RUSSELL FRANK INVESTMENT CO, 497, 1997-05-28

RUSSELL FRANK INVESTMENT CO
497, 1997-05-28

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<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001

Frank Russell Investment Management Company ("FRIMCo") operates and
administers all of the Funds which comprise the Investment Company. FRIMCo is
a wholly owned subsidiary of Frank Russell Company, which researches and
recommends to FRIMCo, 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 International Fund
Equity II Fund Fixed Income I Fund
Equity III Fund Fixed Income II Fund
Equity Q Fund Fixed Income III 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.

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 eight of its Funds that a prospective
investor ought to know before investing. The Investment Company has filed a
Statement of Additional Information dated May 1, 1997, 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
described herein. The Funds listed above currently do not offer shares of
beneficial interest in any other classes.

The Statement of Additional Information, material incorporated by reference
into this Prospectus, and other information regarding the FRIMCo and the Funds
is maintained electronically with the SEC at its Internet Web Site
(http://www.sec.gov).

PROSPECTUS DATED MAY 1, 1997,
AS REVISED JUNE 1, 1997
<PAGE>

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.

This Prospectus describes and offers Class S Shares of the eight Funds set
forth on the first page of this Prospectus. A shareholder of a Fund described
herein may pay a quarterly shareholder investment services fee directly to
FRIMCo. The fee is computed on the amount the shareholder has invested in the
applicable Fund. The Investment Company had aggregate net assets of
approximately $10 billion on April 3, 1997. The net assets of these eight
Funds on April 3, 1997, were:

<TABLE>
<S> <C> <C> <C>
Equity I............. $901,974,708 International........ $943,052,415
Equity II............ $350,811,383 Fixed Income I....... $668,822,040
Equity III........... $200,932,814 Fixed Income II...... $237,434,172
Equity Q............. $866,252,959 Fixed Income III..... $302,338,259
</TABLE>

2
<PAGE>

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.

THE PURPOSE OF THE FUNDS is to provide a means for Eligible Investors to use
FRIMCo's and Frank Russell Company's "multi-style, multi-manager
diversification" techniques and money manager evaluation services on an
economical and efficient basis. PAGE 21.

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 21.

ELIGIBLE INVESTORS are principally those institutional investors and
financial intermediaries that have $10 million or more to invest and that
invest for their own account or in a fiduciary or agency capacity and which
have entered into an Asset Management Services Agreement with FRIMCo and
institutions or individuals who have acquired shares through such institutions
or financial intermediaries. PAGE 22.

GENERAL MANAGEMENT OF THE FUNDS is provided by FRIMCo, 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 FRIMCo comprehensive
consulting and money manager evaluation services. PAGE 23.

EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management
fee to FRIMCo, its expenses and its portion of the general expenses of the
Investment Company. FRIMCo, 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 FRIMCo, for conducting the Fund's general operations
and for providing investment supervision for the Fund. Each Eligible Investor
may pay to FRIMCo directly a fee for other services provided to that Eligible
Investor. PAGE 25.

THE MONEY MANAGERS are evaluated and recommended by FRIMCo and 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 FRIMCo. PAGE 25.

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 26.

3
<PAGE>

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 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
41.

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 41.

FUND PERFORMANCE, including yields and total return information, is
calculated in accordance with formulas prescribed by the Securities and
Exchange Commission. PAGE 43.

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 44.

PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and
orders to purchase are accepted on each business day. PAGE 45.

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 47.

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 49.

4
<PAGE>

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..................................................... .06%
Transfer Agent Fees................................................ .03
Other Fees......................................................... .02
---
Total Other Expenses............................................... .11
----
Total Class S Shares Operating Expenses**........................... .71%
====
</TABLE>

5
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .75%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .10%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .04
---
Total Other Expenses............................................... .20
----
Total Class S Shares Operating Expenses**........................... .95%
====
</TABLE>

6
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .60%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .08%
Transfer Agent Fees................................................ .07
Other Fees......................................................... .04
---
Total Other Expenses............................................... .19
----
Total Class S Shares Operating Expenses**........................... .79%
====
</TABLE>

7
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .60%
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**........................... .71%
====
</TABLE>

8
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .75%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .23%
Transfer Agent Fees................................................ .03
Other Fees......................................................... .03
---
Total Other Expenses............................................... .29
----
Total Class S Shares Operating Expenses**........................... 1.04%
====
</TABLE>

9
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .30%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .06%
Transfer Agent Fees................................................ .03
Other Fees......................................................... .03
---
Total Other Expenses............................................... .12
----
Total Class S Shares Operating Expenses**........................... .42%
====
</TABLE>

10
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .50%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .08%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .06
---
Total Other Expenses............................................... .20
----
Total Class S Shares Operating Expenses**........................... .70%
====
</TABLE>

11
<PAGE>

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

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......................................................... .06
---
Total Other Expenses............................................... .18
----
Total Class S Shares Operating Expenses (1)**....................... .73%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 $22 $41 $92
=== === === ===
</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 thereafter 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 FRIMCo, 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 FRIMCo to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an investor
to FRIMCo.
** 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>

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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20 $ 20.18 $ 28.53
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .42 .52 .62 .60 .61 .75 .91 .88 .81 1.12
Net realized and
unrealized gain (loss)
on investments........ 5.96 7.71 (.41) 2.18 1.54 5.61 (2.37) 5.79 2.46 1.50
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 6.38 8.23 .21 2.78 2.15 6.36 (1.46) 6.67 3.27 2.62
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.42) (.52) (.62) (.60) (.62) (.75) (.90) (1.01) (.77) (1.26)
Net realized gain on
investments........... (3.62) (3.03) (.94) (2.11) (1.70) (1.57) (1.90) (2.47) (.48) (9.71)
In excess of net
realized gain on
investments........... -- -- (.24) (.16) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (4.04) (3.55) (1.80) (2.87) (2.32) (2.32) (2.80) (3.48) (1.25) (10.97)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 30.34 $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20 $ 20.18
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 23.58 35.94 .79 11.61 9.02 31.22 (5.64) 30.79 16.42 5.97
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .71 .59 .12 .14 .15 .19 .23 .18 .17 .14
Net investment income
to average net assets
(a)................... 1.38 1.91 2.52 2.36 2.53 3.14 3.66 3.41 3.68 3.11
Portfolio turnover..... 99.51 92.04 75.02 91.87 71.14 119.55 101.30 61.27 67.59 86.22
Net assets, end of year
($000 omitted)........ 961,953 751,497 547,242 514,356 410,170 330,507 221,543 300,814 243,691 266,371
Average commission rate
paid per share of
security ($ omitted).. .0464 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.

13
<PAGE>

FINANCIAL HIGHLIGHTS
OF THE EQUITY II FUND*

EQUITY II FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $ 23.32 $ 22.50 $ 19.99 $ 23.54
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .16 .27 .36 .32 .30 .41 .51 .61 .52 .50
Net realized and
unrealized gain (loss)
on investments........ 4.96 6.80 (.86) 3.97 3.13 7.65 (3.91) 4.74 2.51 2.17
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 5.12 7.07 (.50) 4.29 3.43 8.06 (3.40) 5.35 3.03 2.67
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.16) (.29) (.31) (.31) (.30) (.41) (.50) (.71) (.52) (.61)
Net realized gain on
investments........... (3.79) (2.90) (.21) (4.72) (1.74) (.57) (.18) (3.82) -- (5.61)
In excess of net
realized gain on
investments........... -- -- (.56) (.39) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (3.95) (3.19) (1.08) (5.42) (2.04) (.98) (.68) (4.53) (.52) (6.22)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 30.05 $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $ 23.32 $ 22.50 $ 19.99
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 18.51 28.67 (2.60) 16.70 13.31 42.40 (14.76) 24.63 15.22 10.32
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .95 .83 .23 .34 .32 .37 .48 .41 .35 .29
Net investment income
to average net
assets (a)............ .52 .97 1.46 1.14 1.10 1.79 2.40 2.45 2.40 1.94
Portfolio turnover..... 120.78 89.31 58.04 87.25 43.33 42.16 80.27 77.55 56.38 130.36
Net assets, end of year
($000 omitted)........ 365,955 279,566 202,977 171,421 120,789 101,206 60,668 70,588 63,903 68,968
Average commission rate
paid per share of
security ($ omitted).. .0381 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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>

FINANCIAL HIGHLIGHTS
OF THE EQUITY III FUND*

EQUITY III FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $ 26.49 $ 24.03 $ 20.74 $ 31.27
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .70 .82 .93 .89 .98 1.08 1.33 1.26 1.15 1.21
Net realized and
unrealized gain (loss)
on investments........ 5.10 7.73 (.85) 2.99 2.24 5.21 (2.85) 5.35 3.40 (.74)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations........... 5.80 8.55 .08 3.88 3.22 6.29 (1.52) 6.61 4.55 .47
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.71) (.83) (.91) (.90) (.99) (1.07) (1.30) (1.40) (1.14) (1.61)
Net realized gain on
investments........... (4.52) (2.79) (1.94) (2.68) (2.56) (1.44) (.37) (2.75) (.12) (9.39)
In excess of net
realized gain on
investments........... -- -- (.10) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (5.23) (3.62) (2.95) (3.58) (3.55) (2.51) (1.67) (4.15) (1.26) (11.00)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 29.68 $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $ 26.49 $ 24.03 $ 20.74
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 20.90 35.96 1.16 14.95 12.30 27.86 (5.73) 28.07 22.19 (1.48)
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .79 .65 .17 .16 .20 .25 .27 .23 .20 .17
Net investment income
to average net assets
(a)................... 2.23 2.90 3.39 3.09 3.57 4.05 4.91 4.58 4.96 4.11
Portfolio turnover..... 100.78 103.40 85.92 76.77 84.56 56.99 65.74 83.13 57.28 97.54
Net assets, end of year
($000 omitted)........ 221,778 222,541 177,807 181,630 166,782 138,076 94,087 135,245 106,695 102,716
Average commission rate
paid per share of
security ($ omitted).. .0447 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.
(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%.

15
<PAGE>

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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987++
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 30.40 $ 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.. .58 .59 .69 .66 .67 .75 .81 .78 .69 .39
Net realized and
unrealized gain (loss)
on investments........ 6.33 8.52 (.41) 2.71 1.73 5.58 (1.89) 4.26 2.15 (3.39)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 6.91 9.11 .28 3.37 2.40 6.33 (1.08) 5.04 2.84 (3.00)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.58) (.61) (.69) (.66) (.68) (.75) (.79) (.86) (.66) (.28)
In excess of net
investment income..... (.01) -- -- -- -- -- -- -- -- --
Net realized gain on
investments........... (3.78) (2.53) (.97) (1.85) (1.39) (.88) (.38) (.58) -- (.05)
In excess of net
realized gain on
investments........... -- -- (.22) (.06) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (4.37) (3.14) (1.88) (2.57) (2.07) (1.63) (1.17) (1.44) (.66) (.33)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 32.94 $ 30.40 $ 24.43 $ 26.03 $ 25.23 $ 24.90 $ 20.20 $ 22.45 $ 18.85 $ 16.67
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)(b).. 23.67 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)................ .71 .58 .11 .15 .18 .23 .31 .33 .33 .24
Net investment income
to average net assets
(b)(c)................ 1.80 2.07 2.74 2.50 2.80 3.23 3.70 3.68 3.82 3.56
Portfolio turnover
(c)................... 74.59 74.00 45.87 54.69 58.35 51.37 66.51 88.03 52.21 46.10
Net assets, end of year
($000 omitted)........ 818,281 620,259 430,661 382,939 290,357 215,779 133,869 129,680 89,320 66,618
Average commission rate
paid per share of
security ($ omitted).. .0332 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.
++ 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.

16
<PAGE>

FINANCIAL HIGHLIGHTS
OF THE INTERNATIONAL FUND*

INTERNATIONAL FUND
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44 $ 35.50 $ 50.23
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .44 .48 .61 .58 .67 .73 1.23 .85 .95 .93
Net realized and
unrealized gain (loss)
on investments (a).... 2.41 3.16 .65 9.63 (2.62) 3.16 (7.27) 7.46 5.77 5.49
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 2.85 3.64 1.26 10.21 (1.95) 3.89 (6.04) 8.31 6.72 6.42
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.35) (.64) (.36) (.57) (.67) (.80) (1.19) (1.02) (1.11) (1.39)
In excess of net
investment income..... -- (.08) -- (.16) -- -- -- -- -- --
Net realized gain on
investments........... (1.37) (.94) (3.73) (1.06) (.42) (.31) (2.11) (4.21) (5.67) (19.76)
In excess of net
realized gain on
investments........... -- -- (.23) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (1.72) (1.66) (4.32) (1.79) (1.09) (1.11) (3.30) (5.23) (6.78) (21.15)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 37.39 $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44 $ 35.50
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(b)..... 7.98 10.71 5.38 35.56 (6.11) 13.47 (15.94) 24.06 20.13 14.42
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average net
assets (b)............ 1.04 .88 .32 .39 .45 .48 .50 .44 .45 .43
Operating expenses,
gross, to average net
assets (b)............ 1.05 .89 .34 .41 .46 .48 .50 .44 .45 .43
Net investment income
to average net
assets (b)............ 1.20 1.41 1.63 1.83 2.46 2.61 3.14 2.38 2.52 1.83
Portfolio turnover..... 42.69 36.78 71.09 62.04 48.99 53.13 78.30 53.49 51.17 96.31
Net assets, end of year
($000 omitted)........ 944,380 796,777 674,180 562,497 348,869 252,828 171,613 186,742 149,064 160,975
Per share amount of
fees waived ($
omitted).............. .0025 .0041 .0093 .0091 .0030 -- -- -- -- --
Average commission rate
paid per share of
security ($ omitted)
(c)................... .0038 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.
(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%.
(c) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.

