fee Funds. (See the Class S
Shares' External Fee Funds' Prospectus, the Class S Shares' Specialty Funds'
Prospectus and the Class C Shares' Prospectus for the External Fee Funds' annual
percentage rates.) A shareholder of the External Fee Funds would continue to
enter into a written Asset Management Services Agreement with the Management
Company to obtain separately individual shareholder services, and therefore
would pay fees under such agreement based on a specified percentage of average
assets which are subject to the agreement concerning the Management Company's
provision of individual shareholder investment services with respect to that
shareholder.

Each of the Funds pays an annual management fee directly to the Management
Company, billed monthly on a pro rata basis and calculated as a specified
percentage of the average daily net assets of each of the Funds. (See the Funds'
Prospectuses for the Funds' annual percentage rates.)

The following Internal Fee Funds paid the Management Company the listed
management fees for the years ended December 31, 1995, 1994 and 1993:

<TABLE>
<CAPTION>
Years Ended
----------------------------------------
12/31/95 12/31/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Diversified Equity $3,842,471 $3,156,276 $2,859,190
Special Growth 2,588,270 2,028,150 1,544,101
Equity Income 1,314,461 1,196,187 1,204,256
Quantitative Equity 3,469,134 2,712,324 2,209,895
International Securities 5,723,534 5,096,797 3,376,561
Real Estate Securities 2,065,552 1,541,758 968,541
Diversified Bond 2,308,823 2,263,561 2,063,142
Volatility Constrained Bond 985,215 1,094,128 1,232,493
Multistrategy Bond* 1,217,039 945,756 275,047
Limited Volatility Tax Free 294,007 290,090 212,524
U.S. Government Money Market 338,745 207,926 256,180
Tax Free Money Market 214,949 228,123 157,066
</TABLE>

- ------------
* Multistrategy Bond Fund commenced operations on January 29, 1993.

Equity T Fund was not offered for public investment during this period.

For the period from April 1, 1995 through December 31, 1995, the External Fee
Funds paid the Management Company the following management fees:

<TABLE>
<S> <C>
Equity I $3,021,465
Equity II 1,456,132
Equity III 945,888
Equity Q 2,434,051
International 4,112,338
Emerging Markets 1,380,549
</TABLE>

-12-
<PAGE> 230
<TABLE>
<S> <C>
Fixed Income I 1,330,021
Fixed Income II 626,548
Fixed Income III 892,253
Money Market 980,668
</TABLE>

Equity T Fund was not offered for public investment during this period.

During 1993, the Management Company reimbursed the Emerging Markets, Fixed
Income III and Multistrategy Bond Funds for all expenses exceeding 0.80%, 0.20%
and 0.85%, respectively, on an annualized basis of average net assets. In 1994,
reimbursements for the Emerging Markets and Multistrategy Bond Funds were
$13,539 and $66,525, respectively. As a result of the reimbursement, management
fees paid by the Multistrategy Bond Fund amounted to $879,231. The amounts
reimbursed for the Emerging Markets, Fixed Income III and Multistrategy Bond
Funds in 1993 were $187,755, $103,620, and $148,504, respectively. As a result
of the reimbursement, management fees paid by the Multistrategy Bond Fund
amounted to $126,543.

Through March 31, 1995, the Management Company reimbursed the Emerging Markets,
Fixed Income III and Multistrategy Bond Funds for all expenses exceeding 0.80%,
0.20% and 0.85% of average daily net assets on an annual basis, respectively.
Effective April, 1995, the Management Company reimbursed the Emerging Markets,
Fixed Income III and Multistrategy Bond Funds for all expenses exceeding 2.00%,
0.75% and 0.85% of average daily net assets on an annual basis, respectively. In
1995, reimbursements for the Emerging Markets and Multistrategy Bond Funds were
$37,115 and $83,382, respectively. No reimbursement was necessary for the Fixed
Income III Fund. As a result of the reimbursements, management fees paid by the
Emerging Markets and Multistrategy Bond Funds amounted to $1,343,434 and
$1,187,657, respectively. Additionally, the Management Company waived fees of
$261,988 and $980,668 for the U.S. Government Money Market and Money Market
Funds, respectively. As a result of the waivers, management fees paid by the
U.S. Government Money Market and Money Market Funds amounted to $76,757 and $0,
respectively.

The Management Company is a wholly owned subsidiary of Frank Russell Company.
The Management Company's mailing address is 909 A Street, Tacoma, WA 98402.

Money Managers. Except with respect to the Money Market and U.S. Government
Money Market Funds, the money managers have no affiliations or relationships
with the Investment Company or the Management Company other than as
discretionary managers for all or a portion of a Fund's portfolio, except some
money managers (and their affiliates) may effect brokerage transactions for the
Funds (see, "Brokerage Allocations" and "Brokerage Commissions"). Money managers
may serve as advisers or discretionary managers for Frank Russell Trust Company,
other consulting clients of Frank Russell Company, other off-shore vehicles
and/or for accounts which have no business relationship with the Frank Russell
Company organization.

-13-
<PAGE> 231
$1,572,199; Equity II $999,551; Equity III $399,940; Fixed Income I $487,575;
Fixed Income II $305,646; Fixed Income III $456,590; International $3,143,259;
Equity Q $1,075,446; Emerging Markets $990,905; Diversified Equity $1,209,215;
Special Growth $1,111,417; Equity Income $326,253; Diversified Bond $448,354;
Volatility Constrained Bond $372,467; International Securities $2,668,349;
Multistrategy Bond $436,464; Quantitative Equity $931,171; Real Estate
Securities $776,312; Limited Volatility Tax Free $146,084 and Tax Free
Money Market $84,857. The Equity T Fund had not commenced operations during the
period. Fees paid to the money managers are not affected by any voluntary or
statutory expense limitations. Some money managers may receive investment
research prepared by Frank Russell Company as additional compensation, or may
receive brokerage commissions for executing portfolio transactions for the Funds
through broker-dealer affiliates.

Distributor. Russell Fund Distributors, Inc. serves as the distributor of the
Investment Company shares. The distributor receives no compensation from the
Investment Company for its services. The distributor is a wholly owned
subsidiary of the Management Company and its mailing address is 909 A Street,
Tacoma, WA 98402.

Custodian. State Street Bank and Trust Company ("State Street") serves as the
custodian for the Investment Company. State Street also provides the basic
portfolio recordkeeping required by each of the Funds for regulatory and
financial reporting purposes. State Street is paid an annual fee of $16,800 per
portfolio per fund, except for Emerging Markets, which is subject to an annual
fee of $18,000, plus specified transaction costs per portfolio per Fund for
these portfolio recordkeeping services.

Transfer and Dividend Disbursing Agent. The Management Company serves as
Transfer Agent for the Investment Company. For this service, the Management
Company is paid a fee of $20.00 per shareholder transaction by all Funds except
Money Market, U.S. Government Money Market and Tax Free Money Market Funds. The
Money Market, U.S. Government Money Market and Tax Free Money Market Funds pay
$15.00 per shareholder transaction. The Management Company is also reimbursed by
the Investment Company for certain out-of-pocket expenses including postage,
taxes, wires, stationery and telephone.

Independent Accountants. Coopers & Lybrand L.L.P. serves as the independent
accountants of the Investment Company. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards and a review
of federal tax returns. The mailing address of Coopers & Lybrand L.L.P. is One
Post Office Square, Boston, MA 02109.

Plan Pursuant to Rule 18f-3. On February 23, 1995, the Securities and Exchange
Commission (the "SEC") adopted Rule 18f-3 under the 1940 Act, which permits a
registered open-end investment company whose shares are registered on Form N-1A
to issue multiple classes of shares in accordance with a written plan approved
by the investment company's board of directors/trustees and filed with the SEC.
At a meeting held on April 22, 1996, the Investment Company's Board of Trustees
(the "Trustees") adopted a Plan Pursuant to Rule 18f-3 (the "Rule 18f-3 plan")
on behalf of each Multiple Class Fund. The key features of the Rule 18f-3 plan
are as follows: shares of each class of a Multiple Class Fund represent an
equal pro rata interest in the underlying assets of that Fund, and generally
have identical voting, dividend, liquidation, and other rights, preferences,
powers, restrictions, limitations, qualifications and terms and conditions,
except that: (a) each class of shares offered in connection with a Rule 12b-1
plan would bear certain fees under its respective plan and would have exclusive
voting rights on matters pertaining to that plan and any related agreements;
(2) each class of shares may contain a conversion feature; (3) each class of
shares may bear differing amounts of certain class expenses; (4) different
policies may be established with respect to the payment of distributions on the
classes of shares of a Multiple Class Fund to equalize the net asset values of
the classes or, in the absence of such policies, the net asset value per share
of the different classes may differ at certain times; (5) each class of shares
of a Multiple Class Fund might have different exchange privileges from
another class; (6) each class of shares of a Multiple Class Fund would have a
different class designation from another class of that Fund; and (7) each class
of Shares offered in connection with a shareholder servicing plan would
bear certain fees under its respective plan.

Distribution Plan. Under the 1940 Act, the SEC has adopted Rule 12b-1 (the
"Rule"), which regulates the circumstances under which the Funds may, directly
or indirectly, bear distribution expenses. The Rule provides that the Funds may
pay for such expenses only pursuant to a plan adopted in accordance with the
Rule. Accordingly, the Diversified Equity, Special Growth, Equity Income,
Quantitative Equity, International Securities, Emerging Markets, Real Estate
Securities, Diversified Bond, Volatility Constrained Bond, and Multistrategy
Bond Funds (the "Multiple Class Funds") have adopted a distribution plan (the
"Distribution Plan") for the Multiple Class Funds' Class C shares, which are
described in the respective Funds' Prospectus. In adopting the Distribution
Plan, a majority of the Trustees, including a majority of the Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Investment
Company and who have no direct or indirect financial interest in the operation
of the Distribution Plan or in any agreements entered into in connecton with
the Distribution Plan (the "Disinterested Trustees"), have concluded in
conformity with the requirements of the 1940 Act that there is a reasonable
likelihood that the Distribution Plan will benefit each respective Multiple
Class Fund and its shareholders. In connection with the Trustees'
consideration of whether to adopt the Plan, the Multiple Class Fund's
principal underwriter (the "Distributor") represented to the Trustees that the
Distributor believes that the Plan should result in increased sales and asset
retention for the Multiple Class Funds by enabling the Multiple Class Funds to
reach and retain more investors and financial intermediaries (like brokers,
banks, financial planners, investment advisors and other financial
institutions), although it is impossible to know for certain, in the absence
of a Distribution Plan or under an alternative distribution arrangement, the
level of sales and asset retention that a Multiple Class Fund would have.

The Distribution Plan provides that each Multiple Class Fund may spend
annually, directly or indirectly, up to 0.75% of the average daily net asset
value of its Class C Shares for any activities or expenses primarily intended
to result in the sale of Class C Shares of a Multiple Class Fund. Such
payments by the Company will be calculated daily and paid periodically and
shall not be made less frequently than quarterly. The Board of Trustees has
presently determined to limit payment under the Distribution Plan to 0.40% of
average daily net assets. Any amendment to increase materially the costs that a
Multiple Class Fund's Shares may bear for distribution pursuant to the
Distribution Plan shall be effective upon a vote of the holders of the lesser
of (a) more than fifty percent (50%) of the outstanding Shares of a Multiple
Class Fund or (b) sixty-seven percent (67%) or more of the Shares of a Multiple
Class Fund present at a shareholders' meeting, if the holders of more than 50%
of the outstanding Shares of such Fund are present or represented by proxy. The
Distribution Plan does not provide for the Multiple Class Funds to be charged
for interest, carrying or any other financing charges on any distribution
expenses carried forward to subsequent years. A quarterly report of the amounts
expended under the Distribution Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Distribution Plan may not be amended without approval of the holders of the
Class C Shares. The Distribution Plan and material amendments to it must be
approved annually by all of the Trustees and by the disinterested Trustees.
While the Distribution Plan is in effect, the selection and nomination of the
Disinterested Trustees shall be committed to the discretion of such
Disinterested Trustees. The Distribution Plan is terminable, as to a Multiple
Class Fund's Shares, without penalty at any time by (a) a vote of a majority of
the Disinterested Trustees, or (b) a vote of the holders of the lesser of (a)
more than fifty percent (50%) of the outstanding Shares of a Multiple Class
Fund or (b) sixty-seven percent (67%) or more of the Shares of a Multiple Class
Fund present at a shareholders' meeting, if the holders of more than 50% of the
outstanding Shares of such Fund are present or represented by proxy.

Under the Distribution Plan, the Multiple Class Funds may also enter into
agreements ("Selling Agent Agreements") with financial intermediaries and with
the Investment Company's Distributor ("Selling Agents"), to provide shareholder
servicing with respect to Multiple Class Fund shares held by or for the
customers of the financial intermediaries. Such arrangements are more fully
described in the Multiple Class Funds' Prospectus under "Distribution and
Shareholder Service Plans."

Shareholder Services Plan. A majority of the Trustees, including a majority of
the Trustees who are not "interested persons" (as defined in the 1940 Act) of
the Company and who have no direct or indirect financial interest in the
operation of the Service Plan (as defined below) or in any agreements entered
into in connection with the Service Plan (the "Independent Trustees"), has also
adopted, on behalf of each Multiple Class Fund a Shareholder Services Plan
pertaining to such Funds' Class C shares (the "Service Plan"), effective April
22, 1996.
Under the Service Plan, the Investment Company may compensate the Distributor or
any investment advisers, banks, broker-dealers, financial planners or other
financial institutions that are dealers of records or holders of record or that
have a servicing relationship with the beneficial owners or record holders of
Shares of any of the Investment Company's Multiple Class Funds offering such
Shares ("Servicing Agents"), for any activities or expenses primarily intended
to assist, support or service their clients who beneficially own or are
primarily intended to assist, support or service their clients who beneficially
own or are record holders of Shares of the Investment Company's Multiple Class
Funds. Such payments by the Investment Company will be calculated daily and paid
quarterly at a rate or rates set from time to time by the Trustees, provided
that no rate set by the Trustees for Shares of any Multiple Class Fund may
exceed, on an annual basis, .25% of the average daily net asset value of that
Fund's Shares.

Among other things, the Service Plan provides that (1) the Distributor shall
provide to the Investment Company's officers and Trustees, and the Trustees
shall review at least quarterly, a written report of the amounts expended by it
pursuant to the Service Plan, or by Servicing Agents pursuant to Service
Agreements, and the purposes for which such expenditures were made; (2) the
Service Plan shall continue in effect for so long as its continuance is
specifically approved at least annually by the Trustees, and any material
amendment thereto is approved, by a majority of the Trustees, including a
majority of the Independent Trustees, cast in person at a meeting called for
that purpose; (3) while the Service Plan is in effect, the selection and
nomination of the Independent Trustees shall be committed to the discretion of
such Independent Trustees; and (4) the Service Plan is terminable, as to a
Multiple Class Fund's Shares, by a vote of a majority of the Independent
Trustees.

Fund Expenses. The Funds will pay all their expenses other than those expressly
assumed by the Management Company. The principal expense of the Funds is the
annual management fee payable to the Management Company. The Funds' other
expenses include: fees for independent accountants, legal, transfer agent,
registrar, custodian, dividend disbursement, and portfolio and shareholder
recordkeeping services, fees for PVS and AIM Reports, and maintenance of tax
records payable to Frank Russell Company (except for

-14-
<PAGE> 232
Money Market, Limited Volatility Tax Free, U.S. Government Money Market, Equity
T and Tax Free Money Market Funds); state taxes; brokerage fees and commissions;
insurance premiums; association membership dues; fees for filing of reports and
registering shares with regulatory bodies; and such extraordinary expenses as
may arise, such as federal taxes and expenses incurred in connection with
litigation proceedings and claims and the legal obligations of the Investment
Company to indemnify its Trustees, officers, employees, shareholders,
distributors and agents with respect thereto.

Whenever an expense can be attributed to a particular Fund, the expense is
charged to that Fund. Other common expenses are allocated among the Funds based
primarily upon their relative net assets.

As of the date of this Statement of Additional Information, the Management
Company has voluntarily agreed to waive all or a portion of its management fee
with respect to certain Funds. These limits may be changed or rescinded at any
time. (See, the Investment Company's four Prospectuses, for the expense
guarantees.) In addition to these "voluntary limits," if the expenses of any
Fund exceed the expense limitations established by the State of California, the
Management Company will pay the excess amount. California's expense limitation
is 2.5% of a Fund's first $30 million of average net assets, 2.0% of the next
$70 million of average net assets, and 1.5% of the remaining average net assets
for any year.

Valuation of Fund Shares. The net asset value per share is calculated for each
Fund Class on each business day on which shares are offered or orders to
redeem are tendered. A business day is one on which the New York Stock Exchange
is open for trading, and for the Money Market, U.S. Government Money Market,
and Tax Free Money Market Funds, any day on which both the New York Stock
Exchange is open for trading and the Boston Federal Reserve Bank is open for
business. Currently, the New York Stock Exchange is open for trading every
weekday except New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Boston
Federal Reserve Bank is open for business Good Friday and every day the
New York Stock Exchange is open, except Martin Luther King Day, Columbus Day
and Veterans Day.

The International, Emerging Markets, International Securities, Fixed Income I,
Diversified Bond, Fixed Income III and Multistrategy Bond Funds' portfolio
securities actively trade on foreign exchanges which may trade on Saturdays and
on days that the Funds do not offer or redeem shares. The trading of portfolio
securities on foreign exchanges on such days may significantly increase or
decrease the net asset value of Fund shares when the shareholder is not able to
purchase or redeem Fund shares. Further, because foreign securities markets may
close prior to the time the Funds determine net asset value, events affecting
the value of the portfolio securities occurring between the time prices are
determined and the time the Funds calculate net asset value may not be reflected
in the calculation of net asset value unless the Management Company determines
that a particular event would materially affect the net asset value.

Portfolio Transaction Policies. Generally, securities are purchased for Equity
I, Equity III, Equity Q, International, Emerging Markets, Fixed Income I,
Diversified Equity, Equity

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<PAGE> 233
Income, Quantitative Equity, International Securities, Real Estate Securities
and Diversified Bond Funds for investment income and/or capital appreciation and
not for short-term trading profits. However, these Funds may dispose of
securities without regard to the time they have been held when such action, for
defensive or other purposes, appears advisable to their money managers. Equity
II, Fixed Income II, Fixed Income III, Special Growth, Volatility Constrained
Bond, Multistrategy Bond and Limited Volatility Tax Free Funds trade more
actively to realize gains and/or to increase yields on investments by trading to
take advantage of short-term market variations. This policy is expected to
result in higher portfolio turnover for these Funds. Conversely, Equity T Fund,
which seeks to minimize the impact of taxes on its shareholders, attempts to
limit short-term capital gains and to minimize the realization of net long-term
capital gains. These policies are expected to result in a low portfolio turnover
rate for the Equity T Fund.

The portfolio turnover rates for certain Funds are likely to be somewhat higher
than the rates for comparable mutual funds with a single money manager.
Decisions to buy and sell securities for each Fund are made by a money manager
independently from other money managers. Thus, one money manager could be
selling a security when another money manager for the same Fund is purchasing
the same security thereby increasing the Fund's portfolio turnover ratios and
brokerage commissions. The Funds' changes of money managers may also result in a
significant number of portfolio sales and purchases as the new money manager
restructures the former money manager's portfolio. In view of Equity T Fund's
investment objective and policies, the Fund's ability to change money managers
may be constrained.

The Funds, except the Limited Volatility Tax Free and Equity T Funds, do not
give significant weight to attempting to realize long-term, rather than
short-term, capital gains when making portfolio management decisions.

Portfolio Turnover Rate. The portfolio turnover rate for each Fund is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
particular year, by the monthly average value of the portfolio securities owned
by the Fund during the year. For purposes of determining the rate, all
short-term securities, including options, futures, forward contracts, and
repurchase agreements, are excluded.

The portfolio turnover rates for the last two years for each Fund (other than
the Money Market, U.S. Government Money Market and Tax Free Money Market Funds)
were:

<TABLE>
<CAPTION>
YEARS ENDED
--------------------
12/31/95 12/31/94
-------- --------
<S> <C> <C>
Equity I 92% 75%
Equity II 89 58
Equity III 103 86
Equity Q 74 46
International 37 71
Emerging Markets 71 57
</TABLE>

-16-
<PAGE> 234
<TABLE>
<CAPTION>
YEARS ENDED
--------------------
12/31/95 12/31/94
-------- --------
<S> <C> <C>
Fixed Income I 138 174
Fixed Income II 269 234
Fixed Income III 141 134
Diversified Equity 93 58
Special Growth 88 55
Equity Income 92 90
Quantitative Equity 79 46
International Securities 43 72
Real Estate Securities 23 46
Diversified Bond 136 153
Volatility Constrained Bond 257 183
Multistrategy Bond 142 136
Limited Volatility Tax Free 74 72
</TABLE>

The Equity T Fund was not offered for public investment during these
periods. The anticipated annual portfolio turnover rate for the Equity T Fund is
expected to be 20%.

Brokerage Allocations. Transactions on US stock exchanges involve the payment of
negotiated brokerage commissions; on non-US exchanges, commissions are generally
fixed. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, including most debt securities and money market
instruments, but the price includes an undisclosed payment in the form of a
mark-up or mark-down. The cost of securities purchased from underwriters
includes an underwriting commission or concession.

Subject to the arrangements and provisions described below, the selection of a
broker or dealer to execute portfolio transactions is usually made by the money
manager. The Investment Company's Agreements with the Management Company and the
money managers provide, in substance and subject to specific directions from
officers of the Investment Company or the Management Company, that in executing
portfolio transactions and selecting brokers or dealers, the principal objective
is to seek the best overall terms available to the Fund. Securities will
ordinarily be purchased in the primary markets, and the money manager shall
consider all factors it deems relevant in assessing the best overall terms
available for any transaction, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any (for the specific transaction and on a continuing basis).

In addition, the Agreements authorize the Management Company and money manager,
respectively, in selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms available, to consider the
"brokerage and research services" (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934)

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<PAGE> 235
provided to the Fund, the Management Company and/or to the money manager (or
their affiliates). The Management Company and the money managers are authorized
to cause the Funds to pay a commission to a broker or dealer who provides such
brokerage and research services for executing a portfolio transaction which is
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction. The Management Company or the money
manager, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided -- viewed in terms of that particular transaction or in terms of all
the accounts over which the Management Company or the money manager exercises
investment discretion. Any commission, fee or other remuneration paid to an
affiliated broker-dealer is paid in compliance with the Investment Company's
procedures adopted in accordance with Rule 17e-1 of the 1940 Act.

The Management Company does not expect the Investment Company ordinarily to
effect a significant portion of the Investment Company's total brokerage
business with broker-dealers affiliated with its money managers. However, a
money manager may effect portfolio transactions for the segment of a Fund's
portfolio assigned to the money manager with a broker-dealer affiliated with the
manager, as well as with brokers affiliated with other money managers.

The Investment Company effects portfolio transactions with or through Frank
Russell Securities, Inc., only when it has been determined by the applicable
money managers that the Investment Company will receive competitive execution,
price and commission. Frank Russell Securities, Inc. refunds up to 70% of the
commissions paid to the Funds effecting such transactions, after reimbursement
for research services provided to the Management Company. As to brokerage
transactions effected by money managers on behalf of the Funds through Frank
Russell Securities, Inc. at the request of the Manager, research services
obtained from third party service providers at market rates are provided to the
Funds by Frank Russell Securities, Inc. Such research services include
performance measurement statistics, fund analytics systems and market monitoring
systems. As to other brokerage transactions effected by the Funds through Frank
Russell Securities, research services provided by Frank Russell Company and
Russell Data Services are provided to the money managers. Such services include
market performance indices, investment adviser performance information and
market analysis. This arrangement is used by Equity I, Equity II, Equity III,
Equity Q, International, Emerging Markets, Diversified Equity, Special Growth,
Equity Income, Quantitative Equity, International Securities and Real Estate
Securities Funds.

Brokerage Commissions. The Board of Trustees reviews, at least annually, the
commissions paid by the Funds to evaluate whether the commissions paid over
representative periods of time were reasonable in relation to commissions being
charged by other brokers and the benefits to the Funds. Frank Russell Company
maintains an extensive data base showing commissions paid by institutional
investors, which is the primary basis for making this evaluation. Certain
services received by the Management Company or money managers attributable to a
particular transaction may benefit one or more other accounts for which
investment discretion is exercised by the money manager, or a Fund

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<PAGE> 236
other than that for which the particular portfolio transaction was effected. The
fees of the money managers are not reduced by reason of their receipt of such
brokerage and research services.

During the last three years, the brokerage commissions paid by the Funds were:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Equity I $1,492,270 $1,102,030 $1,197,566
Equity II 452,355 327,972 301,635
Equity III 470,068 482,877 360,540
Equity Q 663,851 351,400 314,482
International 1,467,692 2,130,525 1,394,963
Emerging Markets* 1,039,478 635,093 310,566
Diversified Equity 1,118,548 807,894 943,992
Special Growth 467,162 382,307 382,457
Equity Income 413,220 388,380 318,701
Quantitative Equity 561,459 284,366 294,689
International
Securities 1,251,533 1,896,734 1,096,271
Real Estate Securities 419,508 627,282 454,990
========== ========== ==========
Total $9,817,144 $9,416,860 $7,370,852
========== ========== ==========
</TABLE>

* The Emerging Markets Fund commenced operations on January 29, 1993.
Equity T was not offered for public investment during these periods.

The principal reasons for changes in several Funds' brokerage commissions for
the three years were (1) changes in Fund asset size, (2) changes in market
conditions, and (3) changes in money managers of certain Funds, which required
substantial portfolio restructurings, resulting in increased securities
transactions and brokerage commissions.

Fixed Income I, Fixed Income II, Fixed Income III, Diversified Bond, Volatility
Constrained Bond, Multistrategy Bond, Limited Volatility Tax Free, Money Market,
U.S. Government Money Market and Tax Free Money Market Funds normally do not pay
a stated brokerage commission on transactions.

During the year ended December 31, 1995, approximately $917,000 of the brokerage
commissions of the Funds were directed to brokers who provided research services
to the Management Company. The research services included industry and company
analysis, portfolio strategy reports, economic analysis, and statistical data
pertaining to the capital markets.

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<PAGE> 237
Gross brokerage commissions received by affiliated broker/dealers from
affiliated and non-affiliated money managers for the year ended December 31,
1995 from portfolio transactions effected for the Funds were as follows:

<TABLE>
<CAPTION>
Percent of Total
Affiliated Broker/Dealer Commissions Commissions
- --------------------------------------------------------------------------------
<S> <C> <C>
Autranet, Inc. $ 8,488 0.09%
Baring London 7,257 0.07
Baring Securities 5,794 0.06
Donaldson, Lufkin & Jenrette 132,734 1.35
Frank Russell Securities 684,903 6.97
Fleming Martin 1,030 0.01
Jardine-Fleming Securities 43,729 0.45
J.P. Morgan Securities, Inc. 39,161 0.40
Morgan Guaranty Trust 518 0.01
Ord Minnett, Inc. 45,018 0.46
Paine Webber, Inc. 27,806 0.28
-------- -----
Total Affiliate Commissions $996,438 10.15%
-------- -----
</TABLE>

The percentage of total affiliated transactions (relating to trading activity)
to total transactions during fiscal 1995 for the Funds was 10.11%.

During the year ended December 31, 1995, the Funds purchased securities issued
by the following regular brokers or dealers as defined by Rule 10b-1 of the 1940
Act, each of which is one of the Funds' ten largest brokers or dealers by dollar
amounts of securities executed or commissions received on behalf of the Funds.
The value of broker-dealer securities held as of December 31, 1995, was as
follows: [SEE TABLE 1]

Yield and Total Return Quotations. The Funds compute their average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission (the "SEC"), and report average annual total return for
each class of shares which they offer. Because the Class C Shares are subject to
a 12b-1 Fee and a shareholder services fee, the average annual total return
performance of the Class C Shares may be different than the average annual total
return performance of the Class S Shares.