17
<PAGE>

FINANCIAL HIGHLIGHTS
OF THE FIXED INCOME I FUND*

FIXED INCOME I FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50 $ 20.48 $ 24.26
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.38 1.42 1.46 1.50 1.63 1.71 1.77 1.93 1.73 1.71
Net realized and
unrealized gain (loss)
on investments........ (.62) 2.02 (2.06) .72 (.07) 1.49 (.05) .71 .01 (1.40)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ .76 3.44 (.60) 2.22 1.56 3.20 1.72 2.64 1.74 .31
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.36) (1.44) (1.44) (1.50) (1.62) (1.69) (1.77) (1.92) (1.72) (2.08)
In excess of net
investment income..... -- -- -- (.01) -- -- -- -- -- --
Net realized gain on
investments........... -- -- -- (.58) (.62) (.08) -- (.31) -- (2.01)
In excess of net
realized gain on
investments........... -- -- (.11) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (1.36) (1.44) (1.55) (2.09) (2.24) (1.77) (1.77) (2.23) (1.72) (4.09)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 20.99 $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50 $ 20.48
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 3.75 18.03 (2.97) 10.46 7.26 16.01 8.60 13.35 8.76 1.49
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net
assets (a)............ .42 .35 .10 .09 .10 .10 .11 .12 .13 .11
Net investment income
to average net assets
(a)................... 6.57 6.82 7.06 6.71 7.45 8.08 8.70 8.96 8.28 8.00
Portfolio turnover..... 147.31 138.05 173.97 173.27 211.26 121.91 114.15 196.18 186.54 211.26
Net assets, end of year
($000 omitted)........ 662,899 638,317 496,038 533,696 530,857 458,201 329,091 297,721 223,216 250,606
</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.
(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%.

18
<PAGE>

FINANCIAL HIGHLIGHTS
OF THE FIXED INCOME II FUND*

FIXED INCOME II FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $ 18.69 $18.51 $18.63 $19.80
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.04 1.16 1.21 .84 1.35 1.52 1.53 1.69 1.61 1.57
Net realized and
unrealized gain (loss)
on investments........ .19 .59 (1.07) .44 (.83) .72 .23 .27 (.12) (.60)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total From Investment
Operations............ .85 1.75 .14 1.28 .52 2.24 1.76 1.96 1.49 .97
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (1.04) (1.18) (1.15) (.71) (1.36) (1.50) (1.51) (1.78) (1.61) (1.91)
Net realized gain on
investments........... -- -- -- -- (.28) -- -- -- -- (.23)
Tax return of capital.. -- -- -- (.14) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total Distributions.... (1.04) (1.18) (1.15) (.85) (1.64) (1.50) (1.51) (1.78) (1.61) (2.14)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $18.69 $18.51 $18.63
======= ======= ======= ======= ======= ======= ======= ====== ====== ======
TOTAL RETURN (%)(a)..... 4.76 9.95 .82 6.98 2.74 12.31 9.71 10.99 8.20 5.21
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .70 .58 .19 .16 .19 .13 .15 .17 .13 .12
Net investment income
to average net
assets (a)............ 5.70 6.41 6.52 6.16 7.21 8.06 8.45 8.97 8.56 8.22
Portfolio turnover..... 264.40 269.31 233.75 229.07 330.58 188.30 184.38 320.16 217.58 197.77
Net assets, end of year
($000 omitted)........ 222,983 183,577 144,030 138,619 182,735 156,685 119,853 83,313 86,052 93,896
</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.
(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%.

19
<PAGE>

FINANCIAL HIGHLIGHTS
OF THE FIXED INCOME III FUND*

FIXED INCOME III FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993++
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......... $ 10.34 $ 9.37 $ 10.44 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... .64 .67 .66 .49
Net realized and unrealized gain (loss) on
investments.............................. (.16) .97 (1.07) .52
------- ------- ------- -------
Total From Investment Operations.......... .48 1.64 (.41) 1.01
------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income..................... (.64) (.67) (.66) (.48)
In excess of net investment income........ (.01) -- -- --
Net realized gain on investments.......... -- -- -- (.08)
In excess of net realized gain on
investments.............................. -- -- -- (.01)
------- ------- ------- -------
Total Distributions...................... (.65) (.67) (.66) (.57)
------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............... $ 10.17 $ 10.34 $ 9.37 $ 10.44
======= ======= ======= =======
TOTAL RETURN (%)(a)(c)..................... 4.88 17.99 (3.89) 10.22
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net
assets (b)(c)............................ .73 .61 .20 .20
Operating expenses, gross, to average net
assets (b)(c)............................ .73 .61 .20 .40
Net investment income to average net
assets (b)............................... 6.32 6.83 7.02 6.30
Portfolio turnover (b).................... 144.26 141.37 134.11 181.86
Net assets, end of year ($000 omitted).... 292,077 252,465 166,620 124,234
Per share amount of fees waived ($
omitted)................................. -- -- -- .0003
Per share amount of fees reimbursed ($
omitted)................................. -- -- -- .0154
</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.
++ 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%.

20
<PAGE>

THE PURPOSE OF THE FUNDS

The Funds have been organized to provide a means for Eligible Investors to
access and use FRIMCo's and Frank Russell Company's "multi-style, multi-
manager diversification" method of investment, and to obtain FRIMCo's and
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 1,300 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

FRIMCo and Frank Russell Company believe 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.

21
<PAGE>

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.

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,
FRIMCo and Frank Russell Company believe that they are able to provide their
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, FRIMCo and Frank Russell Company.

ELIGIBLE INVESTORS

Shares of the Funds are currently offered only to Eligible Investors. These
investors are principally institutional investors and financial intermediaries
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 FRIMCo, and institutions or
individuals who have acquired shares through such institutions and financial
intermediaries. The initial minimum aggregate investment in any combination of
these Funds is $10 million. An investor may be eligible to purchase these
Funds if it does not meet the required initial minimum investment. FRIMCo, at
its discretion, may waive the initial minimum investment for some employee
benefit plans and other plans or if the requirements are met for a combined
purchase privilege, cumulative quantity discount or statement of intention.
Investors should consult their financial intermediary for details.
Institutions and financial intermediaries 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 FRIMCo,
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

22
<PAGE>

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 FRIMCo 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 FRIMCo may acquire shares of the Funds for their
customers. FRIMCo 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 FRIMCo 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
FRIMCo for other services or reports provided by FRIMCo to the shareholder.

The Agreement sets forth the shareholder investment services fees to be paid
to FRIMCo 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 FRIMCo 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 FRIMCo to the client with respect
to the assets, and other factors.

Either the client or FRIMCo may terminate the Agreement upon written notice
as provided in the Agreement. FRIMCo does not expect to exercise its right to
terminate the Agreement unless a client does not (i) promptly pay fees due to
FRIMCo; or (ii) invest sufficient assets in the Funds to compensate FRIMCo for
providing services to the client with respect to assets invested in the Funds.
Upon termination of an Agreement by the client or FRIMCo, FRIMCo 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 FRIMCo, Frank Russell Company and the money managers.
The Investment Company's officers, all of whom are employed by and are
officers of FRIMCo 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.

FRIMCo: (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. FRIMCo 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.

23
<PAGE>

The responsibility of overseeing the money managers rests upon the officers
and employees of FRIMCo. 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 of FRIMCo since
1989.

. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in the Investment
Group of the Frank Russell Company. Ms. Carter jointly with another
portfolio manager identified herein has primary responsibility for
management of the International, International Securities and Emerging
Markets Funds.

. James M. Imhof, Manager of Portfolio Trading, FRIMCo, who has managed the
day to day management of the FRIMCo Funds and ongoing analysis and
monitoring of Fund money managers since 1989.

. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed as a
Senior Research Analyst with Frank Russell Company. Mr. Jornlin jointly
with another portfolio manager identified herein has primary
responsibility for management of the Real Estate Securities Fund.

. Randal C. Burge, who has been a Portfolio Manager of FRIMCo, since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank
Russell Australia. Mr. Burge has primary responsibility for management of
the Fixed Income I, Fixed Income II, Fixed Income III, Diversified Bond,
Volatility Constrained Bond, Multistrategy Bond, Limited Volatility Tax
Free, International, International Securities and Emerging Markets Funds.

. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of US Equity
Manager Research Department with Frank Russell Company. Mr. Trittin
jointly with another portfolio manager identified herein has primary
responsibility for management of the Equity I, Equity II, Equity III,
Equity Q, Equity T, Diversified Equity, Quantitative Equity, Special
Growth and Equity Income Funds.

. C. Nola Williams, who has been a Portfolio Manager of FRIMCo 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. Ms. Williams jointly with another
portfolio manager identified herein has primary responsibility for
management of the Equity I, Equity II, Equity III, Equity Q, Equity T,
Diversified Equity, Quantitative Equity, Special Growth and Equity Income
Funds.

Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.

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. FRIMCo is a wholly owned subsidiary of Frank Russell
Company.

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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.

For its services, FRIMCo receives a management fee from each Fund. From this
fee, FRIMCo, acting as agent for the Investment Company, is responsible for
paying the money managers for their investment selection services. The
remainder is retained by FRIMCo as compensation for the services described
above and to pay expenses. The annual rate of the management fees, payable to
FRIMCo 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%; and Fixed Income III
Fund, .55%. 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.

FRIMCo has voluntarily agreed to waive all or a portion of its management
fee with respect to certain Funds. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or
rescinded at any time. FRIMCo currently waives its management fee for each of
the Funds to the extent a Fund incurs Money Market Management fees in respect
of its investment in the Money Market Fund.

EXPENSES OF THE FUNDS

The Funds, and when appropriate each class, will pay all their expenses
other than those expressly assumed by FRIMCo. The Funds' Class S Shares'
expenses for the year ended December 31, 1996, as a percentage of average net
assets, are shown in the Financial Highlights tables. Principal expenses are:
the management, and transfer agency payable to FRIMCo; fees for custodial and
portfolio accounting services payable to State Street Bank and Trust 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 FRIMCO. THE MONEY
MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME BY
FRIMCO, 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.

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<PAGE>

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, .40%; Equity III Fund, .20%; Equity
Q Fund, .21%; International Fund, .42%; Fixed Income I Fund, .08%; Fixed
Income II Fund, .18%; and Fixed Income III Fund, .21%. 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 FRIMCo as agent to make payment of the money manager's fee, that money
manager will look only to FRIMCo 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.

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 FRIMCo. 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, FRIMCO 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
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.")

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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 FRIMCo 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.

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

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<PAGE>

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. FRIMCo believes quantitative management
over a market cycle should provide a portfolio with consistent performance,
diversification, market-like volatility, and limited market under performance.
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 reserves 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 non-US companies.
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.

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.

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<PAGE>

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.

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, FRIMCo 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 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.

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<PAGE>

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.

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.

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<PAGE>

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.

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 exchange 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, 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

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<PAGE>

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.

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.)

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.

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<PAGE>

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, high-grade, money
market instruments. FRIMCo currently waives its management fee for each of the
Funds to the extent a Fund incurs Money Market Fund management fees in respect
of its investment in the Money Market Fund, thereby eliminating any
duplication of fees.

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 $1 billion. 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 FRIMCo'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 FRIMCo 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 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, liquid assets 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.

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<PAGE>

and principal payments. At an agreed upon future date, the Fund repurchases
the security by paying an agreed upon purchase price plus interest. Liquid
assets 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 33.33% 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 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. FRIMCo 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

34
<PAGE>

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 securities 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 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.

Depository Receipts. The Funds may invest in securities of foreign issuers
in the form of American Depository Receipts ("ADRs") or other similar
securities convertible into securities of foreign issuers. These securities
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by a United
States bank or trust company evidencing ownership of the underlying
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets.

35
<PAGE>

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 liquid assets 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 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

36
<PAGE>

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 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.

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.

37
<PAGE>

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 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

38
<PAGE>

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 liquid assets 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.

39
<PAGE>

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 growth of the market for lower
rated debt securities growth has 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 FRIMCo 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 are shown in the
Financial Highlights tables.

FRIMCo and the various money managers arrange for the purchase and sale of
Investment Company's securities and selects brokers and the selection of
brokers and dealers (including affiliates), which in their best judgment
provide prompt and reliable execution at favorable prices and reasonable
commission rates. In addition to price and commission rates, brokers and
dealers may be selected based on research, statistical or other services they
are able to provide. This may cause the Investment Company to pay commissions
at rates that exceed rates that other brokers and dealers may have charged if
it views the commissions as reasonable in relation to the value of the
brokerage and/or research services.

The Funds may effect portfolio transactions through Frank Russell
Securities, Inc., an affiliate of FRIMCo, when a money manager determines that
the Fund will receive competitive execution, price, and commissions. Upon
completion of such transactions, Frank Russell Securities, Inc. will refund up
to 70% of the commissions paid by that Fund after reimbursement for research
services provided to FRIMCo. Similarly, the Funds may effect portfolio
transactions through and pay brokerage commissions to the various money
manager affiliated brokers.

40
<PAGE>

INCOME DIVIDENDS

The Board of Trustees presently intends that dividends will be declared from
net investment income, if any, for payment on the following schedule:

<TABLE>
<CAPTION>
DECLARED PAYABLE
-------- -------
<C> <C> <S>
Quarterly Mid: April, July, October Equity I, Equity II, Equity III,
and December Equity Q, Fixed Income I, Fixed
Income II and Fixed Income III
Funds

Annually Mid-December International Fund
</TABLE>

CAPITAL GAINS DISTRIBUTIONS

The Board intends that distributions will be declared 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.

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.

41
<PAGE>

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. FRIMCo
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.

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

42
<PAGE>

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 and Fixed Income III 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

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 are as follows:

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<PAGE>

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 FRIMCo 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, 1996 for shares of the Fixed Income I,
Fixed Income II and Fixed Income III Funds were, respectively, 6.55%, 5.47%
and 6.16%.

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 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).

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.

44
<PAGE>

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 instruments maturing within 60 days of the valuation date
held by the 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. 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

Shares of the Funds are sold on each business day 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:

Close of the New York Stock Exchange Equity I, Equity II, Equity III,
(currently 4:00 p.m. Eastern time) Equity Q, International, Fixed Income
I, Fixed Income II and Fixed Income
III Funds

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.

45
<PAGE>

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.

Automatic Investment Program. A shareholder may make scheduled investments
(minimum $50.00) in an established account in a Fund on a monthly, quarterly,
semiannual or annual basis by automatic electronic funds transfer from the
shareholder's bank account. A separate transfer is required for each Fund in
which shares are to be purchased. A shareholder may, of course, terminate the
program as to further transfers at any time. Contact the Financial
Intermediary from whom you received this prospectus for further information on
this program and an enrollment form.

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to the
Financial Intermediary or 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

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 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

46
<PAGE>

Intermediary. Investors should contact the 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 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
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 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:

Close of the New York Stock Exchange Equity I, Equity II, Equity III,
(currently 4:00 p.m. Eastern time) Equity Q, International, Fixed Income
I, Fixed Income II and Fixed Income
III Funds

47
<PAGE>

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 the Financial
Intermediary from whom this prospectus was obtained or 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 FRIMCo 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.

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.

SWP Distribution by Electronic Fund Transfer. Electronic Fund Transfer
payments will be sent to designated bank on payment date.

A Systematic Withdrawal Payment form must be completed and mailed to the
Financial Intermediary from whom this prospectus was obtained or 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.

48
<PAGE>

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 Investment Company Act of 1940 (the "1940
Act") or determined by the SEC, should develop.

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

Russell Fund Distributors, Inc., a wholly owned subsidiary of FRIMCo, 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, prepares tax
records, 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 FRIMCo.

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.

49
<PAGE>

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 March 31, 1997 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
Q, International and Fixed Income III Funds.

MONEY MANAGER PROFILES

The money managers have no other affiliations with the Funds, FRIMCo 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.

Barclays Global Investorss, 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., 590 Madison Avenue, 41st 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 AMVESCO, 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.

50
<PAGE>

County Superior Court by partners of Wellington Management Company
("Wellington"). The proceedings were instituted on December 13, 1996. The
Investment Company believes that the injunction request seeks to prevent
Arnold Schneider from engaging in the investment advisory or investment
management business in competition with Wellington.

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.

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 LLP, 75 State Street, Boston, MA 02109, is a
private Massachusetts limited liability partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John
R. Ryan.

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.

51
<PAGE>

EQUITY Q FUND

Barclays Global Investors, See: Equity I Fund.

Franklin Portfolio Associates LLC, Two International Place, 22nd Floor,
Boston, MA 02110-4104, 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

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

Marathon Asset Management Limited, Orion House, 5 Upper St. Martin's Lane,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.

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.

Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, New York, NY 10153, is a
registered investment adviser. Founded in 1967, Bernstein is controlled by its
Board of Directors, which consists of the following individuals: Andrew S.
Adelson, Zalman C. Bernstein, Kevin R. Rine, Charles C. Cahn, Jr., Marilyn
Goldstein- Fedak, Michael L. Goldstein, Roger Hertog, Lewis A. Sanders and
Francis H. Trainer, Jr.

The Boston Company Asset Management, Inc., One Boston Place, Boston, MA
02108, is 100% owned by Mellon Bank Corporation, a publicly held corporation.

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.

52
<PAGE>

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
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.

FIXED INCOME III FUND

BEA Associates, 153 East 53rd Street, 58th Floor, 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.

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.

53
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001

MONEY MANAGERS

<TABLE>
<S> <C>
EQUITY I FUND FIXED INCOME I FUND
Alliance Capital Management L.P. Lincoln Capital Management Company
Barclays Global Investors Pacific Investment Management Company
Columbus Circle Investors Standish, Ayer & Wood, Inc.
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc. FIXED INCOME II FUND
Lincoln Capital Management Company BlackRock Financial Management
Schneider Capital Management Standish, Ayer & Wood, Inc.
Suffolk Capital Management, Inc. STW Fixed Income Management Ltd.
Trinity Investment Management Corporation
FIXED INCOME III FUND
EQUITY II FUND BEA Associates
Delphi Management, Inc. Pacific Investment Management Company
Fiduciary International, Inc. Standish, Ayer & Wood, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc. MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Sirach Capital Management, Inc. Frank Russell Investment Management Company
Wellington Management Company LLP 909 A Street
Tacoma, Washington 98402
EQUITY III FUND
Brandywine Asset Management, Inc. CONSULTANT
Equinox Capital Management, Inc. Frank Russell Company
Trinity Investment Management Corporation 909 A Street
Tacoma, Washington 98402
EQUITY Q FUND
Barclays Global Investors DISTRIBUTOR
Franklin Portfolio Associates LLC Russell Fund Distributors, Inc.
J.P. Morgan Investment Management, Inc. 909 A Street
Tacoma, Washington 98402
INTERNATIONAL FUND
J.P. Morgan Investment Management, Inc. INDEPENDENT ACCOUNTANTS
Marathon Asset Management Limited Coopers & Lybrand L.L.P.
Oechsle International Advisors One Post Office Square
Rowe Price-Fleming International, Inc. Boston, MA 02109
Sanford C. Bernstein & Co., Inc.
The Boston Company Asset Management, Inc.
</TABLE>

54
<PAGE>

<TABLE>
<S> <C>
LEGAL COUNSEL OFFICE OF SHAREHOLDER INQUIRIES
Stradley, Ronon, Stevens & Young, LLP 909 A Street
2600 -- One Commerce Square Tacoma, Washington 98402
Philadelphia, PA 19103-7098 (800) 972-0700
In Washington (253) 627-7001
</TABLE>

55
<PAGE>

SPECIALTY FUNDS

FRANK RUSSELL INVESTMENT COMPANY SUPPLEMENT DATED JUNE 1, 1997 TO THE
PROSPECTUS DATED MAY 1, 1997 AS REVISED JUNE 1, 1997

The table of annual fund operating expenses on page 9 is temporarily revised
in its entirety to read as set forth below, until further notice. It is
anticipated that the fee table currently set forth in the prospectus will take
effect, and this supplement will simultaneously terminate, promptly upon the
Investment Company's receipt of exemptive relief currently pending with the
U.S. Securities and Exchange Commission.

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 in 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>
<CAPTION>
<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................................................ None
Other Fees......................................................... .02
----
Total Other Expenses............................................... .05
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)**.... .05%
----
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE: ------ ------- ------- --------
<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 $1 $2 $3 $6
=== === === ===
</TABLE>

(1) FRIMCo 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 .30% 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 FRIMCo, 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, FRIMCo 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 FRIMCo to the shareholder. Accordingly, the expense
information does not reflect an amount for fees paid directly by an investor
to FRIMCo.

** 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.
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON, (253) 627-7001

Frank Russell Investment Management Company ("FRIMCo") operates and
administers all of the Funds which comprise the Investment Company, and
manages the portfolios of the Money Market Fund and the U.S. Government Money
Market Fund. FRIMCo is a wholly owned subsidiary of Frank Russell Company,
which researches and recommends to FRIMCo, 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.

Real Estate Securities Fund Money Market Fund
Emerging Markets Fund U.S. Government Money Market Fund
Equity T Fund Tax Free Money Market Fund
Limited Volatility Tax Free Fund

INVESTMENTS IN MONEY MARKET FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE
US GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET FUND, 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 seven of its Funds that a prospective
investor ought to know before investing. The Investment Company has filed a
Statement of Additional Information dated May 1, 1997, 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 seven Funds
described herein. Two of these 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.

The Statement of Additional Information, material incorporated by reference
into this Prospectus, and other information regarding the Investment Company
and the Funds is maintained electronically with the SEC at its Internet
Website (http://www.sec.gov).

PROSPECTUS DATED MAY 1, 1997,
AS REVISED JUNE 1, 1997
<PAGE>

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.

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, high-
grade, money market instruments.

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 seven Funds set
forth on the first page of the Prospectus. A shareholder of the Emerging
Markets Fund or Equity T Fund may pay a quarterly shareholder investment
services fee directly to FRIMCo. The fee is computed on the amount the
shareholder has invested in the applicable Fund. No shareholder of any of the
other Funds described herein 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 approximately $10 billion on April 3, 1997. The net assets of
these Funds on April 3, 1997, were as follows:

<TABLE>
<S> <C> <C> <C>
Real Estate Securities.. $456,918,598 Money Market............ $513,938,200
Emerging Markets........ $325,556,668 U.S. Government Money
Equity T................ $ 33,115,098 Market................. $260,988,365
Limited Volatility Tax Tax Free Money Market... $118,976,087
Free.................... $ 68,491,850
</TABLE>

2
<PAGE>

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 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 19.

ELIGIBLE INVESTORS are principally those institutional investors and
financial intermediaries 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 FRIMCo; and institutions or
individuals who have acquired shares through such institutions or financial
intermediaries. PAGE 20.

EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management
fee to FRIMCo, its expenses and its portion of the general expenses of the
Investment Company. FRIMCo, 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 FRIMCo, for conducting the Fund's general operations
and for providing investment supervision for the Fund. For the Emerging
Markets and Equity T Funds, each Eligible Investor may pay to FRIMCo directly
a fee for other investment services provided to that Eligible Investor. PAGE
23.

3
<PAGE>

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 38.

DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or
received in cash. Dividends from net investment income are declared Daily, by
Money Market, 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 39.

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 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 (twice a day for the Money
Market, 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 Money Market, 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 44.

PURCHASE OF FUND SHARES includes no sales charge. Shares are offered and
orders to purchase are accepted on each business day. PAGE 45.

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 47.

ADDITIONAL INFORMATION is also included in this Prospectus concerning:
Distributor, Custodian, Independent Accountants and Reports; Organization,
Capitalization and Voting; and Money Manager Profiles. PAGE 49.

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 50.

4
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .85%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .04%
Transfer Agent Fees................................................ .11
Other Fees......................................................... .04
---
Total Other Expenses............................................... .19
----
Total Class S Shares Operating Expenses+............................ 1.04%
====
</TABLE>

5
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... 1.20%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .28%
Transfer Agent Fees................................................ .14
Other Fees......................................................... .09
---
Total Other Expenses............................................... .51
----
Total Class S Shares Operating Expenses+............................ 1.71%
====
</TABLE>

6
<PAGE>

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.................................................... 1.00%
Exchange Fees...................................................... None

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver and Reimbursement) (1)............ .47%
12b-1 Fees......................................................... None
Other Expenses:
Custodian Fees.................................................... .18%
Transfer Agent Fees............................................... .11
Other Fees........................................................ .24
---
Total Other Expenses.............................................. .53
----
Total Class S Shares Operating Expenses (After Fee Waivers and Re-
imbursement) (1)+................................................. 1.00%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 $42 $68 $142
=== === === ====
You would pay the following expenses on the
same investment, assuming no redemption...... $10 $31 $55 $126
=== === === ====
</TABLE>
- ---------------------
(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 Fund's
average daily net assets on an annual basis. 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 total operating expenses
absent the waiver and reimbursement would be 1.28% 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.
* 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 FRIMCo, 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 FRIMCo
to the shareholder. Accordingly, the expense information does not reflect an
amount for fees paid directly by an investor to FRIMCo.
+ 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>

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

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................................................ .07
Other Fees......................................................... .09
---
Total Other Expenses............................................... .25
----
Total Class S Shares Operating Expenses+............................ .75%
====
</TABLE>

8
<PAGE>

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).............................. .10%
12b-1 Fees......................................................... None
Other Expenses:
Custodian Fees.................................................... .03%
Transfer Agent Fees............................................... None
Other Fees........................................................ .02
----
Total Other Expenses.............................................. .05
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)**... .15%
====
</TABLE>

9
<PAGE>

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.

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..................................................... .05%
Transfer Agent Fees................................................ .15
Other Fees......................................................... .05
---
Total Other Expenses............................................... .25
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)+..... .25%
====
</TABLE>

10
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1)............................... .15%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .05%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .06
---
Total Other Expenses............................................... .17
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)+..... .32%
====
</TABLE>

11
<PAGE>

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>
1996 1995 1994 1993 1992 1991 1990 1989++
------- ------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 23.51 $ 22.53 $ 22.76 $ 21.50 $19.33 $14.99 $19.31 $20.00
------- ------- ------- ------- ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.39 1.32 1.25 1.05 1.08 1.11 1.30 .42
Net realized and
unrealized gain (loss)
on investments........ 6.89 1.03 .40 2.68 2.16 4.36 (4.30) (.73)
------- ------- ------- ------- ------ ------ ------ ------
Total From Investment
Operations............ 8.28 2.35 1.65 3.73 3.24 5.47 (3.00) (.31)
------- ------- ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (1.34) (1.35) (1.23) (1.04) (1.07) (1.13) (1.32) (.38)
Net realized gain on
investments........... (1.26) -- (.45) (1.43) -- -- -- --
In excess of net
realized gain on
investments........... -- -- (.20) -- -- -- -- --
Tax return of capital.. -- (.02) -- -- -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------
Total Distributions.... (2.60) (1.37) (1.88) (2.47) (1.07) (1.13) (1.32) (.38)
------- ------- ------- ------- ------ ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 29.19 $ 23.51 $ 22.53 $ 22.76 $21.50 $19.33 $14.99 $19.31
======= ======= ======= ======= ====== ====== ====== ======
TOTAL RETURN (%)(a)..... 36.81 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 1.04 1.05 1.11 1.20 1.26 .39 --
Operating expenses,
gross, to average net
assets (b)............ 1.04 1.04 1.05 1.11 1.20 1.31 1.60 .32
Net investment income
to average net assets
(b)................... 5.64 6.10 5.65 4.52 5.60 6.50 8.94 6.90
Portfolio turnover
(b)................... 51.75 23.49 45.84 58.38 19.72 13.28 12.11 8.74
Net assets, end of year
($000 omitted)........ 445,619 290,990 209,208 145,167 75,902 42,771 20,845 7,699
Average commission rate
paid per share of
security ($ omitted).. .0631 N/A N/A N/A N/A N/A N/A N/A
Per share amount of
fees waived ($
omitted).............. -- -- -- -- -- -- .0491 .0394
Per share amount of
fees reimbursed ($
omitted).............. -- -- -- -- -- .0076 .1327 .1155
</TABLE>
- ---------------------
* 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.
++ 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.