Average annual total return is computed by finding the average annual compounded
rates of return on a hypothetical initial investment of $1,000 over the one,
five and ten year periods (or life of the Funds, as appropriate), that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:

(n)
P(1+T) = ERV

Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
N = number of years; and

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<PAGE> 238
TABLE 1

HOLDINGS OF TOP 10 BROKER-DEALERS AT 12/31/95

<TABLE>
<CAPTION>
Daiwa Goldman Merrill Morgan Paine Salomon
FUND Bear Stearns Securities Sachs & Co. Lynch Stanley Webber Brothers
- --------------------------- ------------ ---------- ----------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity I $0 $0 $0 $3,080,000 $742,000 $0 $0
Equity III $0 $0 $0 $0 $0 $388,000 $0
Equity Q $2,691,000 $0 $0 $551,000 $1,443,000 $78,000 $1,708,000
International $0 $4,178,000 $0 $0 $0 $0 $0
Fixed Income I $797,000 $0 $1,991,000 $998,000 $0 $0 $5,421,000
Fixed Income II $1,311,000 $0 $1,865,000 $1,346,000 $457,000 $0 $1,547,000
Fixed Income III $0 $0 $1,062,000 $792,000 $0 $733,000 $2,700,000
Money Market Fund $0 $0 $20,000,000 $26,967,000 $0 $0 $0
Diversified Equity $0 $0 $0 $2,162,000 $452,000 $0 $0
Equity Income $0 $0 $0 $0 $0 $314,000 $0
Quantitative Equity $2,323,000 $0 $0 $474,000 $887,000 $52,000 $1,360,000
International Securities $0 $3,229,000 $0 $0 $0 $0 $0
Diversified Bond $771,000 $0 $1,587,000 $0 $45,000 $0 $1,434,000
Volatility Constrained Bond $1,028,000 $0 $2,514,000 $2,277,000 $0 $0 $2,735,000
Multistrategy Bond $0 $0 $704,000 $0 $0 $733,000 $2,329,000
</TABLE>

At 12/31/95, the Funds did not have any holdings in the following top 10
broker-dealers:

- -Frank Russell Securities
- -Investment Technology Group
- -Instinet Corp.
<PAGE> 239
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
the one, five or ten year period at the
end of the one, five or ten year period
(or fractional portion thereof).

The calculation assumes that all dividends and distributions of each Fund are
reinvested at the price stated in the Prospectuses on the dividend dates during
the period, and includes all recurring fees that are charged to all shareholder
accounts. The average annual total returns for the Class S Shares and the Class
C Shares are reported in the respective Prospectuses.

Yields are computed by using standardized methods of calculation required by the
SEC. Similar to average annual total return calculations, a Fund calculates
yields for each class of shares which it offers. Yields for Funds other than
Funds investing primarily in money market instruments (the "Money Market Funds")
are calculated by dividing the net investment income per share earned during a
30-day (or one month) period by the maximum offering price per share on the last
day of the period, according to the following formula:

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

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

The yields for the Funds investing primarily in fixed income instruments are
reported in the Prospectuses.

Each Money Market Fund computes its current annualized and compound effective
annualized yields using standardized methods required by the SEC. The annualized
yield for each Money Market Fund is computed by (a) determining the net change
in the value of a hypothetical account having a balance of one share at the
beginning of a seven calendar day period; (b) dividing the net change by the
value of the account at the beginning of the period to obtain the base period
return; and (c) annualizing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared on both the original
share and such additional shares, but does not include realized gains and losses
or unrealized appreciation and depreciation. Compound effective yields are
computed by adding 1 to the base period return (calculated as described above),
raising that sum to a power equal to 365/7 and subtracting 1.

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<PAGE> 240
Yield may fluctuate daily and does not provide a basis for determining future
yields. Because each Money Market Fund's yield fluctuates, its yield cannot be
compared with yields on savings accounts or other investment alternatives that
provide an agreed-to or guaranteed fixed yield for a stated period of time.
However, yield information may be useful to an investor considering temporary
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to each fund's investment
policies, including the types of investments made, length of maturities of
portfolio securities, the methods used by each fund to compute the yield
(methods may differ) and whether there are any special account charges which may
reduce effective yield.

Current and effective yields for the Class S Shares of the Money Market Funds
are reported in the Funds' Prospectuses.

Each Fund may, from time to time, advertise non-standard performances, including
average annual total return.

Each Fund may compare its performance with various industry standards of
performance, including Lipper Analytical Services, Inc. or other industry
publications, business periodicals, rating services and market indices.

Tax-equivalent yields for the Limited Volatility Tax Free and Tax Free Money
Market Funds are calculated by dividing that portion of the yield of the
appropriate Fund as computed above which is tax exempt by one, minus a stated
income tax rate and adding the product to that quotient, if any, of the yield of
the Fund that is not tax exempt. The tax-equivalent yields for the Limited
Volatility Tax Free and Tax Free Money Market Funds are reported in the Class S
Shares' Specialty Funds' Prospectus.

INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS

Each Fund has certain fundamental investment objectives, restrictions and
policies which may be changed only with the approval of a majority of the
shareholders of that Fund. Other policies may be changed by a Fund without
shareholder approval. The Funds' investment objectives are set forth in the
Prospectuses.

Investment Restrictions. Each Fund is subject to the following fundamental
investment restrictions. Unless otherwise noted, these restrictions apply on a
Fund-by-Fund basis at the time an investment is being made. No

Fund will:

1. Invest in any security if, as a result of such investment, less
than 75% of its total assets would be represented by cash; cash items;
securities of the US government, its agencies, or instrumentalities;
securities of other investment companies; and other securities limited
in respect of each issuer to an amount not greater in value than 5% of
the total assets of such Fund. Investments by Funds, other than the Tax
Free Money Market and U.S. Government Money Market Funds, in shares of
the Money

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<PAGE> 241
Market Fund are not subject to this restriction, or to Investment
Restrictions 2, 3, 10 and 14. (See, "Investment Policies -- Cash
Reserves.")

2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other
than the US government, its agencies and instrumentalities), but such
concentration may occur incidentally as a result of changes in the
market value of portfolio securities. This restriction does not apply to
the Real Estate Securities Fund. The Real Estate Securities Fund may
invest 25% or more of its total assets in the securities of companies
directly or indirectly engaged in the real estate industry. The Money
Market Fund may invest more than 25% of its assets in money market
instruments issued by domestic branches of US banks having net assets in
excess of $100,000,000. (Please refer to the description of the Real
Estate Securities Fund and the Money Market Fund in the applicable
Prospectuses for a description of each Fund's policy with respect to
concentration in a particular industry.)

3. Acquire more than 5% of the outstanding voting securities, or
10% of all of the securities, of
any one issuer.

4. Invest in companies for the purpose of exercising control or
management.

5. Purchase or sell real estate; provided that a Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.

6. Purchase or sell commodities or commodities contracts, or
interests in oil, gas or other mineral exploration or development
programs, except stock index and financial futures contracts.

7. Borrow amounts more than 5% of the Fund's total assets taken at
cost or at market value, whichever is lower, and only from banks as a
temporary measure for extraordinary or emergency purposes, except that a
Fund may engage in reverse repurchase agreements to meet redemption
requests without immediately selling any portfolio instruments. The Fund
will not mortgage, pledge or in any other manner transfer as security
for any indebtedness, any of its assets. Collateral arrangements with
respect to margin for futures contracts are not deemed a pledge of
assets.

8. Purchase securities on margin or effect short sales (except that a
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases or sales of securities, may trade in futures and
related options, and may make margin payments in connection with
transactions in futures contracts and related options).

9. Engage in the business of underwriting securities issued by others
or purchase securities, except as permitted by the Limited Volatility
Tax Free and Tax Free Money Market Funds' investment objectives.

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<PAGE> 242
10. Invest in securities of an issuer which, together with any
predecessor, has been in operation for less than three years if, as a
result, more than 5% of the Fund's total assets would then be invested
in such securities.

11. The Investment Company will not participate on a joint or a joint
and several basis in any trading account in securities except to the
extent permitted by the 1940 Act and any applicable rules and
regulations and except as permitted by any applicable exemptive orders
from the 1940 Act. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with two or more Funds, or with a Fund
and such other accounts under the management of the Management Company
or any money manager for the Funds to save brokerage costs or to average
prices among them shall not be considered a joint securities trading
account. The purchase of shares of the Money Market Fund by any other
Fund shall also not be deemed to be a joint securities trading account.

12. Make loans of money or securities to any person or firm; provided,
however, that the making of a loan shall not be construed to include (i)
the acquisition for investment of bonds, debentures, notes or other
evidences of indebtedness of any corporation or government which are
publicly distributed or of a type customarily purchased by institutional
investors; (ii) the entry into "repurchase agreements;" or (iii) the
lending of portfolio securities in the manner generally described in the
Funds' Prospectuses' section "Investment Policies -- Lending Portfolio
Securities."

13. Purchase or sell options except to the extent permitted by the
policies set forth in the sections "Certain Investments -- Options on
Securities and Indices," "Certain Investments -- Foreign Currency
Options," "Certain Investments -- Futures Contracts and Options on
Future Contracts" and "Certain Investments -- Forward Foreign Currency
Contracts" below. The Limited Volatility Tax Free and Tax Free Money
Market Funds may purchase municipal obligations from an issuer, broker,
dealer, bank or other persons accompanied by the agreement of such
seller to purchase, at the Fund's option, the municipal obligation prior
to maturity thereof.

14. The Investment Company will not purchase the securities of other
investment companies except to the extent permitted by the 1940 Act and
any applicable rules and regulations and except as permitted by any
applicable exemptive orders from the 1940 Act.

15. Purchase from or sell portfolio securities to the officers,
Trustees or other "interested persons" (as defined in the 1940 Act) of
the Investment Company, including the Fund's money managers and their
affiliates, except as permitted by the 1940 Act, SEC rules or exemptive
orders.

16. No Fund will issue senior securities, as defined in the 1940 Act,
except that this restriction shall not be deemed to prohibit any Fund
from making any otherwise permissible borrowings, mortgages or pledges,
or entering into permissible reverse

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<PAGE> 243
repurchase agreements, and options and futures transactions, or issuing
shares of beneficial interest in multiple classes.

Additional fundamental policies are: (a) Equity I, Equity II, Equity
III, Equity Q, Equity T, Emerging Markets, Fixed Income III, Diversified
Equity, Special Growth, Equity Income, Quantitative Equity and
Multistrategy Bond Funds will not invest more than 5% of the current
market value of their assets in warrants nor more than 2% of such value
in warrants which are not listed on the New York or American Stock
Exchanges; warrants attached to other securities are not subject to this
limitation. (b) Fixed Income I, Fixed Income II, Diversified Bond and
Volatility Constrained Bond Funds may acquire convertible bonds which
will be disposed of by these Funds in as timely a manner as is practical
after conversion. (c) No Fund will purchase or retain the securities of
an issuer if, to the Fund's knowledge, one or more of the Trustees or
officers of the Investment Company, or one or more of the officers or
directors of the money manager responsible for the investment or its
directors or officers, individually own beneficially more than l/2 of l%
of the securities of such issuer and together own beneficially more than
5% of such securities. Compliance with this policy by the Investment
Company's Trustees and officers is monitored by Fund officers.

For purposes of these Investment Restrictions, the Limited Volatility
Tax Free and Tax Free Money Market Funds will consider as a separate
issuer each: governmental subdivision (i.e., state, territory,
possession of the United States or any political subdivision of any of
the foregoing, including agencies, authorities, instrumentalities, or
similar entities, or of the District of Columbia) if its assets and
revenues are separate from those of the government body creating it and
the security is backed by its own assets and revenues; the
non-governmental user of an industrial development bond, if the security
is backed only by the assets and revenues of a non-governmental user.
The guarantee of a governmental or some other entity is considered a
separate security issued by the guarantor as well as the other issuer
for Investment Restrictions, industrial development bonds and
governmental issued securities. The issuer of all other municipal
obligations will be determined by the money manager on the basis of the
characteristics of the obligation, the most significant being the source
of the funds for the payment of principal and interest.

Each Fund has adopted the following additional "non-fundamental"
investment restrictions, which may be changed without shareholder
approval, in compliance with applicable law and regulatory policy. No
Fund will:

1) Invest in real estate limited partnerships that
are not readily marketable. This restriction shall not apply to
the Real Estate Securities Fund's investment in partnership
units of master limited partnerships; or

2) Invest in oil, gas and mineral leases.

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<PAGE> 244
Investment Policies.

Cash Reserves. Each Fund, except the Money Market, U.S. Government
Money Market and Tax Free Money Market Funds, and their money managers, may
elect to invest the Fund's cash reserves in the Money Market Fund. The Money
Market Fund and the Funds investing in the Money Market Fund treat such
investments as the purchase and redemption of Money Market Fund shares. Any Fund
investing in the Money Market Fund pursuant to this procedure participates
equally on a pro rata basis in all income, capital gains and net assets of the
Money Market Fund, and will have all rights and obligations of a shareholder as
provided in the Trust's Master Trust Agreement, including voting rights.
However, shares of the Money Market Fund issued to other Funds will be voted by
the Trustees of the Investment Company in the same proportion as the shares of
the Money Market Fund which are held by shareholders which are not Funds. Funds
investing in the Money Market Fund currently do not pay a management fee to the
Money Market Fund.

Liquidity Portfolios. A Fund at times has to sell portfolio securities
in order to meet redemption requests. The selling of securities may effect a
Fund's performance since the money manager sells the securities for other than
investment reasons. A Fund can avoid selling its portfolio securities by holding
adequate levels of cash to meet anticipated redemption requests.

The holding of significant amounts of cash is contrary to the
investment objectives of the Equity I, Equity II, Equity III, Equity Q, Equity
T, International, Diversified Equity, Special Growth, Equity Income,
Quantitative Equity and International Securities Funds. The more cash these
Funds hold, the more difficult it is for their returns to meet or surpass their
respective benchmarks.