12
<PAGE>

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>
1996 1995 1994 1993++
------- ------- ------- ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......... $ 11.16 $ 12.25 $ 13.90 $10.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... .10 .11 .15 .07
Net realized and unrealized gain (loss) on
investments............................... 1.26 (1.12) (1.24) 4.09
------- ------- ------- ------
Total From Investment Operations........... 1.36 (1.01) (1.09) 4.16
------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income...................... (.08) (.03) (.10) (.07)
In excess of net investment income......... (.09) (.02) (.10) (.01)
Net realized gain on investments........... -- -- (.31) (.18)
In excess of net realized gain on
investments............................... -- (.03) (.05) --
------- ------- ------- ------
Total Distributions........................ (.17) (.08) (.56) (.26)
------- ------- ------- ------
NET ASSET VALUE, END OF YEAR................ $ 12.35 $ 11.16 $ 12.25 $13.90
======= ======= ======= ======
TOTAL RETURN (%)(a)(c)...................... 12.26 (8.21) (5.83) 41.83
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net
assets (b)(c)............................. 1.71 1.75 .80 .80
Operating expenses, gross, to average net
assets (b)(c)............................. 1.72 1.80 .83 1.60
Net investment income to average net assets
(b)(c).................................... .77 .88 1.10 1.33
Portfolio turnover (b)..................... 34.62 71.16 57.47 89.99
Net assets, end of year ($000 omitted)..... 271,490 172,673 127,271 65,457
Average commission rate paid per share of
security ($ omitted) (d).................. .0007 N/A N/A N/A
Per share amount of fees waived ($
omitted).................................. .0006 .0022 .0044 .0016
Per share amount of fees reimbursed ($
omitted).................................. -- .0032 .0017 .0420
</TABLE>
- ---------------------
* 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.
++ 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%.
(d) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.

13
<PAGE>

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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $21.24 $20.48 $21.45 $21.03 $20.85 $20.49 $20.51 $20.41 $20.46 $21.03
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .85 .81 .86 .94 1.01 1.17 1.25 1.21 1.15 1.06
Net realized and
unrealized gain (loss)
on investments........ (.21) .77 (.97) .42 .18 .35 (.03) .17 (.10) (.48)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations............ .64 1.58 (.11) 1.36 1.19 1.52 1.22 1.38 1.05 .58
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.86) (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10) (1.15)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions.... (.86) (.82) (.86) (.94) (1.01) (1.16) (1.24) (1.28) (1.10) (1.15)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $21.02 $21.24 $20.48 $21.45 $21.03 $20.85 $20.49 $20.51 $20.41 $20.46
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)........ 3.07 7.81 (0.54) 6.58 5.85 7.64 6.12 6.95 5.23 2.84
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .75 .74 .72 .75 .80 .84 .86 .74 .65 .63
Net investment income
to average net
assets................ 4.02 3.91 4.14 4.40 4.89 5.68 6.06 5.64 5.50 5.20
Portfolio turnover
(a)................... 74.34 73.91 71.71 24.05 18.21 129.12 99.00 89.93 67.24 75.73
Net assets, end of year
($000 omitted)........ 66,344 63,838 48,975 51,211 38,399 26,173 23,553 25,657 38,151 52,348
</TABLE>
- ---------------------
* 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.
(a) Beginning in 1992, variable rate daily demand securities were excluded
from the turnover calculation.

14
<PAGE>

FINANCIAL HIGHLIGHTS
OF THE MONEY MARKET FUND*

MONEY MARKET FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <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 $1.000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .0549 .0601 .0447 .0342 .0403 .0618 .0823 .0922 .0759 .0663
LESS DISTRIBUTIONS:
Net investment income.. (.0549) (.0601) (.0447) (.0342) (.0403) (.0618) (.0823) (.0922) (.0759) (.0663)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE,
BEGINNING OF YEAR...... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 5.63 6.19 4.57 3.48 4.11 6.38 8.55 9.61 7.86 6.84
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average daily
net assets (a)........ .05 .06 .05 .07 .08 .07 .07 .06 .06 .05
Operating expenses,
gross, to average
daily net assets (a).. .30 .26 .05 .07 .08 .07 .07 .06 .06 .05
Net investment income
to average net assets
(a)................... 5.49 6.01 4.49 3.38 4.04 6.13 8.29 9.31 7.59 6.63
Net assets, end of year
($000 omitted)........ 496,932 533,643 502,302 415,998 347,464 316,426 226,339 145,550 116,369 144,344
Per share amount of
fees waived
($ omitted)........... .0025 .0020 -- -- -- -- -- -- -- --
</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.
(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%.

15
<PAGE>

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

16
<PAGE>

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

17
<PAGE>

FINANCIAL HIGHLIGHTS OF THE
EQUITY T 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 T FUND

<TABLE>
<CAPTION>
1996++
------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. .03
Net realized and unrealized gain (loss) on investments................ .61
------
Total Income From Investment Operations............................... .64
------
LESS DISTRIBUTIONS:
Net investment income................................................. (.03)
------
NET ASSET VALUE, END OF YEAR........................................... $10.61
======
TOTAL RETURN (%)(a)(c)................................................. 6.10
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)(c)................. 1.00
Operating expenses, gross, to average net assets (b)(c)............... 2.83
Net investment income to average net assets (b)(c).................... 1.62
Portfolio turnover (b)................................................ 8.86
Net assets, end of year ($000 omitted)................................ 19,931
Average commission rate paid per share of security ($ omitted)........ .0301
Per share amount of fees waived ($ omitted)........................... .0143
Per share amount of fees reimbursed ($ omitted)....................... .0194
</TABLE>
- ---------------------
* 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.
++ For the period October 7, 1996 (commencement of operations) to December 31,
1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period October 7, 1996 (commencement of operations) to
December 31, 1996 are annualized.
(c) Fund performance, operating expenses, and net investment income are
reported net of investment management fees paid to the Manager or money
managers, but gross of any investment services fees.

18
<PAGE>

THE PURPOSE OF THE FUNDS

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

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

FRIMCo and Frank Russell Company believe 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.

19
<PAGE>

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.

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

. Employee welfare plans

. Broker-Dealers

. Pension or profit sharing plans

. Insurance companies

20
<PAGE>

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 FRIMCo or Class S Shares
of 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 FRIMCo for other services or reports provided by FRIMCo to
the shareholder.

In the case of the Emerging Markets, Equity T and Money Market Funds, the
Agreement sets forth the shareholder investment services fees to be paid to
FRIMCo 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 FRIMCo 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 FRIMCo to the client with respect
to such assets, and other factors.

GENERAL MANAGEMENT OF THE FUNDS

FRIMCo: (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.
FRIMCo 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 of FRIMCo
since 1989.

21
<PAGE>

. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since
1994. From 1990 to 1994, Ms. Carter was a Client Executive in the
Investment Group of the Frank Russell Company. Ms. Carter jointly
with another portfolio manager identified herein has primary
responsibility for management of the International, International
Securities and Emerging Markets Funds.

. James M. Imhof, Manager of Portfolio Trading, FRIMCo, who has managed
the day to day management of the FRIMCo Funds and ongoing analysis
and monitoring of Fund money managers since 1989.

. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed
as a Senior Research Analyst with Frank Russell Company. Mr. Jornlin,
jointly with another portfolio manager identified herein, has primary
responsibility for management of the Real Estate Securities Fund.

. Randal C. Burge, who has been a Portfolio Manager of FRIMCo, since
June 1995. From 1990 to 1995, Mr. Burge was a Client Executive for
Frank Russell Australia. Mr. Burge has primary responsibility for
management of the Fixed Income I, Fixed Income II, Fixed Income III,
Diversified Bond, Volatility Constrained Bond, Multistrategy Bond,
Limited Volatility Tax Free, International, International Securities
and Emerging Markets Funds.

. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of US
Equity Manager Research Department with Frank Russell Company. Mr.
Trittin jointly with another portfolio manager identified herein has
primary responsibility for management of the Equity I, Equity II,
Equity III, Equity Q, Equity T, Diversified Equity, Quantitative
Equity, Special Growth and Equity Income Funds.

. C. Nola Williams, who has been a Portfolio Manager of FRIMCo 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. Ms. Williams jointly
with another portfolio manager identified herein has primary
responsibility for management of the Equity I, Equity II, Equity III,
Equity Q, Equity T, Diversified Equity, Quantitative Equity, Special
Growth and Equity Income Funds.

Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.

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. FRIMCo 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,

22
<PAGE>

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 shareholders held on
January 22, 1996.

For its services, FRIMCo receives a management fee from each Fund. From this
fee, FRIMCo, acting as agent for the Investment Company, is responsible for
paying the money managers for their investment selection services. The
remainder is retained by FRIMCo as compensation for the services as described
above and to pay expenses. The annual rate of the management fees, payable to
FRIMCo 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%; Money Market Fund, 0.25%; 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.

FRIMCo has voluntarily agreed to waive all or a portion of its management
fee with respect to certain Funds. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or
rescinded at any time. FRIMCo currently waives its management fee for each of
the Funds to the extent a Fund incurs Money Market Fund management fees in
respect of its investment in the Money Market Fund.

EXPENSES OF THE FUNDS

The Funds, and when appropriate each class, will pay all their expenses
other than those expressly assumed by FRIMCo. The Funds' Class S Shares'
expenses for the year ended December 31, 1996, as a percentage of average net
assets, are shown in the Financial Highlights tables. Principal expenses are:
the management, and transfer agency payable to FRIMCo; fees for custodial,
preparing tax records, and portfolio accounting payable to State Street Bank
and Trust 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 FRIMCO. THE MONEY
MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME BY
FRIMCO, 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.

23
<PAGE>

Fund .0%; U.S. Government Money Market Fund, 0%; and Tax Free Money Market
Fund, .10%. 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 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.

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 FRIMCo. 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, FRIMCO (EXCEPT WITH
RESPECT TO THE MONEY MARKET FUND AND THE U.S. GOVERNMENT MONEY MARKET FUND),
NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF THE MONEY
MANAGERS' INDIVIDUAL SECURITY SELECTIONS.

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.")

24
<PAGE>

REAL ESTATE SECURITIES FUND

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
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

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.

25
<PAGE>

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 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.

26
<PAGE>

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 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

27
<PAGE>

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, 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.

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 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,

28
<PAGE>

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 -- 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.

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

29
<PAGE>

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 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."

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
(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

30
<PAGE>

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 Money Market Fund. FRIMCo currently waives its management
fee for each of the Funds to the extent a Fund incurs Money Market Fund
management fees in respect of its investment in the Money Market Fund, thereby
eliminating any duplication of fees.

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

31
<PAGE>

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. Liquid assets 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, the Money Market and the U.S. Government Money Market
Funds may lend portfolio securities with a value of up to 33.33% 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 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

32
<PAGE>

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 Real Estate Securities, Emerging Markets and
Equity T 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 securities or used for Fund
transactions.

Investment in Foreign Securities. The Funds, other than the Money Market
Fund, U.S. Government Money Market Fund and Tax Free Money Market Fund, 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.

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.

Depository Receipts. Funds may invest in securities of foreign issuers in
the form of American Depository Receipts ("ADRs") or other similar securities
convertible into securities of foreign issuers. These securities may

33
<PAGE>

not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by a United
States bank or trust company evidencing ownership of the underlying
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets.

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 liquid assets
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 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

34
<PAGE>

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.

35
<PAGE>

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.

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.

36
<PAGE>

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.

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.

37
<PAGE>

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 growth of the market for lower rated debt securities has 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 Fund and the Tax Free
Money Market Fund 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 the 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 FRIMCo 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
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 FRIMCo to change money managers of the Equity T Fund. The
annual portfolio turnover rates for the Funds (other than the Money Market
Funds) are shown in the Financial Highlights tables.

38
<PAGE>

able to provide. This may cause the Investment Company to pay commissions at
rates that exceed rates that other brokers and dealers may have charged if it
views the commissions as reasonable in relation to the value of the brokerage
and/or research services.

DIVIDENDS AND DISTRIBUTIONS

INCOME DIVIDENDS

The Board of Trustees presently intends that dividends will be declared 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
-------- -------
<C> <C> <S>
Daily 1st business day of following Money Market, U.S. Government
month Money Market and 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

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.

39
<PAGE>

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
Money Market Fund and 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 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.

40
<PAGE>

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. FRIMCo 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.

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 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 Money Market Fund's and
U.S. Government Money Market Fund's income attributable to US government,
Treasury and agency securities.

41
<PAGE>

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

<TABLE>
<CAPTION>
5 YEARS 10 YEARS
1 YEAR ENDED ENDED INCEPTION TO
ENDED DEC. 31, DEC. 31, DEC. 31,
DEC. 31, 1996 1996 1996 INCEPTION
1996 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
-------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Real Estate Securities.. 36.81% 17.50% -- 13.37% 07/28/89
Emerging Markets*....... (12.26) -- -- 8.48 01/29/93
Equity T**.............. -- -- -- 6.42 10/07/96
Limited Volatility Tax
Free................... 3.07 4.51 5.12% 5.53 09/05/85
Money Market*........... 5.63 4.79 6.31 7.46 10/15/81
U.S. Government Money
Market................. 5.40 4.33 5.78 5.92 09/05/85
Tax Free Money Market... 3.35 3.12 -- 4.27 05/08/87
</TABLE>
- ---------------------
* The performance for the Emerging Markets Fund and the Money Market 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.
** Equity T commenced operations on October 7, 1996.

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

42
<PAGE>

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, 1996 for the shares of Limited Volatility Tax Free Fund was
3.62%.

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, 1996, based on a tax rate of 39.6%, was 6.00%.

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 1996 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>
Money Market Fund....... 5.46% 5.61% 5.47% 5.62% 5.50% 5.65% 5.46% 5.61%
U.S. Government Money
Market................. 5.28% 5.41% 5.21% 5.35% 5.24% 5.38% 5.31% 5.46%
Tax Free Money Market
7 day period......... 3.23% 3.28% 3.29% 3.34% 3.48% 3.54% 3.65% 3.71%
30 day period......... 3.17% 3.21% 3.25% 3.29% 3.35% 3.40% 3.35% 3.41%
</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 equivalent
yields for shares of the Tax Free Money Market Fund, based on a tax rate of
39.6%, during 1996 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......... 5.35% 5.43% 5.45% 5.53% 5.77% 5.86% 6.04% 6.14%
30 day period......... 5.25% 5.31% 5.37% 5.45% 5.55% 5.63% 5.55% 5.65%
</TABLE>

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

43
<PAGE>

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 Money Market Fund
and U.S. Government Money Market Fund also determines their net asset values
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.

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 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. The Money Market 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.

44
<PAGE>

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:

Close of the New York Stock Exchange Real Estate Securities, Emerging
(currently 4:00 p.m. Eastern Time) Markets, 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
12:45 p.m. Eastern time Money Market Fund

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 Funds' 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.

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.

45
<PAGE>

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to a Financial
Intermediary or 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.

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

46
<PAGE>

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
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 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:

Close of the New York Stock Exchange Real Estate Securities, Emerging
(currently 4:00 p.m. Eastern Time) Markets, 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
12:45 p.m. Eastern time Money Market Fund

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.

47
<PAGE>

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 the Financial
Intermediary from whom this prospectus was obtained or 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
FRIMCo 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.

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.

SWP Distribution by Electronic Fund Transfer. Electronic Fund Transfer
payments will be sent to designated bank on payment date.

A Systematic Withdrawal Payment form must be completed and mailed to the
Financial Intermediary from whom this prospectus was obtained or Frank Russell
Investment Management Company, Attention: Frank

48
<PAGE>

Russell Investment Company, Operations Department, P.O. Box 1591, Tacoma, WA
98401-1591. The Systematic Withdrawal Payment form must be received by FRIMCo
five business days before the initial distribution date.

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

State Street Bank and Trust Company ("State Street"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, prepares tax
records 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.

ORGANIZATION, CAPITALIZATION, AND VOTING

49
<PAGE>

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 March 31, 1997, 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: Citizens Bank (Saginaw)--Tax Free
Money Market Fund; Indiana Trust & Investment Company--Equity T Fund.

MONEY MANAGER PROFILES

The money managers other than the Investment Manager for the Money Market
Fund and the U.S. Government Money Market Fund, identified below have no other
affiliations with the Funds, FRIMCo, 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.

AEW Capital Management, L.P., 225 Franklin Street, Boston, MA 02110-2803, is
a wholly-owned affiliate of New England Investment Companies, L.P. ("NEIC").
NEIC is a publicly-held limited partnership. Metropolitan Life Insurance
Company, a publicly held Corporation, owns approximately 53% of NEIC. AEW
Capital Management, Inc., a wholly-owned subsidiary of NEIC, is the general
partner, and NEIC is the sole limited partner, of AEW Capital Management, L.P.

EMERGING MARKETS FUND

Genesis Asset Managers, Ltd., 21 Knights Bridge, London, SW1X 7LY, 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 International Ltd. is controlled 55% by management
and assorted interests, and the balance held by outside shareholders, with the
largest single holding being 15%.

50
<PAGE>

J.P. Morgan Investment Management Inc., 522 Fifth Avenue, 14th Floor, 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., 101 California Street, 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 Group Holdings, L.L.C. is the
sole limited partner. Montgomery Asset Management, Inc. and Montgomery Group
Holdings, L.L.C. 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 Institutional Advisors, 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.

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.

U.S. GOVERNMENT MONEY MARKET FUND

Frank Russell Investment Management Company See: Money Market Fund.

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.

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.

51
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON, (253) 627-7001

MONEY MANAGERS

<TABLE>
<S> <C>
REAL ESTATE SECURITIES FUND MANAGER, TRANSFER AND DIVIDEND
Cohen & Steers Capital Management PAYING AGENT
AEW Capital Management, L.P. Frank Russell Investment Management Company
909 A Street
EMERGING MARKETS FUND Tacoma, Washington 98402
Genesis Asset Managers, Ltd.
J.P. Morgan Investment Management Inc. CONSULTANT
Montgomery Asset Management, L.P. Frank Russell Company
909 A Street
EQUITY T FUND Tacoma, Washington 98402
J.P. Morgan Investment Management Inc.
DISTRIBUTOR
LIMITED VOLATILITY TAX FREE FUND Russell Fund Distributors, Inc.
MFS Institutional Advisors, Inc. 909 A Street
T. Rowe Price Associates, Inc. Tacoma, Washington 98402

MONEY MARKET FUND INDEPENDENT ACCOUNTANTS
Frank Russell Investment Management Company Coopers & Lybrand L.L.P.
One Post Office Square
U.S. GOVERNMENT MONEY MARKET FUND Boston, MA 02109
Frank Russell Investment Management Company
LEGAL COUNSEL
TAX FREE MONEY MARKET FUND Stradley, Ronon, Stevens & Young, LLP
Weiss, Peck & Greer, L.L.C. 2600-One Commerce Square
Philadelphia, PA 19103-7098

OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington, (253) 627-7001
</TABLE>

52
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001

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

This Prospectus relates only to the Class S Shares of the eight Funds
described herein. These 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 MAY 1, 1997,
AS REVISED JUNE 1, 1997
<PAGE>

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 the eight Funds set
forth on the first page of this prospectus. The Investment Company's Funds had
aggregate net assets of approximately $10 billion on April 3, 1997.

The net assets of these eight Funds on April 3 1997, were:

<TABLE>
<S> <C> <C> <C>
Diversified Equity............. $725,869,515 International Securities....... $743,069,351
Special Growth................. $378,841,598 Diversified Bond............... $571,226,204
Equity Income.................. $185,215,009 Volatility Constrained Bond.... $157,636,687
Quantitative Equity............ $702,850,798 Multistrategy Bond............. $327,453,730
</TABLE>

2
<PAGE>

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 and
financial intermediaries which invest for their own account or in a fiduciary
or agency capacity, and which have entered into an Asset Management Services
Agreement with FRIMCo; and institutions or individuals who have acquired
shares through such institutions or financial intermediaries. 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>

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 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 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 49.

4
<PAGE>

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..................................................... .07%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .03
---
Total Other Expenses............................................... .16
----
Total Class S Operating Expenses**.................................. .94%
====
</TABLE>

5
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .95%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .10%
Transfer Agent Fees................................................ .10
Other Fees......................................................... .04
---
Total Other Expenses............................................... .24
----
Total Class S Operating Expenses**.................................. 1.19%
====
</TABLE>

6
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .80%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .10%
Transfer Agent Fees................................................ .13
Other Fees......................................................... .04
---
Total Other Expenses............................................... .27
----
Total Class S Shares Operating Expenses**........................... 1.07%
====
</TABLE>

7
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .78%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .06%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .03
---
Total Other Expenses............................................... .15
----
Total Class S Shares Operating Expenses**........................... .93%
====
</TABLE>

8
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .95%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .25%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .04
---
Total Other Expenses............................................... .35
----
Total Class S Shares Operating Expenses**........................... 1.30%
====
</TABLE>

9
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee...................................................... .45%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .07%
Transfer Agent Fees................................................ .06
Other Fees......................................................... .03
---
Total Other Expenses............................................... .16
----
Total Class S Shares Operating Expenses**........................... .61%
====
</TABLE>

10
<PAGE>

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

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................................................ .11
Other Fees......................................................... .06
---
Total Other Expenses............................................... .26
----
Total Class S Shares Operating Expenses**........................... .76%
====
</TABLE>

11
<PAGE>

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

ANNUAL CLASS S SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1)............................... .58%
12b-1 Fees.......................................................... None
Other Expenses:
Custodian Fees..................................................... .07%
Transfer Agent Fees................................................ .09
Other Fees......................................................... .06
---
Total Other Expenses............................................... .22
----
Total Class S Shares Operating Expenses (After Fee Waiver) (1)**.... .80%
====
</TABLE>

12
<PAGE>

FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED EQUITY FUND*

DIVERSIFIED EQUITY FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 38.62 $ 32.26 $ 34.88 $ 35.60 $ 36.36 $ 30.66 $ 35.22 $ 30.46 $ 27.22 $ 31.20
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .48 .60 .58 .56 .60 .81 .99 .94 .89 1.37
Net realized and
unrealized gain (loss)
on investments........ 8.15 10.63 (.49) 3.03 2.30 8.36 (3.45) 7.68 3.57 1.05
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ 8.63 11.23 .09 3.59 2.90 9.17 (2.46) 8.62 4.46 2.42
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.48) (.60) (.58) (.55) (.61) (.82) (.96) (1.11) (.81) (.97)
Net realized gain on
investments........... (5.32) (4.27) (1.87) (3.76) (3.05) (2.65) (1.14) (2.75) (.41) (5.43)
In excess of net
realized gain
on investments........ -- -- (.26) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (5.80) (4.87) (2.71) (4.31) (3.66) (3.47) (2.10) (3.86) (1.22) (6.40)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 41.45 $ 38.62 $ 32.26 $ 34.88 $ 35.60 $ 36.36 $ 30.66 $ 35.22 $ 30.46 $ 27.22
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 23.29 35.17 (0.01) 10.53 8.32 31.05 (7.01) 29.06 16.37 6.94
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .94 .95 .95 .96 .98 .98 1.03 1.01 1.00 .97
Net investment income
to average net assets. 1.18 1.56 1.73 1.54 1.69 2.28 2.97 2.65 2.92 2.27
Portfolio turnover..... 99.90 92.53 57.53 99.80 77.02 116.53 96.90 61.80 66.02 87.69
Net assets, end of year
($000 omitted)........ 699,691 530,645 414,036 388,420 337,549 325,746 251,254 234,988 202,948 198,902
Average commission rate
paid per share of
security ($ omitted).. .0465 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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>

FINANCIAL HIGHLIGHTS OF THE SPECIAL GROWTH FUND*

SPECIAL GROWTH FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 39.17 $ 33.47 $ 35.82 $ 36.63 $ 34.47 $ 24.71 $29.35 $26.19 $23.58 $26.68
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .12 .18 .16 .07 .05 .24 .42 .42 .24 .30
Net realized and
unrealized gain (loss)
on investments........ 6.87 9.25 (.71) 5.22 4.22 10.34 (4.57) 5.78 2.99 1.59
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Total From Investment
Operations............ 6.99 9.43 (.55) 5.29 4.27 10.58 (4.15) 6.20 3.23 1.89
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.12) (.21) (.10) (.07) (.06) (.24) (.42) (.48) (.21) (.35)
Net realized gain on
investments........... (5.25) (3.52) (.85) (6.03) (2.05) (.58) (.07) (2.56) (.41) (4.64)
In excess of net
realized gain on
investments........... -- -- (.85) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Total Distributions.... (5.37) (3.73) (1.80) (6.10) (2.11) (.82) (.49) (3.04) (.62) (4.99)
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 40.79 $ 39.17 $ 33.47 $ 35.82 $ 36.63 $ 34.47 $24.71 $29.35 $26.19 $23.58
======= ======= ======= ======= ======= ======= ====== ====== ====== ======
TOTAL RETURN (%)........ 18.65 28.52 (3.71) 15.48 12.52 43.11 (14.28) 23.92 13.82 6.54
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses, net
to average net
assets................ 1.19 1.22 1.20 1.31 1.33 1.36 1.50 1.49 1.47 1.37
Operating expenses,
gross to average net
assets................ 1.19 1.22 1.20 1.31 1.33 1.36 1.53 1.49 1.47 1.37
Net investment income
to average net
assets................ .28 .49 .50 .19 .14 .80 1.57 1.42 .92 1.07
Portfolio turnover..... 118.13 87.56 55.40 91.97 42.20 42.81 63.87 85.24 51.75 161.46
Net assets, end of year
($000 omitted)........ 393,048 313,678 229,077 188,891 134,913 105,245 62,116 60,146 47,405 45,460
Average commission rate
paid per share of
security ($ omitted).. .0384 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Per share amount of
fees reimbursed
($ omitted)........... -- -- -- -- -- -- .0093 -- -- --
</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.