A Liquidity Portfolio addresses this potential detriment by having the
Management Company or a money manager selected for this purpose create an equity
exposure for cash reserves through the use of options and futures contracts.
This will enable the Funds to hold cash while receiving a return on the cash
which is similar to holding equity securities.

Money Market Instruments. The Money Market, U.S. Government Money
Market and Tax Free Money Market Funds expect to maintain, but do not guarantee,
a net asset value of $1.00 per share for purposes of purchases and redemptions
by valuing their Fund shares at "amortized cost." The three Money Market Funds
will maintain a dollar-weighted average maturity of 90 days or less. Each of the
Funds will invest in securities with maturities of 397 days or less at the time
from the trade date or such other date upon which a Fund's interest in a
security is subject to market action. Each Fund will follow procedures
reasonably designed to assure that the prices so determined approximate

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<PAGE> 245
the current market value of the Funds' securities. The procedures also address
such matters as diversification and credit quality of the securities the Funds
purchase, and were designed to ensure compliance by the Funds with the
requirements of Rule 2a-7 of the 1940 Act. For additional information concerning
these Funds, refer to the Prospectuses.

Russell 1000 Index. The Russell 1000(R) Index consists of the 1,000
largest US companies by capitalization. The Index does not include cross
corporate holdings in a company's capitalization. For example, when IBM owned
approximately 20% of Intel, only 80% of the total shares outstanding of Intel
were used to determine Intel's capitalization. Also not included in the Index
are closed-end investment companies, companies that do not file a Form 10-K
report with the SEC, foreign securities and American Depository Receipts (ADRs).

The Index's composition is changed annually to reflect changes in
market capitalization and share balances outstanding. These changes are expected
to represent less than 1% of the total market capitalization of the Index.
Changes for mergers and acquisitions are made when trading ceases in the
acquirer's shares. The 1,001st largest US company by capitalization is then
added to the Index to replace the acquired stock.

Certain Investments.

Repurchase Agreements. Each Fund may enter into repurchase agreements
with the seller -- a bank or securities dealer -- who agrees to repurchase the
securities at the Fund's cost plus interest within a specified time (normally
one day). The securities purchased by the Fund have a total value in excess of
the value of the repurchase agreement and are held by the Fund's custodian bank
until repurchased. Repurchase agreements assist a Fund in being invested fully
while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature. The Funds will limit repurchase transactions to those member
banks of the Federal Reserve System and primary dealers in US government
securities whose creditworthiness is continually monitored and found
satisfactory by the Funds' money managers.

Reverse Repurchase Agreements. Each Fund may enter into reverse
repurchase agreements to meet redemption requests where the liquidation of
portfolio securities is deemed by the Fund's money manager to be inconvenient or
disadvantageous. A reverse repurchase agreement is a transaction whereby a Fund
transfers possession of a portfolio security to a bank or broker-dealer in
return for a percentage of the portfolio securities' market value. The Fund
retains record ownership of the security involved including the right to receive
interest and principal payments. At an agreed upon future date, the Fund
repurchases the security by paying an agreed upon purchase price plus interest.
Cash or liquid high grade debt obligations of the Fund equal in value to the
repurchase price, including any accrued interest, will be segregated on the
Fund's records while a reverse repurchase agreement is in effect.

High Risk Bonds. The Funds, other than the Emerging Markets, Fixed
Income III and Multistrategy Bond Funds, do not invest assets in securities
rated less than

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<PAGE> 246
BBB by Standard & Poor's Ratings Group ("S&P") or Baa by Moody's Investors
Service, Inc. ("Moody's"), or in unrated securities judged by the money manager
to be of a lesser credit quality than those designations. Securities rated BBB
by S&P or Baa by Moody's are the lowest ratings which are considered "investment
grade." The Funds, other than Emerging Markets, Fixed Income III and
Multistrategy Bond Funds, will dispose of securities which they have purchased
which drop below these minimum ratings.

Securities rated BBB by S&P or Baa by Moody's may involve greater risks
than securities in higher rating categories. Securities receiving S&P's BBB
rating are regarded as having adequate capacity to pay interest and repay
principal. Such securities typically exhibit adequate investor protections but
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rating categories.

Securities possessing Moody's Baa rating are considered medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security is judged adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact may have speculative characteristics as
well.

Risk Factors. The market for lower rated debt securities is relatively
new, its operating history is not extensive, and its growth has paralleled a
long period of economic expansion. Lower rated debt securities may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The prices of low rated debt
securities have been found to be less sensitive to interest rate changes than
investment grade securities, but more sensitive to economic downturns,
individual corporate developments, and price fluctuations in response to
changing interest rates. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low rated debt securities defaults, a Fund
may incur additional expenses to seek financial recovery.

In addition, the markets in which low rated debt securities are traded
are more limited than those for higher rated securities. The existence of
limited markets for particular securities may diminish a Fund's ability to sell
the securities at fair value either to meet redemption requests or to respond to
changes in the economy or in the financial markets and could adversely affect
and cause fluctuations in the daily net asset value of the Fund's shares.

Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated securities may be more complex than for
issuers of other investment grade securities, and the ability of a Fund to
achieve its investment objectives may be more dependent on credit

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<PAGE> 247
analysis than would be the case if the Fund was investing only in investment
grade securities.

The managers of the Funds may use ratings to assist in investment
decisions. Ratings of debt securities represent a rating agency's opinion
regarding their quality and are not a guarantee of quality. Rating agencies
attempt to evaluate the safety of principal and interest payments and do not
evaluate the risks of fluctuations in market value. Also, rating agencies may
fail to make timely changes in credit ratings in response to subsequent events,
so that an issuer's current financial condition may be better or worse than a
rating indicates.

Illiquid Securities. The expenses of registration of restricted
securities that are illiquid (excluding securities that may be resold by the
Funds pursuant to Rule 144A, as explained in the Prospectuses) may be negotiated
at the time such securities are purchased by a Fund. When registration is
required, a considerable period may elapse between a decision to sell the
securities and the time the sale would be permitted. Thus, the Fund may not be
able to obtain as favorable a price as that prevailing at the time of the
decision to sell. A Fund also may acquire, through private placements,
securities having contractual resale restrictions, which might lower the amount
realizable upon the sale of such securities.

Delayed Delivery Transactions. A Fund may make contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments" or "when-issued" transactions) consistent with the Fund's
ability to manage its investment portfolio and meet redemption requests. A Fund
may dispose of a commitment or when-issued transaction prior to settlement if it
is appropriate to do so and realize short-term profits or losses upon such sale.
When effecting such transactions, cash or liquid high grade debt obligations of
the Fund in a dollar amount sufficient to make payment for the portfolio
securities to be purchased will be segregated on the Fund's records at the trade
date and maintained until the transaction is settled. Forward commitments and
when-issued transactions involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date or the other party to the
transaction fails to complete the transaction.

Additionally, under certain circumstances, the International, International
Securities and Emerging Markets Funds may occasionally engage in "free trade"
transactions in which delivery of securities sold by the Fund is made prior to
the Fund's receipt of cash payment therefor or the Fund's payment of cash for
portfolio securities occurs prior to the Fund's receipt of those securities.
"Free trade" transactions involve the risk of loss to a Fund if the other party
to the "free trade" transaction fails to complete the transaction after a Fund
has tendered cash payment or securities, as the case may be.

Options and Futures. The Funds, other than the Money Market, US
Government Money Market and Tax Free Money Market Funds, may purchase and sell
(write) both call and put options on securities, securities indexes, and foreign
currencies, and enter into interest rate, foreign currency and index futures
contracts and purchase and sell options on such futures contracts for hedging
purposes. If other types of options, futures contracts, or options on futures
contracts are traded in the future, the Funds may also

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<PAGE> 248
use those instruments, provided that the Investment Company's Board determines
that their use is consistent with the Funds' investment objectives, and provided
that their use is consistent with restrictions applicable to options and futures
contracts currently eligible for use by the Funds (i.e., that written call or
put options will be "covered" or "secured" and that futures and options on
futures contracts will be used only for hedging purposes).

Options on Securities and Indexes. Each Fund, except as noted above,
may purchase and write both call and put options on securities and securities
indexes in standardized contracts traded on foreign or national securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on a
regulated foreign over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of bonds from a dealer.

An option on a security (or index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect specified facets of a particular
financial or securities market, a specified group of financial instruments or
securities, or certain economic indicators.)

A Fund will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Fund owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Fund. For a call option on an index,
the option is covered if the Fund maintains with its custodian cash or cash
equivalents equal to the contract value. A call option is also covered if the
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (1) equal to or less than the exercise price
of the call written, or (2) greater than the exercise price of the call written,
provided the difference is maintained by the Fund in cash or cash equivalents in
a segregated account with its custodian. A put option on a security or an index
is "covered" if the Fund maintains cash or cash equivalents equal to the
exercise price in a segregated account with its custodian. A put option is also
covered if the Fund holds a put on the same security or index as the put written
where the exercise price of the put held is (1) equal to or greater than the
exercise price of the put written, or (2) less than the exercise price of the
put written, provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian.

If an option written by a Fund expires, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by a Fund

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expires unexercised, the Fund realizes a capital loss (long or short-term
depending on whether the Fund's holding period for the option is greater than
one year) equal to the premium paid.

Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.

A Fund will realize a capital gain from a closing transaction on an
option it has written if the cost of the closing option is less than the premium
received from writing the option, or, if it is more, the Fund will realize a
capital loss. If the premium received from a closing sale transaction is more
than the premium paid to purchase the option, the Fund will realize a capital
gain or, if it is less, the Fund will realize a capital loss. With respect to
closing transactions on purchased options, the capital gain or loss realized
will be short or long-term depending on the holding period of the option closed
out. The principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of the option,
the volatility of the underlying security or index, and the time remaining until
the expiration date.

The premium paid for a put or call option purchased by a Fund is an
asset of the Fund. The premium received for an option written by a Fund is
recorded as a liability. The value of an option purchased or written is
marked-to-market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.

Risks Associated with Options on Securities and Indexes. There are
several risks associated with transactions in options on securities and on
indexes. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.

There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If a Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If a Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, a Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.

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If trading were suspended in an option purchased by a Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.

Foreign Currency Options. A Fund may buy or sell put and call options
on foreign currencies either on exchanges or in the over-the-counter market. A
put option on a foreign currency gives the purchaser of the option the right to
sell a foreign currency at the exercise price until the option expires. Currency
options traded on US or other exchanges may be subject to position limits which
may limit the ability of a Fund to reduce foreign currency risk using such
options. Over-the-counter options differ from traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options.

Futures Contracts and Options on Futures Contracts. A Fund may use
interest rate, foreign currency or index futures contracts, as specified in the
Prospectuses. An interest rate, foreign currency or index futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument, foreign currency or the cash value
of an index at a specified price and time. A futures contract on an index is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index may be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering
several indexes as well as a number of financial instruments and foreign
currencies. For example: the S&P 500; the Russell 2000(R); Nikkei 225; CAC-40;
FT-SE 100; the NYSE composite; US Treasury bonds; US Treasury notes; GNMA
Certificates; three-month US Treasury bills; Eurodollar certificates of deposit;
the Australian Dollar; the Canadian Dollar; the British Pound; the German Mark;
the Japanese Yen; the French Franc; the Swiss Franc; the Mexican Peso; and
certain multinational currencies, such as the European Currency Unit ("ECU"). It
is expected that other futures contracts will be developed and traded in the
future.

A Fund may purchase and write call and put options on futures
contracts. Options on futures contracts possess many of the same characteristics
as options on securities and indexes (discussed above). A futures option gives
the holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true.

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As long as required by regulatory authorities, each Fund will limit its
use of futures contracts and options on futures contracts to hedging
transactions. For example, a Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. Additionally, a Fund may use futures contracts to create
equity exposure for its cash reserves for liquidity purposes.

A Fund will only enter into futures contracts and options on futures
contracts which are standardized and traded on a US or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.

When a purchase or sale of a futures contract is made by a Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of cash or US government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund, but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will
mark-to-market its open futures positions.

A Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.

Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.

Limitations on Use of Futures and Options on Futures Contracts. A Fund
will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are

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"in-the-money," would exceed 5% of the Fund's total assets. A call option is
"in-the-money" if the value of the futures contract that is the subject of the
option exceeds the exercise price. A put option is "in-the-money" if the
exercise price exceeds the value of the futures contract that is the subject of
the option.

When purchasing a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, US government securities
or other highly liquid debt securities that, when added to the amounts deposited
with a futures commission merchant as margin, are equal to the market value of
the futures contract. Alternatively, the Fund may "cover" its position by
purchasing a put option on the same futures contract with a strike price as high
or higher than the price of the contract held by the Fund.

When selling a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's custodian).

When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, US government
securities or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, equal the total
market value of the futures contract underlying the call option. Alternatively,
the Fund may "cover" its position by entering into a long position in the same
futures contract at a price no higher than the strike price of the call option,
by owning the instruments underlying the futures contract, or by holding a
separate call option permitting the Fund to purchase the same futures contract
at a price not higher than the strike price of the call option sold by the Fund.

When selling a put option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, US government
securities or other highly liquid debt securities that equal the purchase price
of the futures contract, less any margin on deposit. Alternatively, the Fund may
"cover" the position either by entering into a short position in the same
futures contract, or by owning a separate put option permitting it to sell the
same futures contract so long as the strike price of the purchased put option is
the same or higher than the strike price of the put option sold by the Fund.

In order to comply with applicable regulations of the Commodity Futures
Trading Commission ("CFTC") pursuant to which the Funds avoid being deemed to be
a "commodity pool," the Funds are limited in their futures activities to
positions which constitute "bona fide hedging" positions within the meaning and
intent of applicable CFTC rules, and with respect to positions which do not
qualify under that hedging test, to positions

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for which the aggregate initial margins and premiums will not exceed 5% of the
net assets of a Fund as determined under the CFTC Rules.

The requirements for qualification as a regulated investment company
also may limit the extent to which a Fund may enter into futures, options on
futures contracts or forward contracts. See "Taxation."

Risks Associated with Futures and Options on Futures Contracts. There
are several risks associated with the use of futures contracts and options on
futures contracts as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund securities being hedged.
In addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures and options on futures contracts on
securities, including technical influences in futures trading and options on
futures contracts, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.

Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.

There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures or a futures option position, and that
Fund would remain obligated to meet margin requirements until the position is
closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.

Additional Risks of Options on Securities, Futures Contracts, Options
on Futures Contracts, and Forward Currency Exchange Contract and Options
Thereon. Options on securities, futures contracts, options on futures contracts,
currencies and options

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on currencies may be traded on foreign exchanges. Such transactions may not be
regulated as effectively as similar transactions in the United States; may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by (1)
other complex foreign, political, legal and economic factors, (2) lesser
availability than in the United States of data on which to make trading
decisions, (3) delays in a Fund's ability to act upon economic events occurring
in foreign markets during non-business hours in the United States, (4) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, and (5) lesser trading volume.

Hedging strategies. Stock index futures contracts may be used by the
Equity I, Equity II, Equity III, Equity Q, International, Emerging Markets,
Diversified Equity, Special Growth, Equity Income, Quantitative Equity, Equity T
and International Securities Funds as an "equitization" vehicle for cash
reserves held by the Funds. For example: equity index futures contracts are
purchased to correspond with the cash reserves in each of the Funds. As a
result, a Fund will realize gains or losses based on the performance of the
equity market corresponding to the relevant indexes for which futures contracts
have been purchased. Thus, each Fund's cash reserves always will be fully
exposed to equity market performance.

Financial futures contracts may be used by the International, Emerging
Markets, Fixed Income I, Fixed Income II, Fixed Income III, International
Securities, Diversified Bond, Volatility Constrained Bond, Multistrategy Bond
and Limited Volatility Tax Free Funds as a hedge during or in anticipation of
interest rate changes. For example: if interest rates were anticipated to rise,
financial futures contracts would be sold (short hedge) which would have an
effect similar to selling bonds. Once interest rates increase, fixed-income
securities held in the Fund's portfolio would decline, but the futures contract
value would decrease, partly offsetting the loss in value of the fixed-income
security by enabling the Fund to repurchase the futures contract at a lower
price to close out the position.

The Funds may purchase a put and/or sell a call option on a stock index
futures contract instead of selling a futures contract in anticipation of market
decline. Purchasing a call and/or selling a put option on a stock index futures
contract is used instead of buying a futures contract in anticipation of a
market advance, or to temporarily create an equity exposure for cash balances
until those balances are invested in equities. Options on financial futures are
used in a similar manner in order to hedge portfolio securities against
anticipated changes in interest rates.

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Foreign Currency Futures Contracts. The Funds are also permitted to
enter into foreign currency futures contracts in accordance with their
investment objectives and as limited by the procedures outlined above.

A foreign currency futures contract is a bilateral agreement pursuant
to which one party agrees to make, and the other party agrees to accept delivery
of a specified type of debt security or currency at a specified price. Although
such futures contacts by their terms call for actual delivery or acceptance of
debt securities or currency, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery.

The Funds may sell a foreign currency futures contract to hedge against
possible variations in the exchange rate of the foreign currency in relation to
the US dollar. When a manager anticipates a significant change in a foreign
exchange rate while intending to invest in a foreign security, a Fund may
purchase a foreign currency futures contract to hedge against a rise in foreign
exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the Fund against any rise
in the foreign exchange rate which may add additional costs to acquiring the
foreign security position. The Fund may also purchase call or put options on
foreign currency futures contracts to obtain a fixed foreign exchange rate. The
Fund may purchase a call option or write a put option on a foreign exchange
futures contract to hedge against a decline in the foreign exchange rates or the
value of its foreign securities. The Fund may write a call option on a foreign
currency futures contract as a partial hedge against the effects of declining
foreign exchange rates on the value of foreign securities.

Risk Factors. There are certain investment risks in using futures
contracts and/or options as a hedging technique. One risk is the imperfect
correlation between price movement of the futures contracts or options and the
price movement of the portfolio securities, stock index or currency subject of
the hedge. The risk increases for the Limited Volatility Tax Free Fund since
financial futures contracts that may be engaged in are on taxable securities
rather than tax exempt securities. There is no assurance that the price of
taxable securities will move in a similar manner to the price of tax exempt
securities. Another risk is that a liquid secondary market may not exist for a
futures contract causing a Fund to be unable to close out the futures contract
thereby affecting a Fund's hedging strategy.

In addition, foreign currency options and foreign currency futures
involve additional risks. Such transactions may not be regulated as effectively
as similar transactions in the United States; may not involve a clearing
mechanism and related guarantees; and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities. The value of
such positions could also be adversely affected by (1) other complex foreign,
political, legal and economic factors, (2) lesser availability than in the
United States of data on which to make trading decisions, (3) delays in a Fund's
ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and

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procedures and margin requirements than in the United States, and (5) lesser
trading volume.

Forward Foreign Currency Exchange Transactions. The Funds may engage in
forward foreign currency exchange transactions to hedge against uncertainty in
the level of future exchange rates. The Funds will conduct their forward foreign
currency exchange transactions either on a spot (i.e. cash) basis at the rate
prevailing in the currency exchange market, or through entering into forward
currency exchange contracts ("forward contract") to purchase or sell currency at
a future date. A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. The Funds may engage in a forward contract that involves
transacting in a currency whose changes in value are considered to be linked (a
proxy) to a currency or currencies in which some or all of the Funds' portfolio
securities are or are expected to be denominated. A Fund's dealings in forward
contracts will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of foreign
currency with respect to specific receivables or payables of the Funds generally
accruing in connection with the purchase or sale of their portfolio securities.
Position hedging is the sale of foreign currency with respect to portfolio
security positions denominated or quoted in the currency. A Fund may not
position hedge with respect to a particular currency to an extent greater than
the aggregate market value (at the time of making such sale) of the securities
held in its portfolio denominated or quoted in or currency convertible into that
particular currency (or another currency or aggregate of currencies which act as
a proxy for that currency). The Funds may, however, enter into a position
hedging transaction with respect to a currency other than that held in the
Funds' portfolios, if such a transaction is deemed a hedge. If a Fund enters
into this type of hedging transaction, cash or liquid high grade debt securities
will be placed in a segregated account in an amount equal to the value of the
Fund's total assets committed to the consummation of the forward contract. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the value of
the account will equal the amount of the Fund's commitment with respect to the
contract. Hedging transactions may be made from any foreign currency into US
dollars or into other appropriate currencies.

At or before the maturity of a forward foreign currency contract, a
Fund may either sell a portfolio security and make delivery of the currency, or
retain the security and offset its contractual obligation to deliver the
currency by purchasing a second contract pursuant to which the Fund will obtain,
on the same maturity date, the same amount of the currency which it is obligated
to deliver. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward currency contract prices. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a currency and the date that it enters into an offsetting contract for
the purchase of the currency, the Fund will realize a gain to the extent that
the price of the currency that it has agreed to sell exceeds the price of the
currency that it has agreed to purchase. Should forward prices increase, the
Fund will suffer

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a loss to the extent that the price of the currency it has agreed to purchase
exceeds the price of the currency that it has agreed to sell.

The cost to a Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved. The
use of forward foreign currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, although forward foreign
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, at the same time, they limit any potential gain that might
result should the value of the currency increase.

If a devaluation is generally anticipated, a Fund may be able to
contract to sell the currency at a price above the devaluation level that it
anticipates. A Fund will not enter into a currency transaction if, as a result,
it will fail to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"), for a given year.

Forward foreign currency contracts are not regulated by the SEC. They
are traded through financial institutions acting as market-makers. In the
forward foreign currency market, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Moreover, a trader of forward contracts could lose
amounts substantially in excess of its initial investments, due to the
collateral requirements associated with such positions.

Forward foreign currency transactions are subject to the risk of
governmental actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by (1)
other complex foreign, political, legal and economic factors, (2) lesser
availability than in the United States of data on which to make trading
decisions, (3) delays in a Fund's ability to act upon economic events occurring
in foreign markets during non-business hours in the United States, (4) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, (5) lesser trading volume and (6) that a
perceived linkage between various currencies may not persist throughout the
duration of the contracts.

Indexed Commercial Paper. Indexed commercial paper is US-dollar
denominated commercial paper the yield of which is linked to certain foreign
exchange rate movements. The yield to the investor on indexed commercial paper
is established at maturity as a function of spot exchange rates between the US
dollar and a designated currency as of or about that time. The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on US-dollar
denominated commercial paper, with both the minimum and maximum rates of return
on the investment corresponding to the minimum and maximum values of the spot
exchange rate two business days prior to maturity. While such commercial paper
entails

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risk of loss of principal, the potential risk for realizing gains as a result
of changes in foreign currency exchange rates enables a Fund to hedge (or
cross-hedge) against a decline in the US-dollar value of investments denominated
in foreign currencies while providing an attractive money market rate of return.
Currently only the Fixed Income III and Multistrategy Bond Funds intend to
invest in indexed commercial paper, and then only for hedging purposes. The
staff of the SEC is currently considering whether the purchase of this type of
commercial paper would result in the issuance of a "senior security." If
required by the appropriate authorities to assure that investments in indexed
commercial paper are not used to achieve investment leverage, a Fund will
segregate cash or readily marketable high quality securities in an amount at all
times equal or exceeding the Fund's commitment with respect to these contracts.

US Government Obligations. The types of US government obligations the
Funds may purchase include: (1) a variety of US Treasury obligations which
differ only in their interest rates, maturities and times of issuance: (a) US
Treasury bills at time of issuance have maturities of one year or less, (b) US
Treasury notes at time of issuance have maturities of one to ten years and (c)
US Treasury bonds at time of issuance generally have maturities of greater than
ten years; (2) obligations issued or guaranteed by US government agencies and
instrumentalities and supported by any of the following: (a) the full faith and
credit of the US Treasury (such as Government National Mortgage Association
participation certificates), (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the US Treasury, (c) discretionary
authority of the US government agency or instrumentality or (d) the credit of
the instrumentality (examples of agencies and instrumentalities are: Federal
Land Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association). No assurance can be given that the US government will provide
financial support to such US government agencies or instrumentalities described
in (2)(b), (2)(c) and (2)(d) in the future, other than as set forth above, since
it is not obligated to do so by law. The Funds may purchase US government
obligations on a forward commitment basis.

Variable and Floating Rate Securities. A floating rate security is one
whose terms provide for the automatic adjustment of an interest rate whenever a
specified interest rate changes. A variable rate security is one whose terms
provide for the automatic establishment of a new interest rate on set dates. The
interest rate on floating rate securities is ordinarily tied to and is a
percentage of the prime rate of a specified bank or some similar objective
standard, such as 90-day US Treasury Bill rate, and may change as often as twice
daily. Generally, changes in interest rates on floating rate securities will
reduce changes in the securities' market value from the original purchase price
resulting in the potential for capital appreciation or capital depreciation
being less than for fixed-income obligations with a fixed interest rate.

The U.S. Government Money Market Fund may purchase variable rate US
government obligations which are instruments issued or guaranteed by the US
government, or an agency or instrumentality thereof, which have a rate of
interest subject to adjustment at regular intervals but no less frequently than
annually. Variable rate US government

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obligations whose interest rates are readjusted no less frequently than annually
will be deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.

Variable Amount Master Demand Notes. The Money Market and U.S.
Government Money Market Funds, consistent with their fundamental investment
objectives, may invest in variable amount master demand notes. Variable amount
master demand notes are unsecured obligations redeemable upon notice that permit
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements with the issuer of the instrument. A variable amount master
demand note differs from ordinary commercial paper in that (1) it is issued
pursuant to a written agreement between the issuer and the holders, (2) its
amount may, from time to time, be increased (subject to an agreed maximum) or
decreased by the holder of the issue, (3) it is payable on demand, (4) its rate
of interest payable varies with an agreed upon formula and (5) it is not
typically rated by a rating agency.

Zero Coupon Securities. Zero coupon securities are notes, bonds and
debentures that (1) do not pay current interest and are issued at a substantial
discount from par value, (2) have been stripped of their unmatured interest
coupons and receipts or (3) pay no interest until a stated date one or more
years into the future. These securities also include certificates representing
interests in such stripped coupons and receipts. Zero coupon securities trade at
a discount from their par value and are subject to greater fluctuations of
market value in response to changing interest rates.

Mortgage-Related and other Asset-Backed Securities. The forms of
mortgage-related and other asset-backed securities the Funds may invest in
include the securities described below:

Mortgage pass-through securities. Mortgage pass-through
securities are securities representing interests in "pools" of
mortgages in which payments of both interest and principal on the
securities are generally made monthly. The securities are
"pass-through" securities because they provide investors with monthly
payments of principal and interest which in effect are a "pass-through"
of the monthly payments made by the individual borrowers on the
underlying mortgages, net of any fees paid to the issuer or guarantor.
The principal governmental issuer of such securities is the Government
National Mortgage Association ("GNMA"), which is a wholly-owned US
government corporation within the Department of Housing and Urban
Development. Government-related issuers include the Federal Home Loan
Mortgage Corporation ("FHLMC"), a corporate instrumentality of the
United States created pursuant to an Act of Congress, and which is
owned entirely by the Federal Home Loan Banks, and the Federal National
Mortgage Association ("FNMA"), a government sponsored corporation owned
entirely by private stockholders. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers also create pass-through pools of
conventional

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residential mortgage loans. Such issuers may be the originators of the
underlying mortgage loans as well as the guarantors of the
mortgage-related securities.

Collateralized Mortgage Obligations. Collateralized mortgage
obligations ("CMOs") are hybrid instruments with characteristics of
both mortgage-backed bonds and mortgage pass-through securities.
Similar to a bond, interest and pre-paid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are
structured into multiple classes (or "tranches"), with each class
bearing a different stated maturity.

Asset-Backed Securities. Asset-backed securities represent
undivided fractional interests in pools of instruments, such as
consumer loans, and are similar in structure to mortgage-related
pass-through securities. Payments of principal and interest are passed
through to holders of the securities and are typically supported by
some form of credit enhancement, such as a letter of credit, surety
bond, limited guarantee by another entity or by priority to certain of
the borrower's other securities. The degree of enhancement varies,
generally applying only until exhausted and covering only a fraction of
the security's par value. If the credit enhancement held by a Fund has
been exhausted, and if any required payments of principal and interest
are not made with respect to the underlying loans, the Fund may
experience loss or delay in receiving payment and a decrease in the
value of the security.