14
<PAGE>

FINANCIAL HIGHLIGHTS OF THE EQUITY INCOME FUND*

EQUITY INCOME FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $38.43 $32.21 $35.90 $35.32 $36.54 $30.75 $34.91 $30.85 $26.92 $34.66
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .82 .94 .90 .83 .99 1.11 1.43 1.34 1.22 1.18
Net realized and
unrealized gain (loss)
on investments........ 7.03 10.08 (.70) 3.69 3.08 7.15 (3.83) 6.47 3.96 (1.44)
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
Total From Investment
Operations............ 7.85 11.02 .20 4.52 4.07 8.26 (2.40) 7.81 5.18 (.26)
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.82) (.97) (.89) (.83) (1.00) (1.10) (1.37) (1.50) (1.25) (1.50)
In excess of net
investment income..... (.01) -- -- (.00) -- -- -- -- -- --
Net realized gain on
investments........... (5.23) (3.83) (3.00) (3.11) (4.29) (1.37) (.39) (2.25) -- (5.98)
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
Total Distributions.... (6.06) (4.80) (3.89) (3.94) (5.29) (2.47) (1.76) (3.75) 1.25) (7.48)
------- ------- ------- ------- ------- ------- ------ ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $40.22 $38.43 $32.21 $35.90 $35.32 $36.54 $30.75 $34.91 $30.85 $26.92
======= ======= ======= ======= ======= ======= ====== ======= ====== ======
TOTAL RETURN (%)........ 21.45 34.76 .69 13.23 11.51 27.52 (6.90) 25.61 19.42 (2.44)
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... 1.07 1.06 1.04 1.05 1.08 1.11 1.14 1.15 1.13 1.06
Net investment income
to average net
assets................ 2.03 2.51 2.56 2.23 2.68 3.11 4.12 3.94 4.08 3.30
Portfolio turnover..... 106.40 92.40 89.91 78.72 95.07 61.73 65.97 79.82 58.12 98.67
Net assets, end of year
($000 omitted)........ 195,132 180,116 144,285 149,532 134,365 122,689 99,575 101,589 68,998 61,300
Average commission rate
paid per share of
security ($ omitted).. .0441 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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.

15
<PAGE>

FINANCIAL HIGHLIGHTS OF THE QUANTITATIVE EQUITY FUND*

QUANTITATIVE EQUITY FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987++
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 30.76 $ 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.. .51 .50 .49 .45 .49 .58 .66 .68 .56 .32
Net realized and
unrealized gain (loss)
on investments........ 6.24 8.72 (.19) 2.69 1.67 5.93 (1.99) 4.53 2.14 (1.86)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations............ 6.75 9.22 .30 3.14 2.16 6.51 (1.33) 5.21 2.70 (1.54)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.51) (.51) (.49) (.45) (.49) (.58) (.64) (.76) (.57) (.25)
Net realized gain on
investments........... (3.95) (2.79) (1.41) (2.07) (1.73) (1.12) (.53) (1.09) -- (.13)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions.... (4.46) (3.30) (1.90) (2.52) (2.22) (1.70) (1.17) (1.85) (.57) (.38)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 33.05 $ 30.76 $ 24.84 $ 26.44 $ 25.82 $ 25.88 $ 21.07 $ 23.57 $20.21 $18.08
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(a)..... 23.08 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 .93 .94 .98 1.02 1.03 1.12 1.14 1.16 .97
Net investment income
to average net
assets(b)............. 1.59 1.71 1.95 1.68 1.94 2.39 2.94 3.00 3.00 3.38
Portfolio turnover(b).. 74.33 78.83 45.97 62.48 59.19 58.07 57.49 90.65 59.37 47.78
Net assets, end of year
($000 omitted)........ 663,925 488,948 380,592 314,647 244,870 201,614 147,730 124,111 89,858 64,182
Average commission rate
paid per share of
security ($ omitted).. .0331 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</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>

FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL SECURITIES FUND*

INTERNATIONAL SECURITIES FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 56.61 $ 53.96 $ 57.95 $ 44.75 $ 49.15 $ 44.60 $ 55.81 $ 50.49 $45.26 $49.22
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .53 .56 .44 .40 .61 .72 1.05 .67 .86 .55
Net realized and
unrealized gain (loss)
on investments (a).... 3.72 4.89 1.23 14.53 (4.02) 4.60 (9.53) 10.32 8.98 6.84
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations............ 4.25 5.45 1.67 14.93 (3.41) 5.32 (8.48) 10.99 9.84 7.39
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.31) (.88) (.04) (.38) (.68) (.76) (1.08) (.89) (.95) (.45)
In excess of net
investment income..... (.17) (.23) (.02) (.23) -- -- -- -- -- --
Net realized gain on
investments........... (1.90) (1.69) (5.60) (1.12) (.31) (.01) (1.65) (4.78) (3.66) (10.90)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions.... (2.38) (2.80) (5.66) (1.73) (.99) (.77) (2.73) (5.67) (4.61) (11.35)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 58.48 $ 56.61 $ 53.96 $ 57.95 $ 44.75 $ 49.15 $ 44.60 $ 55.81 $50.49 $45.26
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)........ 7.63 10.20 4.86 33.48 (6.94) 11.99 (15.34) 22.24 22.05 15.89
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average
assets................ 1.30 1.30 1.30 1.38 1.45 1.49 1.50 1.50 1.50 1.50
Operating expenses,
gross, to average
assets................ 1.31 1.31 1.33 1.42 1.47 1.49 1.50 1.54 1.50 1.50
Net investment income
to average net
assets................ .91 .97 .70 .82 1.37 1.68 2.28 1.54 1.60 .91
Portfolio turnover..... 42.43 42.96 72.23 60.22 48.93 52.46 68.89 57.16 43.50 113.04
Net assets, end of year
($000 omitted)........ 743,615 623,389 563,333 454,482 262,886 243,065 169,818 123,823 91,006 88,321
Average commission rate
paid per share of
security ($ omitted).. .0039 N/A N/A N/A N/A N/A N/A N/A N/A N/A
Per share amount of
fees waived ($
omitted).............. .0050 .0080 .0178 .0161 .0054 -- -- .0169 -- --
</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>

FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED BOND FUND*

DIVERSIFIED BOND FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 23.69 $ 21.53 $ 23.73 $ 23.49 $ 24.29 $ 22.81 $ 22.90 $ 22.38 $ 22.38 $ 25.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.47 1.54 1.46 1.48 1.62 1.72 1.74 1.87 1.69 1.55
Net realized and
unrealized gain (loss)
on investments........ (.71) 2.18 (2.22) .83 (.10) 1.61 (.09) .83 (.02) (1.28)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ .76 3.72 (.76) 2.31 1.52 3.33 1.65 2.70 1.67 .27
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.48) (1.56) (1.42) (1.48) (1.63) (1.69) (1.74) (1.92) (1.67) (1.65)
In excess of net
investment income..... -- -- -- (.01) -- -- -- -- -- --
Net realized gain on
investments........... -- -- -- (.58) (.69) (.16) -- (.26) -- (1.24)
In excess of net
realized gain on
investments........... -- -- (.02) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (1.48) (1.56) (1.44) (2.07) (2.32) (1.85) (1.74) (2.18) (1.67) (2.89)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 22.97 $ 23.69 $ 21.53 $ 23.73 $ 23.49 $ 24.29 $ 22.81 $ 22.90 $ 22.38 $ 22.38
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 3.43 17.76 (3.25) 10.02 6.57 15.29 7.58 12.52 7.67 1.25
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average
assets................ .61 .59 .56 .58 .62 .74 .88 .93 .93 .90
Operating expenses,
gross, to average
assets................ .61 .59 .56 .58 .67 .74 .88 .93 .93 .90
Net investment income
to average net
assets................ 6.46 6.69 6.57 6.13 6.79 7.38 7.89 8.16 7.48 7.05
Portfolio turnover..... 138.98 135.85 153.21 177.74 228.37 130.96 94.88 195.14 197.15 180.54
Net assets, end of year
($000 omitted)........ 554,804 513,808 525,315 477,341 412,394 344,081 294,677 230,156 211,656 197,730
Per share amount of
fees waived
($ omitted)........... -- -- -- -- .0115 -- -- -- -- --
</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.

18
<PAGE>

FINANCIAL HIGHLIGHTS OF THE VOLATILITY CONSTRAINED BOND FUND*

VOLATILITY CONSTRAINED BOND FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51 $ 19.37 $ 19.14 $ 19.21 $ 20.06
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.09 1.21 1.15 .82 1.34 1.45 1.52 1.66 1.55 1.48
Net realized and
unrealized gain (loss)
on investments........ (.22) .58 (1.16) .45 (.88) .80 .13 .30 (.10) (.67)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations............ .87 1.79 (.01) 1.27 .46 2.25 1.65 1.96 1.45 .81
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.01) (1.22) (1.13) (.71) (1.28) (1.43) (1.51) (1.73) (1.52) (1.59)
Net realized gain on
investments........... -- -- -- -- -- -- -- -- -- (.07)
Tax Return of capital.. -- -- -- (.29) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions.... (1.01) (1.22) (1.13) (1.00) (1.28) (1.43) (1.51) (1.73) (1.52) (1.66)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 19.07 $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51 $ 19.37 $ 19.14 $ 19.21
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)........ 4.66 9.89 (.02) 6.67 2.29 12.00 8.92 10.64 7.77 4.27
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets.... .76 .71 .67 .66 .68 .62 .62 .61 .59 .58
Net investment income
to average net
assets................ 5.69 6.33 5.97 5.79 6.74 7.34 7.88 8.41 7.97 7.75
Portfolio turnover..... 311.51 256.72 182.65 220.77 312.05 159.20 181.66 331.12 238.69 190.36
Net assets, end of year
($000 omitted)........ 163,197 181,881 195,007 225,672 292,909 293,603 240,887 214,745 234,095 251,702
</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.

19
<PAGE>

FINANCIAL HIGHLIGHTS OF THE
MULTISTRATEGY BOND FUND*

MULTISTRATEGY BOND FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993++
------- ------- ------- ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......... $ 10.25 $ 9.29 $ 10.31 $10.00
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... .61 .65 .58 .46
Net realized and unrealized gain (loss) on
investments............................... (.12) .97 (1.03) .40
------- ------- ------- ------
Total From Investment Operations.......... .49 1.62 (.45) .86
------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income...................... (.61) (.66) (.57) (.46)
In excess of net investment income......... (.01) -- -- --
Net realized gain on investments........... (.01) -- -- (.08)
In excess of net realized gain on
investments............................... -- -- -- (.01)
------- ------- ------- ------
Total Distributions....................... (.63) (.66) (.57) (.55)
------- ------- ------- ------
NET ASSET VALUE, END OF YEAR................ $ 10.11 $ 10.25 $ 9.29 $10.31
======= ======= ======= ======
TOTAL RETURN (%)(a)......................... 4.97 17.92 (4.35) 8.74
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net
assets (b)................................ .81 .85 .85 .85
Operating expenses, gross, to average net
assets (b)................................ .88 .89 .90 1.20
Net investment income to average net assets
(b)....................................... 6.19 6.61 6.26 5.60
Portfolio turnover (b)..................... 145.38 142.26 136.39 188.95
Net assets, end of year ($000 omitted)..... 305,428 218,765 173,035 98,374
Per share amount of fees waived ($
omitted).................................. .0055 -- -- .0002
Per share amount of fees reimbursed ($
omitted).................................. .0005 .0042 .0043 .0286
</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.
++ 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.

20
<PAGE>

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

FRIMCo and Frank Russell Company believe 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.

21
<PAGE>

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,
FRIMCo and Frank Russell Company believe that they are able to provide their
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, FRIMCo 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

Shares of the Funds generally are not offered or "retailed" to individual
investors, although FRIMCo 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 FRIMCo may acquire shares of the Funds for the
benefit of their customers. FRIMCo 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 FRIMCo or the Funds;
they may charge their customers a fee for providing these and possibly other
trust or

22
<PAGE>

investment-related services. A shareholder may pay a fixed dollar fee to
FRIMCo for other services or reports provided by FRIMCo to the shareholder.

Either the client or FRIMCo may terminate the Agreement upon written notice
as provided for in the Agreement. FRIMCo does not expect to exercise its right
to terminate the Agreement unless a client does not (i) promptly pay fees due
to FRIMCo; or (ii) invest sufficient assets in the Funds to compensate FRIMCo
for providing services to the client with respect to assets invested in the
Funds. Upon termination of an Agreement by the client or FRIMCo, FRIMCo 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 of FRIMCo since
1989.

. James M. Imhof, Manager of Portfolio Trading, FRIMCo, who has managed the
day to day management of the FRIMCo Funds and ongoing analysis and
monitoring of Fund money managers since 1989.

23
<PAGE>

Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.

For its services, FRIMCo receives a management fee from each Fund. From this
fee, FRIMCo, acting as agent for the Investment Company, is responsible for
paying the money managers for their investment selection services. The
remainder is retained by FRIMCo as compensation for the services described
above and to pay expenses. The annual rate of the management fees, payable to
FRIMCo 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%; 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.

24
<PAGE>

FRIMCo has voluntarily agreed to waive all or a portion of its management
fee with respect to certain funds. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or
rescinded at any time. FRIMCo currently waives its management fee for each of
the Funds to the extent a Fund incurs Money Market Fund management fees in
respect of their investment in the Money Market Fund.

EXPENSES OF THE FUNDS

The Funds, and when appropriate each class, will pay their own expenses
other than those expressly assumed by FRIMCo. The Funds' Class S Shares'
expenses for the year ended December 31, 1996, 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 FRIMCo; fees
for custodial, preparing tax records and portfolio accounting payable to State
Street Bank and Trust 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 FRIMCO. THE MONEY
MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED AT ANY TIME BY
FRIMCO, 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.