Risk Factors. Prepayment of principal on mortgage or
asset-backed securities may expose a Fund to a lower rate of return
upon reinvestment of principal. Also, if a security subject to
prepayment has been purchased at a premium, in the event of prepayment
the value of the premium would be lost. Like other fixed-income
securities, the value of mortgage-related securities is affected by
fluctuations in interest rates.

Loan Participations. The Fixed Income III and Multistrategy Bond Funds
may purchase participations in commercial loans. Such indebtedness may be
secured or unsecured. Loan participations typically represent direct
participation in a loan to a corporate borrower, and generally are offered by
banks or other financial institutions or lending syndicates. In purchasing the
loan participations, a Fund assumes the credit risk associated with the
corporate buyer and may assume the credit risk associated with the interposed
bank or other financial intermediary. The participation may not be rated by a
nationally recognized rating service. Further, loan participations may not be
readily marketable and may be subject to restrictions on resale.

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Municipal Obligations. "Municipal obligations" are debt obligations
issued by states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities, or multi-state agencies or authorities the interest from
which is exempt from federal income tax in the opinion of bond counsel to the
issuer. Municipal obligations include debt obligations issued to obtain funds
for various public purposes and certain industrial development bonds issued by
or on behalf of public authorities. Municipal obligations are classified as
general obligation bonds, revenue bonds and notes.

Municipal Bonds. Municipal bonds generally have maturities of
more than one year when issued and have two principal classifications
-- General Obligation Bonds and Revenue Bonds.

General Obligation Bonds - are secured by the
issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest.

Revenue Bonds - are payable only from the revenues
derived from a particular facility or group of facilities or from
the proceeds of special excise or other specific revenue service.

Industrial Development Bonds - are a type of revenue
bond and do not generally constitute the pledge of credit of the
issuer of such bonds. The payment of the principal and interest on
such bonds is dependent on the facility's user to meet its
financial obligations and the pledge, if any, of real and personal
property financed as security for such payment. Industrial
development bonds are issued by or on behalf of public authorities
to raise money to finance public and private facilities for
business, manufacturing, housing, ports, pollution control,
airports, mass transit and other similar type projects.

Municipal Notes. Municipal notes generally have maturities of
one year or less when issued and are used to satisfy short-term capital
needs. Municipal notes include:

Tax Anticipation Notes - are issued to finance
working capital needs of municipalities and are generally issued
in anticipation of future tax revenues.

Bond Anticipation Notes - are issued in expectation
of a municipality issuing a long-term bond in the future. Usually
the long-term bonds provide the money for the repayment of the
notes.

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Revenue Anticipation Notes - are issued in
expectation of receipt of other types of revenues such as certain
federal revenues.

Construction Loan Notes - are sold to provide
construction financing and may be insured by the Federal Housing
Administration. After completion of the project, FNMA or GNMA
frequently provides permanent financing.

Pre-Refunded Municipal Bonds - are bonds no longer
secured by the credit of the issuing entity, having been escrowed
with US Treasury securities as a result of a refinancing by the
issuer. The bonds are escrowed for retirement either at original
maturity or at an earlier call date.

Tax Free Commercial Paper - is a promissory
obligation issued or guaranteed by a municipal issuer and
frequently accompanied by a letter of credit of a commercial bank.
It is used by agencies of state and local governments to finance
seasonal working capital needs, or as short-term financing in
anticipation of long-term financing.

Tax Free Floating and Variable Rate Demand Notes -
are municipal obligations backed by an obligation of a commercial
bank to the issuer thereof which allows the issuer to issue
securities with a demand feature, which, when exercised, usually
becomes effective within thirty days. The rate of return on the
notes is readjusted periodically according to some objective
standard such as changes in a commercial bank's prime rate.

Tax Free Participation Certificates - are tax free
floating or variable rate demand notes which are issued by a bank,
insurance company or other financial institution or affiliated
organization that sells a participation in the note. They are
usually purchased by the Limited Volatility Tax Free and Tax Free
Money Market Funds to maintain liquidity. The Funds' money
managers will continually monitor the pricing, quality and
liquidity of the floating and variable rate demand instruments
held by the Funds, including the participation certificates.

A participation certificate gives a Fund an undivided
interest in the municipal obligation in the proportion that the
Fund's participation interest bears to the total principal amount
of the municipal obligation and provides the demand feature
described below. Each participation is backed by: an irrevocable
letter of credit or guaranty of a bank which may be the bank
issuing the participation

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certificate, a bank issuing a confirming letter of credit to that
of the issuing bank, or a bank serving as agent of the issuing
bank with respect to the possible repurchase of the certificate of
participation; or insurance policy of an insurance company that
the money manager has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the
participation certificate back to the institution and draw on the
letter of credit or insurance on demand after thirty days' notice
for all or any part of the full principal amount of the Fund's
participation interest in the security plus accrued interest. The
Funds' money managers intend to exercise the demand feature only
(1) upon a default under the terms of the bond documents, (2) as
needed to provide liquidity to the Funds in order to make
redemptions of Fund shares, or (3) to maintain the required
quality of its investment portfolios.

The institutions issuing the participation
certificates will retain a service and letter of credit fee and a
fee for providing the demand feature, in an amount equal to the
excess of the interest paid on the instruments over the negotiated
yield at which the participations were purchased by a Fund. The
total fees generally range from 5% to 15% of the applicable prime
rate or other interest rate index. The Fund will attempt to have
the issuer of the participation certificate bear the cost of the
insurance. The Fund retains the option to purchase insurance if
necessary, in which case the cost of insurance will be a
capitalized expense of the Fund.

Demand Notes. The Limited Volatility Tax Free and Tax Free
Money Market Funds may purchase municipal obligations with the right to
a "put" or "stand-by commitment." A "put" on a municipal obligation
obligates the seller of the put to buy within a specified time and at
an agreed upon price a municipal obligation the put is issued with. A
stand-by commitment is similar to a put except the seller of the
commitment is obligated to purchase the municipal obligation on the
same day the Fund exercises the commitment and at a price equal to the
amortized cost of the municipal obligation plus accrued interest. The
seller of the put or stand-by commitment may be the issuer of the
municipal obligation, a bank or broker-dealer.

The Funds will enter into put and stand-by commitments with
institutions such as banks and broker-dealers that the Funds' money
managers continually believe satisfy the Funds' credit quality
requirements. The ability of the Funds to exercise the put or stand-by
commitment may depend on the seller's ability to purchase the
securities at the time the put or stand-by

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commitment is exercised or on certain restrictions in the buy back
arrangement. Such restrictions may prohibit the Funds from exercising
the put or stand-by commitment except to maintain portfolio flexibility
and liquidity. In the event the seller would be unable to honor a put
or stand-by commitment for financial reasons, the Funds may, in the
opinion of Funds' management, be a general creditor of the seller.
There may be certain restrictions in the buy back arrangement which may
not obligate the seller to repurchase the securities. (See, "Certain
Investments -- Municipal Notes -- Tax Free Participation
Certificates.")

The Limited Volatility Tax Free and Tax Free Money Market
Funds may purchase from issuers floating or variable rate municipal
obligations some of which are subject to payment of principal by the
issuer on demand by the Funds (usually not more than thirty days'
notice). The Funds may also purchase floating or variable rate
municipal obligations or participations therein from banks, insurance
companies or other financial institutions which are owned by such
institutions or affiliated organizations. Each participation is usually
backed by an irrevocable letter of credit, or guaranty of a bank or
insurance policy of an insurance company.

Interest Rate Transactions. The Fixed Income II, Fixed Income III,
Volatility Constrained Bond and Multistrategy Bond Funds may enter into interest
rate swaps, on either an asset-based or liability-based basis, depending on
whether they are hedging their assets or their liabilities, and will usually
enter into interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Funds receiving or paying, as the case may be, only the net
amount of the two payments. Inasmuch as these hedging transactions are entered
into for good faith hedging purposes, the money managers and the Funds believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the Funds' borrowing restrictions. The net amount
of the excess, if any, of the Funds' obligations over their entitlements with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or liquid high-grade debt securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Funds' custodian. To the extent that the Funds enter
into interest rate swaps on other than a net basis, the amount maintained in a
segregated account will be the full amount of the Funds' obligations, if any,
with respect to such interest rate swaps, accrued on a daily basis. The Funds
will not enter into any interest rate swaps unless the unsecured senior debt or
the claims-paying ability of the other party thereto is rated in the highest
rating category of at least one nationally recognized rating organization at the
time of entering into such transaction. If there is a default by the other party
to such a transaction, the Funds will have contractual remedies pursuant to the
agreement related to the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid.

The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If a money manager using this
technique is incorrect in its forecast of market values, interest rates and
other applicable factors, the investment performance of a

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Fund would diminish compared to what it would have been if this investment
technique was not used.

A Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Funds are contractually obligated to make. If the other party to an interest
rate swap defaults, the Funds' risk of loss consists of the net amount of
interest payments that the Funds are contractually entitled to receive. Since
interest rate swaps are individually negotiated, the Funds expect to achieve an
acceptable degree of correlation between their rights to receive interest on
their portfolio securities and their rights and obligations to receive and pay
interest pursuant to interest rate swaps.

Foreign Government Securities. Foreign government securities which the
Funds may invest in generally consist of obligations issued or backed by the
national, state or provincial government or similar political subdivisions or
central banks in foreign countries. Foreign government securities also include
debt obligations of supranational entities, which include international
organizations designated or backed by governmental entities to promote economic
reconstruction or development, international banking institutions and related
government agencies. These securities also include debt securities of
"quasi-government agencies" and debt securities denominated in multinational
currency units of an issuer.

Brady Bonds. The Fixed Income III and Multistrategy Bond Funds may
invest in Brady Bonds, the products of the "Brady Plan," under which bonds are
issued in exchange for cash and certain of a country's outstanding commercial
bank loans. The Brady Plan offers relief to debtor countries that have effected
substantial economic reforms. Specifically, debt reduction and structural reform
are the main criteria countries must satisfy in order to obtain Brady Plan
status. Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (primarily US-dollar) and are actively traded on the
over-the-counter market. Brady Bonds have been issued only recently and
accordingly they do not have a long payment history.

Credit and Liquidity Enhancements. The Mony Market Funds may invest in
securities supported by credit and liquidity enhancements from third parties,
generally letters of credit from foreign or domestic banks. Adverse changes in
the credit quality of these institutions could cause losses to Money Market
Funds that invest in these securities and may affect their share price.

TAXES

In order to qualify for treatment as a regulated investment company ("RIC")
under Subchapter M of the Code, each Fund must distribute annually to its
shareholders at least 90% of its investment company taxable income (generally,
net investment income plus net short-term capital gain) ("Distribution
Requirement") and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of a Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock or
securities or foreign currencies (exclusive of losses), or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Income Requirement"); (ii) less than 30% of a Fund's gross

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income each taxable year may be derived from gains (exclusive of losses) from
the sale or other disposition of any stock or securities; any options, futures,
or forward contracts; foreign currencies including any options or futures
thereon (which are not directly related to a Fund's business in investing) held
for less than three months (the "Short-Short Limitation"); (iii) at the close of
each quarter of a Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, US government securities,
securities of other RICs and other securities, with such other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (iv) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than US government securities or the
securities of other RICs) of any one issuer.

Notwithstanding the Distribution Requirement described above, which only
requires each Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss),
each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year at least 98% of its ordinary
income for that year and 98% of its capital gain net income for the one-year
period ending on October 31 of that year, plus prior-year shortfalls. For this
and other purposes, dividends declared by a RIC in October, November or December
of any calendar year and payable to shareholders of record on a date in such a
month will be deemed to have been paid by the RIC and received by shareholders
on December 31 of such year if the dividends are paid by the RIC at any time
through the end of the following January.

At December 31, 1995, certain of the Funds had net tax basis capital loss
carryforwards which may be applied against any realized net taxable gains of
each succeeding year until their respective expiration dates, whichever occurs
first. Available capital loss carryforwards and expiration dates are as follows:

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<TABLE>
<CAPTION>
12/31/96 12/31/97 12/31/98 12/31/99 12/31/01 12/31/02 12/31/03
------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income I $ - $ - $ - $ - $ - $(12,046,548) $ -
Fixed Income II - - - - (948,478) (3,534,633) (698,949)
Fixed Income III - - - - - (2,010,657) -
Emerging Markets - - - - - - (5,631,976)
Money Market - - - - - - (42,377)
Diversified Bond - - - - - (9,899,442)
Volatility Constrained (2,298,957) - - - - (5,583,410) (1,871,605)
Bond
Limited Volatility Tax (238,975) (103,283) (26,604) (383,404) - (345,504) (110,634)
Free
Real Estate Securities - - - - - - (2,387,399)
U.S. Government - - - - - (1,309) (4,913)
Money Market
</TABLE>

The Equity T Fund. The fundamental documents establishing the Equity T
Fund provide that the amount payable upon the redemption of shares of the Fund
will be equal to ninety-nine percent of the net asset value per share. The one
percent retained by the Fund will be treated by the Fund as a contribution to
the capital of the Fund.

Issues Related to Hedging and Option Investments. The use of hedging
instruments, such as options and futures contracts, involves specialized and
complex rules that will determine the character for income tax purposes of the
income received in connection therewith by a Fund and thereby affect, among
other things, the amount and proportion of distributions that will be taxable to
shareholders as ordinary income or capital gain.

As described above and in the Funds' Prospectuses, the Funds may buy
and sell foreign currencies and options on foreign currencies, and may enter
into forward currency contracts and currency futures contracts. The Funds
anticipate that these investment activities will not prevent the Funds from
qualifying as a RIC. As a general rule, gains or losses on the disposition of
debt securities denominated in a foreign currency that are attributable to
fluctuations in exchange rates between the date that the debt securities are
acquired and the date of disposition, gains and losses from the disposition of
foreign currencies, and gains and losses attributable to options on foreign
currencies, forward currency contracts and currency futures contracts will be
treated as ordinary income or loss.