From its management fees, FRIMCo, 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, .40%; Equity Income Fund, .20%; Quantitative Equity Fund, .21%;
International Securities Fund, .42%; Diversified Bond Fund, .08%; Volatility
Constrained Bond Fund, .18%; and Multistrategy Bond Fund, .21%. 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 FRIMCo as agent to make payment of the money manager's fee, the money
manager will look only to FRIMCo 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.

25
<PAGE>

developed by Frank Russell Company and FRIMCo. 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, FRIMCO,
NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF THE MONEY
MANAGERS' INDIVIDUAL SECURITY SELECTIONS.

INVESTMENT OBJECTIVES, RESTRICTIONS, POLICIES, AND RISKS

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.")

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 @ 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.

26
<PAGE>

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 FRIMCo
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 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.

The Fund will seek to achieve its investment objectives by using various
quantitative management techniques. FRIMCo believes quantitative management
over a market cycle should provide a portfolio with consistent performance,
diversification, market-like volatility and limited market under performance.
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

27
<PAGE>

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.

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

28
<PAGE>

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, FRIMCo 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.

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 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.

29
<PAGE>

MULTISTRATEGY BOND FUND

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
"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."

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

30
<PAGE>

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.

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).

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<PAGE>

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:

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, high-grade, money
market instruments. FRIMCo currently waives its management fee for each of the
Funds to the extent a Fund incurs Money Market Fund management fees in respect
of its investment in the Money Market Fund, thereby eliminating any
duplication of fees.

The Russell 1000(R) Index is used as the basis for the Quantitative Equity
Fund's performance because it, in FRIMCo'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.

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<PAGE>

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.

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. Liquid
assets 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 33.33% 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.

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<PAGE>

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.

Liquidity Portfolios. FRIMCo 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 securities or used for
Fund transactions.

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.

34
<PAGE>

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.

Depository Receipts. The Funds may invest in securities of foreign issuers
in the form of American Depository Receipts ("ADRs") or other similar
securities convertible into securities of foreign issuers. These securities
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by United
States bank or trust company evidencing ownership of the underlying
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets.

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 liquid assets in an amount at all times equal to or
exceeding the Fund's commitment with respect to these contracts.

35
<PAGE>

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.

36
<PAGE>

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.

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.

37
<PAGE>

38
<PAGE>

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.

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 growth of the market for lower
rated debt securities 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 FRIMCo 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.

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<PAGE>

DIVIDENDS AND DISTRIBUTIONS

INCOME DIVIDENDS

The Board of Trustees presently intends that dividends will be declared 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 Diversified Equity,
and December Special Growth, Equity
Income and Quantitative
Equity Funds

Annually Mid-December International Securities
Fund
</TABLE>

CAPITAL GAINS DISTRIBUTIONS

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<PAGE>

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 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 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 withholding taxes by non-US
governments. FRIMCo 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.

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<PAGE>

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.

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<PAGE>

CALCULATION OF FUND PERFORMANCE

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, 1996 for the Class S shares of the
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
were, respectively, 6.28%, 5.48% and 5.99%.

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).

43
<PAGE>

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

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<PAGE>

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.

Automatic Investment Program. A shareholder may make scheduled
investments (minimum $50.00) in an established account in a Fund on a
monthly, quarterly, semiannual or annual basis by automatic electronic
funds transfer from the shareholder's bank account. A separate transfer is
required for each Fund in which shares are to be purchased. A shareholder
may, of course, terminate the program as to further transfers at any time.
Contact the Financial Intermediary from whom you received this prospectus
for further information on this program and an enrollment form.

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to a
Financial Intermediary or 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.

THIRD PARTY TRANSACTIONS

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<PAGE>

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
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 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>

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.

SWP Distribution by Electronic Fund Transfer. Electronic Fund Transfer
payments will be sent to designated bank on payment date.

A Systematic Withdrawal Payment form must be completed and mailed to the
Financial Intermediary from whom this prospectus was obained or 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.

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

47
<PAGE>

securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Funds.

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.

At March 31, 1997, no one Shareholder could deemed by the 1940 Act to
"control" the Funds

48
<PAGE>

MONEY MANAGER PROFILES

The money managers have no other affiliations with the Funds, FRIMCo 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.

Barclays Global Investors, 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., 590 Madison Avenue, 41st 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 AMVESCO, PLC, a
London-based financial services holding company.

Schneider Capital Management, 460 E. Swedesford Road, Suite 1080, Wayne, PA
19087, is a SEC registered investment adviser owned by Arnold Schneider. As of
the date of this supplement, the Investment Company understands that an
injunction is being sought against Arnold Schneider in Massachusetts Middlesex
County Superior Court by partners of Wellington Management Company
("Wellington"). The proceedings were instituted on December 13, 1996. The
Investment Company believes that the injunction request seeks to prevent
Arnold Schneider from engaging in the investment advisory or investment
management business in competition with Wellington.

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

49
<PAGE>

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.

EQUITY INCOME FUND

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

Trinity Investment Management Corporation, See: Diversified Equity Fund.

QUANTITATIVE EQUITY FUND

Barclays Global Investors, 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

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

Marathon Asset Management Limited, Orion House, 5 Upper St. Martin Lane,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.

50
<PAGE>

The Boston Company Asset Management, Inc., One Boston Place, Boston, MA
02108, is 100% owned by Mellon Bank Corporation, a publicly held corporation.

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
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.

MULTISTRATEGY BOND FUND

51
<PAGE>

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.

52
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001

MONEY MANAGERS

<TABLE>
<S> <C>
DIVERSIFIED EQUITY INTERNATIONAL SECURITIES
Alliance Capital Management L.P. J.P. Morgan Investment Management, Inc.
Barclays Global Fund Advisors Marathon Asset Management Limited
Columbus Circle Investors Oechsle International Advisors
Equinox Capital Management, Inc. Rowe Price-Fleming International, Inc.
INVESCO Capital Management, Inc. Sanford C. Bernstein & Co., Inc.
Lincoln Capital Management Company The Boston Company Asset Management, Inc.
Schneider Capital Management
Suffolk Capital Management, Inc. DIVERSIFIED BOND
Trinity Investment Management Corporation Lincoln Capital Management Company
Pacific Investment Management Company
SPECIAL GROWTH Standish, Ayer & Wood, Inc.
Delphi Management, Inc.
Fiduciary International, Inc. VOLATILITY CONSTRAINED BOND
GlobeFlex Capital, L.P. BlackRock Financial Management
Jacobs Levy Equity Management, Inc. Standish, Ayer & Wood, Inc.
Sirach Capital Management, Inc. STW Fixed Income Management Ltd.
Wellington Management Company LLP
MULTISTRATEGY BOND
EQUITY INCOME BEA Associates
Brandywine Asset Management, Inc. Pacific Investment Management Company
Equinox Capital Management, Inc. Standish, Ayer & Wood, Inc.
Trinity Investment Management Corporation

QUANTITATIVE EQUITY
Barclays Global Fund Advisors
Franklin Portfolio Associates LLC
J.P. Morgan Investment Management, Inc.
</TABLE>

53
<PAGE>

<TABLE>
<S> <C>
MANAGER, TRANSFER AND DIVIDEND INDEPENDENT ACCOUNTANTS
PAYING AGENT Coopers & Lybrand L.L.P.
Frank Russell Investment Management Company One Post Office Square
909 A Street Boston, Massachusetts 02109
Tacoma, Washington 98402
LEGAL COUNSEL
CONSULTANT Stradley, Ronon, Stevens & Young, LLP
Frank Russell Company 2600 -- One Commerce Square
909 A Street Philadelphia, Pennsylvania 19103-7098
Tacoma, Washington 98402
OFFICE OF SHAREHOLDER INQUIRIES
DISTRIBUTOR 909 A Street
Russell Fund Distributors, Inc. Tacoma, Washington 98402
909 A Street (800) 972-0700
Tacoma, Washington 98402 In Washington (253) 627-7001
</TABLE>

54
<PAGE>

PROSPECTUS

CLASS C SHARES

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001

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

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.

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 May 1, 1997, 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
described herein. These 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 MAY 1, 1997,
AS REVISED JUNE 1, 1997
<PAGE>

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 the ten Funds set
forth on the first page of this prospectus. A shareholder of the Emerging
Markets Fund described herein may pay a quarterly shareholder investment
services fee directly to FRIMCo. The fee is computed on the amount the
shareholder has invested in the applicable Fund. No Shareholder of the other
nine Funds described herein pays any such fees and, currently, no shareholder
of the Emerging Markets Fund pays any such fee, although such fees may be
required with respect to that Fund in the future. The Investment Company Funds
had aggregate net assets of approximately $10 billion on April 3, 1997. The
net assets of these ten Funds on April 3, 1997, were:

<TABLE>
<S> <C> <C> <C>
Diversified Equity.......... $ 0 Emerging Markets............ $ 0
Special Growth.............. $ 945,807 Real Estate Securities...... $ 112,980
Equity Income............... $ 15,629 Diversified Bond............ $1,123,226
Quantitative Equity......... $ 396,751 Volatility Constrained
International Securities.... $ 748,240 Bond....................... $ 0
Multistratey Bond........... $ 0
</TABLE>

2
<PAGE>

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 16.

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

EXPENSES OF THE FUNDS are borne by the Funds. Each Fund pays a management
fee to FRIMCo, its expenses and its portion of the general expenses of the
Investment Company. FRIMCo, 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 FRIMCo, for conducting the Fund's general operations
and for providing investment supervision for the Fund. Each Eligible Investor
may pay to FRIMCo directly a fee for other services provided to that Eligible
Investor. PAGE 27.

3
<PAGE>

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 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
44.

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 45.

FUND PERFORMANCE, including yields and total return information, is
calculated in accordance with formulas prescribed by the Securities and
Exchange Commission. PAGE 47.

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 48.

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 48.

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 51.

THE FUNDS also offer a second class of shares, the Class S Shares, which are
designed to meet different investor needs. PAGE 53.

4
<PAGE>

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.................................................. .07%
Transfer Agent Fees............................................. .06
Other Fees (2)(3) (including shareholder servicing fee of up to
0.25%)......................................................... .35
Total Other Expenses............................................ .48
----
Total Class C Shares Operating Expenses+ ........................ 1.66%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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............................ $17 $51 $92 $209
=== === === ====
</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 during 1996.
(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>

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)..................................................... .40
Other Expenses:
Custodian Fees.................................................... .10%
Transfer Agent Fees............................................... .10
Other Fees (2) (including a shareholder servicing fee of up to
0.25%)........................................................... .36
---
Total Other Expenses.............................................. .56
----
Total Class C Shares Operating Expenses+........................... 1.91%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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............................ $19 $58 $105 $240
=== === ==== ====
</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) 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>

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

ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee................................................... .80%
12b-1 Fees (1)................................................... .40
Other Expenses:
Custodian Fees.................................................. .10%
Transfer Agent Fees............................................. .13
Other Fees (2) (including a shareholder servicing fee of up to
0.25%)......................................................... .36
---
Total Other Expenses............................................ .59
----
Total Class C Shares Operating Expenses+......................... 1.79%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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............................ $18 $55 $99 $225
=== === === ====
</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) 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>

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

ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee..................................................... .78%
12b-1 Fees (1)..................................................... .40
Other Expenses:
Custodian Fees.................................................... .07%
Transfer Agent Fees............................................... .04
Other Fees (2) (including a shareholder servicing fee of up to
0.25%)........................................................... .36
---
Total Other Expenses.............................................. .47
----
Total Class C Shares Operating Expenses+........................... 1.65%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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............................ $16 $50 $91 $207
=== === === ====
</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) 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>

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)............................................. .40
Other Expenses:
Custodian Fees............................................ .25%
Transfer Agent Fees....................................... .06
Other Fees (2) (including a shareholder servicing fee of
up to 0.25%)............................................. .36
---
Total Other Expenses...................................... .67
----
Total Class C Shares Operating Expenses+................... 2.02%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 $62 $112 $254
=== === ==== ====
</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) 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>

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

ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (1)................................................. 1.20%
12b-1 Fees (2)(3).................................................. .40
Other Expenses:
Custodian Fees.................................................... .28%
Transfer Agent Fees............................................... .14
Other Fees (2)(4) (including a shareholder servicing fee of up to
0.25%)*.......................................................... .41
---
Total Other Expenses.............................................. .83
----
Total Class C Shares Operating Expenses (After Fee Waiver) (1)+.... 2.43%
====
</TABLE>

10
<PAGE>

(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 FRIMCo, 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 FRIMCo to the shareholder. Accordingly, the expense information
does not reflect an amount for fees paid directly by an investor to FRIMCo.
+ 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>

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

ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee..................................................... .85%
12b-1 Fees (1)..................................................... .40
Other Expenses:
Custodian Fees..................................................... .04%
Transfer Agent Fees............................................... .11
Other Fees (2) (including a shareholder servicing fee of up to
0.25%)........................................................... .36
---
Total Other Expenses.............................................. .51
----
Total Class C Shares Operating Expenses+........................... 1.76%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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............................ $18 $54 $97 $221
=== === === ====
</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) 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>

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

ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee..................................................... .45%
12b-1 Fees (1)..................................................... .40
Other Expenses:
Custodian Fees.................................................... .07%
Transfer Agent Fees............................................... .06
Other Fees (2) (including a shareholder servicing fee of up to
0.25%)........................................................... .35
---
Total Other Expenses.............................................. .48
----
Total Class C Shares Operating Expenses+........................... 1.33%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 $40 $73 $167
=== === === ====
</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) 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>

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

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.................................................... .09%
Transfer Agent Fees............................................... .11
Other Fees (2)(3) (including a shareholder servicing fee of up to
0.25%)........................................................... .38
---
Total Other Expenses.............................................. .58
----
Total Class C Shares Operating Expenses+........................... 1.48%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 $45 $82 $186
=== === === ====
</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 during 1996.
(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>

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

ANNUAL CLASS C SHARES OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fee (After Fee Waiver) (1).............................. .58%
12b-1 Fees (2)(3).................................................. .40
Other Expenses:
Custodian Fees.................................................... .07%
Transfer Agent Fees............................................... .09
Other Fees (2)(4) (including a shareholder servicing fee of up to
0.25%)........................................................... .38
---
Total Other Expenses.............................................. .54
----
Total Class C Shares Operating Expenses (After Fee Waiver) (1)+.... 1.52%
====
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
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 $47 $84 $192
=== === === ====
</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 1.59% 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 during 1996.
(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 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.