Gains or losses attributable to fluctuations in exchange rates which
occur between the time a Fund accrues interest or other receivables, or expenses
or other liabilities, denominated in a foreign currency and the time the Fund
actually collects such receivables, or pays such liabilities, are generally
treated as ordinary income or loss. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency between the date of
acquisition of the security and the date of disposition also are treated as
ordinary gain or loss. These gains, referred to under the Code as "Section 988"
gains or losses, may increase or decrease the amount of the Fund's investment
company taxable income to be distributed to its shareholders, rather than
increasing or decreasing the amount of the Fund's capital gains or losses.

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<PAGE> 268
As noted above and in the Prospectuses, the Funds may acquire forward
currency contracts, currency futures contracts and options on foreign currencies
to hedge their risk of currency fluctuations with regard to property held or to
be held by the Funds, and before the close of the day on which the Funds enter
into the contract or options, the Funds will, as a general rule, identify on
their records that the contracts or options were entered into as part of a
hedging transaction. If the Funds were to invest in a forward currency contract,
currency futures contract or option on a foreign currency and offsetting
positions in such contracts or options, and if the two offsetting positions were
characterized as a straddle (as opposed to a hedge) for federal income tax
purposes, then the Funds might not be able to receive the benefit of certain
realized losses from the liquidation of one of those positions for an indefinite
period of time (i.e., until the gain position and any successor positions are
disposed of). The Funds expect that their activities with respect to forward
foreign currency contracts, currency futures contracts and options on foreign
currencies will not require them, as a general rule, to have to treat such
contracts or options as straddle positions for federal income tax purposes.
Under current law, unless certain requirements are satisfied, the Funds will be
required to calculate separately certain gains and losses attributable to
certain of their forward currency contracts, currency futures contracts and
options on foreign currencies, even if the Funds acquired the contracts or
options to hedge their risk of currency fluctuations with regard to capital
assets held or to be held by the Funds. The Internal Revenue Service, however,
has the authority to issue additional regulations that would permit or require
the Funds either to integrate some or all of their forward currency contracts,
currency futures contracts, options on foreign currencies and hedged investments
as a single transaction or otherwise to treat the contracts or options in the
manner that is consistent with the hedged investments. It is uncertain if or
when these regulations will be issued.

To the extent that a Fund's forward contracts, currency futures
contracts or options on foreign currencies can be classified as either regulated
futures contracts or foreign currency contracts (as described in section 1256(b)
of the Code) (collectively referred to herein as "section 1256 contracts"), such
investments will be taxed pursuant to a special "mark-to-market" system. Under
the mark-to-market system, the Funds may be treated as realizing a greater or
lesser amount of gains or losses than actually realized. As a general rule,
except for certain currency related activities (as described above) in which
gain or loss is treated as ordinary income or loss, gain or loss on section 1256
contracts is treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, and accordingly, the mark-to-market system generally will
affect the amount of capital gains or losses taxable to the Funds and the amount
of distributions taxable to a shareholder. Moreover, if the Funds invested in
both section 1256 contracts and offsetting positions with respect to such
contracts, then the Funds might not be able to receive the benefit of certain
realized losses for an indeterminate period of time (i.e., until disposition of
the "gain leg" of the straddle and any successor position). The Funds expect
that their activities with respect to section 1256 contracts and offsetting
positions in such contracts (a) will not cause them or their shareholders to be
treated as receiving a materially greater amount of ordinary income, capital
gains, dividends, or distributions than actually realized or received by the

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Funds and (b) will permit them to use substantially all of the losses of the
Funds for the fiscal years in which such losses actually occur.

Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures and
forward contracts to a Fund are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by a Fund which is taxed
as ordinary income when distributed to shareholders.

A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.

Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
in any given fiscal year as compared to a fund that did not engage in such
hedging transactions.

The 30% limit on gains from the disposition of certain options, futures
and forward contracts held less than three months and the qualifying income and
diversification requirements applicable to a Fund's assets may limit the extent
to which a Fund will be able to engage in transactions in options, futures
contracts or forward contracts.

Income (excluding certain gains) from transactions in options and
futures contracts derived by a Fund with respect to its business of investing in
securities, will qualify as permissible income under the Income Requirement.
Furthermore, any increase in value on a position that is part of a "designated
hedge" will be offset by any decrease in value (whether realized or not) of the
offsetting hedging position during the period of the hedge for purposes of
determining whether the Fund satisfies the Short-Short Limitation. Thus, only
the net gain (if any) from the designated hedge will be included in gross income
for purposes of that limitation. The Funds anticipate engaging in hedging
transactions that are intended to qualify for this treatment, but at the present
time it is not clear whether this treatment will be available to all of a Fund's
hedging transactions. To the extent this treatment is not available, a Fund may
be forced to defer the closing out of certain options and futures contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to qualify as a RIC. Income derived from currencies, options, futures
and

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forward contracts on currencies directly related to a Fund's principal business
of investing in stocks or securities is excluded from the Short-Short Limitation
computation.

If a call option written by a Fund expires, the Fund will realize a
capital gain equal to the amount of the premium it received for writing the
option. If a Fund terminates its obligations under a call option it has written,
or if the Fund writes a put option terminating its rights as the holder of a put
option, the Fund will realize a capital gain or loss, depending on whether the
cost of the closing transaction is less than or exceeds the premium received
when the option was written. If a call option written by a Fund is exercised,
the Fund will be treated as having sold the underlying security and will realize
a long-term or short-term capital gain and loss, depending on the holding period
of the underlying security and on whether the sum of the option price received
upon the exercise plus the premium received when the option was written exceeds
or is less than the basis of the optioned security.

If an option purchased by a Fund expires, the Fund generally will
realize a capital loss equal to the cost of the option, long-term if the option
was held for more than one year. If the Fund sells the option, it generally will
realize a capital gain or loss, depending on whether the proceeds from the sale
are greater or less than the cost of the option plus the transaction costs. If
the Fund exercises a call option, the cost of the option will be added to the
basis of the security purchased. If the Fund exercises a put option, it will
realize a capital gain or loss (depending on the Fund's basis for the underlying
security), which will be long-term or short-term, depending on the holding
period of the underlying security. Any such capital gain will be decreased (or
loss increased) by the premium paid for the option.

FOREIGN INCOME TAXES. Investment income received from sources within
foreign countries may be subject to foreign income taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which would entitle a Fund to a reduced rate on such taxes or exemption from
taxes on such income. It is impossible to determine the effective rate of
foreign tax for a Fund in advance since the amount of the assets to be invested
within various countries is not known.

If a Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. Under U.S. Treasury regulations for
PFICs, the International, Emerging Markets and International Securities Funds
can elect to mark-to-market their PFIC holdings in lieu of paying taxes on gains
or distributions therefrom.

STATE AND LOCAL TAXES. Depending upon the extent of a Fund's activities
in states and localities in which its offices are maintained, in which its
agents or independent contractors are located or in which it is otherwise deemed
to be conducting business, a Fund may be subject to the tax laws of such states
or localities.

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RATINGS OF DEBT INSTRUMENTS

Corporate and Municipal Bond Ratings.

Moody's Investors Service, Inc. (Moody's):

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 exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.

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

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

Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great period 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 other 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
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 and interest.

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

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

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

Standard & Poor's Ratings Group ("S&P"):

AAA -- This is the highest rating assigned by S&P 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 interest and repay principal. While bonds with this rating normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal for debt in this category than debt in
higher rated categories.

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

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

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<PAGE> 273
B -- Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.

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

CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.

C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating. The C
rating has been used to cover a situation where a bankruptcy petition
has been filed but debt service payments are continued.

C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.

D -- Bonds rated D are in payment default. The D rating is used when
interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.

Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
appropriate category.

Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.

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<PAGE> 274
State, Municipal Notes and Tax Exempt Demand Notes.

Moody's:

Moody's rating for state, municipal and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction is
in recognition of the differences between short-term credit risk and
long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors
of the first importance in bond risk are of lesser importance in the
short run. Symbols used are as follows:

MIG-1--Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing or both.

MIG-2--Notes bearing this designation are of high quality, with margins
of protection ample although not so large as in the preceding group.

S&P:

A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making
that assessment:

-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).

-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a
note).

Note rating symbols are as follows:

SP-1--Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.

SP-2--Satisfactory capacity to pay principal and interest.

S&P assigns "dual" ratings to all long-term debt issues that have as
part of their provisions a variable rate demand or double feature.

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand
feature. The long-term debt rating symbols are used to denote the put
option (for example, "AAA/A-1+") or if the nominal maturity is short, a
rating of "SP-1+/AAA" is assigned.

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<PAGE> 275
Commercial Paper Ratings.

Moody's:

Commercial paper rated Prime by Moody's is based upon its evaluation of
many factors, including: (l) management of the issuer; (2) the issuer's
industry or industries and the speculative-type risks which may be
inherent in certain areas; (3) the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationships
which exist with the issue; 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. Relative
differences in these factors determine whether the issuer's commercial
paper is rated Prime-l, Prime-2, or Prime-3.

Prime-1 - indicates a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: (1) leading market positions
in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate
reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial
markets and assured sources of alternative liquidity.

Prime-2 - indicates a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.

S&P:

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

A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.

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<PAGE> 276
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.

Duff & Phelps, Inc.:

Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank
loans, master notes, bankers' acceptances, irrevocable letters of
credit, and current maturities of long-term debt. Asset-backed
commercial paper is also rated according to this scale.

Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including
trade credit, bank lines, and the capital markets. An important
consideration is the level of an obligor's reliance on short-term funds
on an ongoing basis.

The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term
debt issuers carries the highest rating, yet quality differences exist
within that tier. As a consequence, Duff & Phelps has incorporated
gradations of '1+' (one plus) and '1-' (one minus) to assist investors
in recognizing those differences.

Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free US
Treasury short-term obligations.

Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.

Duff 1- --High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.

Good Grade

Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.

Satisfactory Grade

Duff 3--Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.

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<PAGE> 277
Non-Investment Grade

Duff 4--Speculative investment characteristics. Liquidity is not
sufficient to ensure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.

Default

Duff 5--Issuer failed to meet scheduled principal and/or interest
payments.

IBCA, Inc.:

In addition to conducting a careful review of an institution's reports
and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to
the preparation of individual reports and ratings. To keep abreast of
any changes that may affect assessments, analysts maintain contact
throughout the year with the management of the companies they cover.

IBCA's analysts speak the languages of the countries they cover, which
is essential to maximize the value of their meetings with management and
to properly analyze a company's written materials. They also have a
thorough knowledge of the laws and accounting practices that govern the
operations and reporting of companies within the various countries.

Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While this confidential
data cannot be disclosed in reports, it is taken into account when
assigning ratings. Before dispatch to subscribers, a draft of the report
is submitted to each company to permit correction of any factual errors
and to enable clarification of issues raised.

IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for
institutions in all the countries covered. Following the Committee
meetings, ratings are issued directly to subscribers. At the same time,
the company is informed of the ratings as a matter of courtesy, but not
for discussion.

A1+--Obligations supported by the highest capacity for timely repayment.

A1--Obligations supported by a very strong capacity for timely
repayment.

A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.

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<PAGE> 278
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher
categories.

B2--Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial
conditions.

C1--Obligations for which there is an inadequate capacity to ensure
timely repayment.

D1--Obligations which have a high risk of default or which are currently
in default.

Fitch Investors Service, Inc. ("Fitch"):

Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes
and municipal and investment notes.

The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in
a timely manner.

Fitch short-term ratings are as follows:

F-1+--Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.

F-1--Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.

F-2--Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned 'F-1+' and 'F-1' ratings.

F-3--Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.

F-5--Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.

D--Default. Issues assigned this rating are in actual or imminent
payment default.

Thomson BankWatch ("TBW") Short-Term Ratings:

The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.

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<PAGE> 279
These ratings are derived exclusively from a quantitative analysis of publicly
available information. Qualitative judgments have not been incorporated. The
ratings are intended to be applicable to all operating entities of an
organization but there may be in some cases more credit liquidity and/or risk in
one segment of the business than another.

The TBW short-term rating applies only to unsecured instruments that have a
maturity of one year or less, and reflects the likelihood of an untimely payment
of principal or interest.

TBW-1 The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.

TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."

TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and
interest in a timely fashion is considered adequate.

TBW-4 The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.

FINANCIAL STATEMENTS

The 1995 annual financial statements of the Funds, including notes to the
financial statements and financial highlights and the Report of Independent
Accountants, are included in the Investment Company's Annual Reports to
Shareholders. Copies of these Annual Reports accompany this Statement of
Additional Information and are incorporated herein by reference.

-61-
<PAGE> 280

FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED EQUITY FUND*

DIVERSIFIED EQUITY FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR...... $32.26 $34.88 $35.60 $36.36 $30.66 $35.22 $30.46 $27.22 $31.20 $27.85
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. .60 .58 .56 .60 .81 .99 .94 .89 1.37 .78
Net realized and unrealized gain
(loss)
on investments...................... 10.63 (.49) 3.03 2.30 8.36 (3.45) 7.68 3.57 1.05 3.28
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations.... 11.23 .09 3.59 2.90 9.17 (2.46) 8.62 4.46 2.42 4.06
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................. (.60) (.58) (.55) (.61) (.82) (.96) (1.11) (.81) (.97) (.67)
Net realized gain on investments...... (4.27) (1.87) (3.76) (3.05) (2.65) (1.14) (2.75) (.41) (5.43) (.04)
In excess of net realized gain
on investments...................... -- (.26) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................. (4.87) (2.71) (4.31) (3.66) (3.47) (2.10) (3.86) (1.22) (6.40) (.71)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............ $38.62 $32.26 $34.88 $35.60 $36.36 $30.66 $35.22 $30.46 $27.22 $31.20
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........................ 35.17 (0.01) 10.53 8.32 31.05 (7.01) 29.06 16.37 6.94 14.63
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets.............................. .95 .95 .96 .98 .98 1.03 1.01 1.00 .97 .98
Net investment income to average
net assets.......................... 1.56 1.73 1.54 1.69 2.28 2.97 2.65 2.92 2.27 2.87
Portfolio turnover.................... 92.53 57.53 99.80 77.02 116.53 96.90 61.80 66.02 87.69 80.50
Net assets, end of year ($000
omitted)............................ 530,645 414,036 388,420 337,549 325,746 251,254 234,988 202,948 198,902 214,325
</TABLE>

<PAGE> 281

FINANCIAL HIGHLIGHTS OF THE SPECIAL GROWTH FUND*

SPECIAL GROWTH FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR........... $33.47 $35.82 $36.63 $34.47 $24.71 $29.35 $26.19 $23.58 $26.68 $25.10
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... .18 .16 .07 .05 .24 .42 .42 .24 .30 .28
Net realized and unrealized gain (loss)
on investments........................... 9.25 (.71) 5.22 4.22 10.34 (4.57) 5.78 2.99 1.59 1.74
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total From Investment Operations......... 9.43 (.55) 5.29 4.27 10.58 (4.15) 6.20 3.23 1.89 2.02
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income...................... (.21) (.10) (.07) (.06) (.24) (.42) (.48) (.21) (.35) (.25)
Net realized gain on investments........... (3.52) (.85) (6.03) (2.05) (.58) (.07) (2.56) (.41) (4.64) (.19)
In excess of net realized gain on
investments.............................. -- (.85) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total Distributions...................... (3.73) (1.80) (6.10) (2.11) (.82) (.49) (3.04) (.62) (4.99) (.44)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR................. $39.17 $33.47 $35.82 $36.63 $34.47 $24.71 $29.35 $26.19 $23.58 $26.68
======= ======= ======= ======= ======= ====== ====== ====== ====== ======
TOTAL RETURN (%)............................. 28.52 (3.71) 15.48 12.52 43.11 (14.28) 23.92 13.82 6.54 8.07
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net to average net
assets................................... 1.22 1.20 1.31 1.33 1.36 1.50 1.49 1.47 1.37 1.49
Operating expenses, gross to average net
assets................................... 1.22 1.20 1.31 1.33 1.36 1.53 1.49 1.47 1.37 1.51
Net investment income to average net
assets................................... .49 .50 .19 .14 .80 1.57 1.42 .92 1.07 1.20
Portfolio turnover......................... 87.56 55.40 91.97 42.20 42.81 63.87 85.24 51.75 161.46 99.59
Net assets, end of year ($000 omitted)..... 313,678 229,077 188,891 134,913 105,245 62,116 60,146 47,405 45,460 41,523
Per share amount of fees reimbursed
($ omitted).............................. -- -- -- -- -- .0093 -- -- -- .0026
</TABLE>

<PAGE> 282

FINANCIAL HIGHLIGHTS OF THE EQUITY INCOME FUND*

EQUITY INCOME FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR.......... $32.21 $35.90 $35.32 $36.54 $30.75 $34.91 $30.85 $26.92 $34.66 $31.98
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... .94 .90 .83 .99 1.11 1.43 1.34 1.22 1.18 1.36
Net realized and unrealized gain (loss) on
investments............................. 10.08 (.70) 3.69 3.08 7.15 (3.83) 6.47 3.96 (1.44) 2.89
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
Total From Investment Operations........ 11.02 .20 4.52 4.07 8.26 (2.40) 7.81 5.18 (.26) 4.25
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income..................... (.97) (.89) (.83) (1.00) (1.10) (1.37) (1.50) (1.25) (1.50) (1.25)
In excess of net investment income........ -- -- (.00) -- -- -- -- -- -- --
Net realized gain on investments.......... (3.83) (3.00) (3.11) (4.29) (1.37) (.39) (2.25) -- (5.98) (.32)
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
Total Distributions..................... (4.80) (3.89) (3.94) (5.29) (2.47) (1.76) (3.75) (1.25) (7.48) (1.57)
------- ------- ------- ------- ------- ------ ------- ------ ------ ------
NET ASSET VALUE, END OF YEAR................ $38.43 $32.21 $35.90 $35.32 $36.54 $30.75 $34.91 $30.85 $26.92 $34.66
======= ======= ======= ======= ======= ====== ======= ====== ====== ======
TOTAL RETURN (%)............................ 34.76 (.69) 13.23 11.51 27.52 (6.90) 25.61 19.42 (2.44) 13.42
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets.................................. 1.06 1.04 1.05 1.08 1.11 1.14 1.15 1.13 1.06 1.02
Net investment income to average net
assets.................................. 2.51 2.56 2.23 2.68 3.11 4.12 3.94 4.08 3.30 4.05
Portfolio turnover........................ 92.40 89.91 78.72 95.07 61.73 65.97 79.82 58.12 98.67 83.55
Net assets, end of year ($000 omitted).... 180,116 144,285 149,532 134,365 122,689 99,575 101,589 68,998 61,300 75,032
</TABLE>

<PAGE> 283

FINANCIAL HIGHLIGHTS OF THE QUANTITATIVE EQUITY FUND*

QUANTITATIVE EQUITY FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR............... $24.84 $26.44 $25.82 $25.88 $21.07 $23.57 $20.21 $18.08 $20.00
------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................... .50 .49 .45 .49 .58 .66 .68 .56 .32
Net realized and unrealized gain (loss)
on investments............................... 8.72 (.19) 2.69 1.67 5.93 (1.99) 4.53 2.14 (1.86)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment Operations............. 9.22 .30 3.14 2.16 6.51 (1.33) 5.21 2.70 (1.54)
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.......................... (.51) (.49) (.45) (.49) (.58) (.64) (.76) (.57) (.25)
Net realized gain on investments............... (2.79) (1.41) (2.07) (1.73) (1.12) (.53) (1.09) -- (.13)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions.......................... (3.30) (1.90) (2.52) (2.22) (1.70) (1.17) (1.85) (.57) (.38)
------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF YEAR..................... $30.76 $24.84 $26.44 $25.82 $25.88 $21.07 $23.57 $20.21 $18.08
======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(A).............................. 37.69 .19 12.56 8.67 31.70 (5.60) 26.08 15.05 (7.74)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (b)... .93 .94 .98 1.02 1.03 1.12 1.14 1.16 .97
Net investment income to average net assets
(b).......................................... 1.71 1.95 1.68 1.94 2.39 2.94 3.00 3.00 3.38
Portfolio turnover (b)......................... 78.83 45.97 62.48 59.19 58.07 57.49 90.65 59.37 47.78
Net assets, end of year ($000 omitted)......... 488,948 380,592 314,647 244,870 201,614 147,730 124,111 89,858 64,182
</TABLE>

<PAGE> 284

FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL SECURITIES FUND*

INTERNATIONAL SECURITIES FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR........ $53.96 $57.95 $44.75 $49.15 $44.60 $55.81 $50.49 45.26 $49.22 $34.16
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... .56 .44 .40 .61 .72 1.05 .67 .86 .55 .19
Net realized and unrealized gain (loss)
on investments (a).................... 4.89 1.23 14.53 (4.02) 4.60 (9.53) 10.32 8.98 6.84 15.90
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
Total From Investment Operations...... 5.45 1.67 14.93 (3.41) 5.32 (8.48) 10.99 9.84 7.39 16.09
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
LESS DISTRIBUTIONS:
Net investment income................... (.88) (.04) (.38) (.68) (.76) (1.08) (.89) (.95) (.45) (.02)
In excess of net investment income...... (.23) (.02) (.23) -- -- -- -- -- -- --
Net realized gain on investments........ (1.69) (5.60) (1.12) (.31) (.01) (1.65) (4.78) (3.66) (10.90) (1.01)
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
Total Distributions................... (2.80) (5.66) (1.73) (.99) (.77) (2.73) (5.67) (4.61) (11.35) (1.03)
------- ------- ------- ------- ------- ------- ------- ------ ------ -------
NET ASSET VALUE, END OF YEAR.............. $56.61 $53.96 $57.95 $44.75 $49.15 $44.60 $55.81 $50.49 $45.26 $49.22
======= ======= ======= ======= ======= ======= ======= ====== ====== =======
TOTAL RETURN (%).......................... 10.20 4.86 33.48 (6.94) 11.99 (15.34) 22.24 22.05 15.89 48.54
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
assets................................ 1.30 1.30 1.38 1.45 1.49 1.50 1.50 1.50 1.50 1.50
Operating expenses, gross, to average
assets................................ 1.31 1.33 1.42 1.47 1.49 1.50 1.54 1.50 1.50 1.61
Net investment income to average net
assets................................ .97 .70 .82 1.37 1.68 2.28 1.54 1.60 .91 .96
Portfolio turnover...................... 42.96 72.23 60.22 48.93 52.46 68.89 57.16 43.50 113.04 55.53
Net assets, end of year ($000
omitted).............................. 623,389 563,333 454,482 262,886 243,065 169,818 123,823 91,006 88,321 100,733
Per share amount of fees reimbursed ($
omitted).............................. .0080 .0178 .0161 .0054 -- -- .0169 -- -- .0347
</TABLE>

<PAGE> 285

FINANCIAL HIGHLIGHTS OF THE EMERGING MARKETS FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Investment Company.

EMERGING MARKETS FUND

- ------------------------------
++ For the period January 29, 1993 (commencement of operations) to December 31,
1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993, are annualized.
(c) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See notes to Financial Statements which appear in the Investment Company's
Annual Report to Shareholders and which are incorporated by reference into
the Statement of Additional Information.

<PAGE> 286

FINANCIAL HIGHLIGHTS OF THE REAL ESTATE SECURITIES FUND*

The following table contains important financial information relating to
the Fund and has been audited by Coopers & Lybrand L.L.P., the Investment
Company's independent accountants. The table includes selected data for a share
outstanding throughout each year or period ended December 31, and other
performance information derived from the financial statements. The information
in the table represents the Financial Highlights for the Fund's Class S Shares
for the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Investment Company.

REAL ESTATE SECURITIES FUND

<PAGE> 287

FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED BOND FUND*

DIVERSIFIED BOND FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR...... $21.53 $23.73 $23.49 $24.29 $22.81 $22.90 $22.38 $22.38 $25.00 $23.29
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 1.54 1.46 1.48 1.62 1.72 1.74 1.87 1.69 1.55 1.73
Net realized and unrealized gain
(loss)
on investments...................... 2.18 (2.22) .83 (.10) 1.61 (.09) .83 (.02) (1.28) 1.76
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations.... 3.72 (.76) 2.31 1.52 3.33 1.65 2.70 1.67 .27 3.49
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................. (1.56) (1.42) (1.48) (1.63) (1.69) (1.74) (1.92) (1.67) (1.65) (1.76)
In excess of net investment income.... -- -- (.01) -- -- -- -- -- -- --
Net realized gain on investments...... -- -- (.58) (.69) (.16) -- (.26) -- (1.24) (.02)
In excess of net realized gain on
investments......................... -- (.02) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................. (1.56) (1.44) (2.07) (2.32) (1.85) (1.74) (2.18) (1.67) (2.89) (1.78)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............ $23.69 $21.53 $23.73 $23.49 $24.29 $22.81 $22.90 $22.38 $22.38 $25.00
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........................ 17.76 (3.25) 10.02 6.57 15.29 7.58 12.52 7.67 1.25 15.49
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average assets... .59 .56 .58 .62 .74 .88 .93 .93 .90 .96
Operating expenses, gross, to average assets... .59 .56 .58 .67 .74 .88 .93 .93 .90 .96
Net investment income to average
net assets.......................... 6.69 6.57 6.13 6.79 7.38 7.89 8.16 7.48 7.05 7.27
Portfolio turnover.................... 135.85 153.21 177.74 228.37 130.96 94.88 195.14 197.15 180.54 229.48
Net assets, end of year ($000
omitted)............................ 513,808 525,315 477,341 412,394 344,081 294,677 230,156 211,656 197,730 122,333
Per share amount of fees waived
($ omitted)......................... -- -- -- .0115 -- -- -- -- -- --
</TABLE>

<PAGE> 288

FINANCIAL HIGHLIGHTS OF THE VOLATILITY CONSTRAINED BOND FUND*

VOLATILITY CONSTRAINED BOND FUND

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, BEGINNING OF YEAR...... $18.64 $19.78 $19.51 $20.33 $19.51 $19.37 $19.14 $19.21 $20.06 $19.93
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 1.21 1.15 .82 1.34 1.45 1.52 1.66 1.55 1.48 1.53
Net realized and unrealized gain
(loss)
on investments...................... .58 (1.16) .45 (.88) .80 .13 .30 (.10) (.67) .13
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment Operations.... 1.79 (.01) 1.27 .46 2.25 1.65 1.96 1.45 .81 1.66
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income................. (1.22) (1.13) (.71) (1.28) (1.43) (1.51) (1.73) (1.52) (1.59) (1.53)
Net realized gain on investments...... -- -- -- -- -- -- -- -- (.07) --
Tax Return of capital................. -- -- (.29) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions................. (1.22) (1.13) (1.00) (1.28) (1.43) (1.51) (1.73) (1.52) (1.66) (1.53)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............ $19.21 $18.64 $19.78 $19.51 $20.33 $19.51 $19.37 $19.14 $19.21 $20.06
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........................ 9.89 (.02) 6.67 2.29 12.00 8.92 10.64 7.77 4.27 8.68
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets.............................. .71 .67 .66 .68 .62 .62 .61 .59 .58 .58
Net investment income to average
net assets.......................... 6.33 5.97 5.79 6.74 7.34 7.88 8.41 7.97 7.75 7.88
Portfolio turnover.................... 256.72 182.65 220.77 312.05 159.20 181.66 331.12 238.69 190.36 227.17
Net assets, end of year ($000
omitted)............................ 181,881 195,007 225,672 292,909 293,603 240,887 214,745 234,095 251,702 214,860
</TABLE>

<PAGE> 289

FINANCIAL HIGHLIGHTS OF THE MULTISTRATEGY BOND FUND*

MULTISTRATEGY BOND FUND

- ------------------------------
++ For the period January 29, 1993 (commencement of operations) to December
31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
* See the notes to financial statements which appear in the Investment
Company's Annual Report to Shareholders and which are incorporated by
reference into the Statement of Additional Information.