15
<PAGE>

FINANCIAL HIGHLIGHTS

Class C Shares of the Diversified Equity, Volatility Constrained Bond,
MultiStrategy Bond and Emerging Markets Funds were not issued prior to
December 31, 1996. Those 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
those Funds' Annual Reports to shareholders. 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 those Funds named above 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.

16
<PAGE>

FINANCIAL HIGHLIGHTS OF THE
SPECIAL GROWTH FUND CLASS C SHARES*

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 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.

SPECIAL GROWTH FUND CLASS C SHARES

<TABLE>
<CAPTION>
1996++
-------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................................... $ 43.48
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)......................................... (.02)
Net realized and unrealized gain (loss) on investments............... 1.63
-------
Total Income From Investment Operations.............................. 1.61
-------
LESS DISTRIBUTIONS:
Net realized gain on investments..................................... (4.34)
-------
Total Distributions.................................................. (4.34)
-------
NET ASSET VALUE, END OF YEAR.......................................... $ 40.75
=======
TOTAL RETURN (%)(a)................................................... 4.04
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets (b)........................ 1.89
Net investment income (loss) to average net assets (b)............... (.38)
Portfolio turnover................................................... 118.13
Net assets, end of year ($000 omitted)............................... 910
Average Commission rate paid per share of security ($ omitted)....... .0384
</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.
++ For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.

17
<PAGE>

FINANCIAL HIGHLIGHTS OF THE
EQUITY INCOME FUND CLASS C SHARES*

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 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.

EQUITY INCOME FUND CLASS C SHARES

<TABLE>
<CAPTION>
1996++
-------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................................... $ 41.86
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ .10
Net realized and unrealized gain (loss) on investments............... 2.39
-------
Total Income From Investment Operations.............................. 2.49
-------
LESS DISTRIBUTIONS:
Net investment income................................................ (.18)
Net realized gain on investments..................................... (3.95)
-------
Total Distributions.................................................. (4.13)
-------
NET ASSET VALUE, END OF YEAR.......................................... $ 40.22
=======
TOTAL RETURN (%)(a)................................................... 6.23
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (b)......................... 1.77
Net investment income to average net assets (b)...................... 1.50
Portfolio turnover................................................... 106.40
Net assets, end of year ($000 omitted)............................... 122
Average Commission rate paid per share of security ($ omitted)....... .0441
</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.
++ For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.

18
<PAGE>

FINANCIAL HIGHLIGHTS OF THE
QUANTITATIVE EQUITY FUND CLASS C SHARES*

QUANTITATIVE EQUITY FUND CLASS C SHARES

<TABLE>
<CAPTION>
1996++
------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................................... $33.81
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. .05
Net realized and unrealized gain (loss) on investments................ 1.87
------
Total Income From Investment Operations............................... 1.92
------
LESS DISTRIBUTIONS:
Net investment income................................................. (.08)
Net realized gain on investments...................................... (2.60)
------
Total Distributions................................................... (2.68)
------
NET ASSET VALUE, END OF YEAR........................................... $33.05
======
TOTAL RETURN (%)(a).................................................... 5.91
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (b).......................... 1.65
Net investment income to average net assets (b)....................... .81
Portfolio turnover (b)................................................ 74.33
Net assets, end of year ($000 omitted)................................ 322
Average Commission rate paid per share of security ($ omitted)........ .0331
</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.
++ For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.

19
<PAGE>

FINANCIAL HIGHLIGHTS OF THE
INTERNATIONAL SECURITIES FUND CLASS C SHARES*

INTERNATIONAL SECURITIES FUND CLASS C SHARES

<TABLE>
<CAPTION>
1996++
------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................................... $58.56
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. (.03)
Net realized and unrealized gain (loss) on investments................ 1.68
------
Total Income From Investment Operations............................... 1.65
------
LESS DISTRIBUTIONS:
Net investment income................................................. (.27)
In excess of net investment income.................................... (.16)
Net realized gain on investments...................................... (1.31)
------
Total Distributions................................................... (1.74)
------
NET ASSET VALUE, END OF YEAR........................................... $58.47
======
TOTAL RETURN (%)(a).................................................... 2.86
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, to average net assets (b)......................... 2.00
Net investment income (loss) to average net assets (b)................ (.61)
Portfolio turnover.................................................... 42.43
Net assets, end of year ($000 omitted)................................ 623
Average Commission rate paid per share of security ($ omitted) (c).... .0039
</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.
++ For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.
(c) In certain foreign markets, the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.

20
<PAGE>

FINANCIAL HIGHLIGHTS OF THE
REAL ESTATE SECURITIES FUND CLASS C SHARES*

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.

REAL ESTATE SECURITIES FUND CLASS C SHARES

<TABLE>
<CAPTION>
1996++
------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................................... $26.67
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. .24
Net realized and unrealized gain (loss) on investments................ 3.85
------
Total Income From Investment Operations............................... 4.09
------
LESS DISTRIBUTIONS:
Net investment income................................................. (.32)
Net realized gain on investments...................................... (1.26)
------
Total Distributions................................................... (1.58)
------
NET ASSET VALUE, END OF YEAR........................................... $29.18
======
TOTAL RETURN (%)(a).................................................... 15.75
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net assets (b).......................... 1.77
Net investment income to average net assets (b)....................... 5.31
Portfolio turnover.................................................... 51.75
Net assets, end of year ($000 omitted)................................ 101
Average Commission rate paid per share of security ($ omitted)........ .0631
</TABLE>
- ---------------------
* 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.
++ For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.

21
<PAGE>

FINANCIAL HIGHLIGHTS OF THE
DIVERSIFIED BOND FUND CLASS C SHARES*

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 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.

DIVERSIFIED BOND FUND CLASS C SHARES

<TABLE>
<CAPTION>
1996++
-------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................................... $ 23.16
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ .25
Net realized and unrealized gain (loss) on investments............... (.09)
-------
Total From Investment Operations..................................... .16
-------
LESS DISTRIBUTIONS:
Net investment income................................................ (.34)
-------
Total Distributions.................................................. (.34)
-------
NET ASSET VALUE, END OF YEAR.......................................... $ 22.98
=======
TOTAL RETURN (%)(a)................................................... .67
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average assets (b)............................. 1.31
Net investment income to average net assets (b)...................... 5.75
Portfolio turnover................................................... 138.98
Net assets, end of year ($000 omitted)............................... 962
</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.
++ For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.

22
<PAGE>

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

23
<PAGE>

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,
FRIMCo and Frank Russell Company believe that they are able to provide their
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, FRIMCo 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

24
<PAGE>

allocation services to their customers. These Financial Intermediaries receive
no compensation from FRIMCo 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 FRIMCo for other
services or reports provided by FRIMCo to the shareholder.

Either the client or FRIMCo may terminate the Agreement upon written notice
as provided for in the Agreement. FRIMCo does not expect to exercise its right
to terminate the Agreement unless a client does not invest sufficient assets
in the Funds to compensate FRIMCo for providing services to the client. Upon
termination of an Agreement by the client or FRIMCo, FRIMCo will no longer
provide asset-allocation, objective-setting or other services.

GENERAL MANAGEMENT OF THE FUNDS

FRIMCo: (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. FRIMCo 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.

. Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
1989.

. James M. Imhof, Manager of Portfolio Trading, FRIMCo, who has managed the
day to day management of the FRIMCo Funds and ongoing analysis and
monitoring of Fund money managers since 1989.

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

25
<PAGE>

Jornlin jointly with another portfolio manager identified herein has
primary responsibility for management of the Real Estate Securities Fund.

Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.

26
<PAGE>

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
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.

FRIMCo has voluntarily agreed to waive all or a portion of its management
fee with respect to certain funds. This arrangement is not part of the
Management Agreement with the Investment Company and may be changed or
rescinded at any time. FRIMCo currently waives its management fee for each of
the Funds to the extent a Fund incurs Money Market management fees in respect
of its investment in the Money Market Fund.

EXPENSES OF THE FUNDS

The Funds, and when appropriate each class, will pay their own expenses
other than those expressly assumed by FRIMCo. Principal expenses are: the
management and transfer agency fees payable to FRIMCo; fees for custodial,
preparing tax records and portfolio accounting payable to State Street Bank
and Trust 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.

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, .40%; Equity Income Fund, .20%; Quantitative
Equity Fund, .21%; International Securities Fund, .42%; Emerging Markets Fund,
.72%; Real Estate Securities Fund, .31%; Diversified Bond Fund, .08%;
Volatility Constrained Bond Fund, .18%; and Multistrategy Bond Fund, .21%.
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 for the
payment of its fee.

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<PAGE>

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

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.")

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

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<PAGE>

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 FRIMCo
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 Fund will seek to achieve its investment objectives by using various
quantitative management techniques. FRIMCo 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.

29
<PAGE>

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 SECURITIES FUND

EMERGING MARKETS FUND

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.

30
<PAGE>

REAL ESTATE SECURITIES FUND

31
<PAGE>

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.

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.

VOLATILITY CONSTRAINED BOND FUND

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

32
<PAGE>

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, FRIMCo 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.

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.

33
<PAGE>

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.

MULTISTRATEGY BOND FUND

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

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.

34
<PAGE>

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.

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.

35
<PAGE>

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:

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, high-grade, money
market instruments. FRIMCo currently waives its management fee for each of the
funds to the extent a Fund incurs Money Market Fund Management fees in respect
of its investment in the Money Market Fund, thereby eliminating any
duplication of fees.

36
<PAGE>

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.

Lending Portfolio Securities. Each Fund may lend portfolio securities with a
value of up to 33.33% 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.

37
<PAGE>

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 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.

38
<PAGE>

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.

Depository Receipts. The Funds may invest in securities of foreign issuers
in the form of American Depository Receipts ("ADRs") or other similar
securities convertible into securities of foreign issuers. These securities
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by a United
States bank and trust company evidencing ownership of the underlying
securities. Generally, ADRs in registered form are designed for use in the
U.S. Securities markets.

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 liquid assets in an amount at
all times equal to or exceeding the Fund's commitment with respect to these
contracts.

39
<PAGE>

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.

40
<PAGE>

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.

41
<PAGE>

42
<PAGE>

(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.

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 growth of the market for lower
rated debt securities has 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 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 FRIMCo 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

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<PAGE>

and other transaction based costs. The annual portfolio turnover rates for
each of the Funds are shown in the Financial Highlights tables.

FRIMCo and the various money managers arrange for the purchase and sale of
the Investment Company's securities and the selection of brokers and dealers
(including affiliates), which in their best judgment provide prompt and
reliable execution at favorable prices and reasonable commission rates. In
addition to price and commission rates, brokers and dealers may be selected
based on research, statistical or other services they are able to provide.
This may cause the Investment Company to pay commissions at rates that exceed
rates that other brokers and dealers may have charged if it views the
commissions as reasonable in relation to the value of the brokerage and/or
research services.

DIVIDENDS AND DISTRIBUTIONS

INCOME DIVIDENDS

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

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

CAPITAL GAINS DISTRIBUTIONS

44
<PAGE>

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

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.

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 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. FRIMCo 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

45
<PAGE>

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.

46
<PAGE>

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

The returns shown above represent results for the periods shown. The Class C
Shares of the [list funds] were not issued prior to [list class inception
dates], respectively, and the deduction of their 12b-1 Fee and Shareholder
Servicing Fee are not reflected in the returns shown above for periods prior
to these dates. Had such fees been related in the returns above, the returns
would have been lower.

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, 1996 for the Class S Shares of the
Diversified Bond, Volatility Constrained Bond and Multistrategy Bond Funds
were, respectively, 6.28%, 5.48% and 5.99%. The 30 day yields for year ended
December 31, 1996 for Class C Shares of the Diversified Bond Fund was 5.56%.

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

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<PAGE>

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.

PURCHASE OF FUND SHARES

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<PAGE>

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.

ORDER PROCEDURES

49
<PAGE>

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.

Automatic Investment Program. A shareholder may make scheduled
investments (minimum $50.00) in an established account in a Fund on a
monthly, quarterly, semiannual or annual basis by automatic electronic
funds transfer from the shareholder's bank account. A separate transfer is
required for each Fund in which shares are to be purchased. A shareholder
may, of course, terminate the program as to further transfers at any time.
Contact the Financial Intermediary from whom you received this prospectus
for further information on this program and an enrollment form.

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to a
Financial Intermediary or 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

50
<PAGE>

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 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
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 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>

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.

SWP Distribution by Electronic Fund Transfer. Electronic Fund Transfer
payments will be sent to designated bank on payment date.

52
<PAGE>

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

State Street Bank and Trust Company ("State Street"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds prepares tax
records, 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.

ORGANIZATION, CAPITALIZATION, AND VOTING

In addition to offering a Class C Shares, the Funds also offer Class S
Shares, which are described in separate prospectuses. 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.

53
<PAGE>

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 March 31, 1997 the following shareholders 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 Funds: FMB Trust--Special Growth, Equity
Income, Quantitative Equity, International Securities, Real Estate Securities
and Diversified Bond Funds.

MONEY MANAGER PROFILES

The money managers identified below have no other affiliations with the
Funds, FRIMCo 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

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

Equinox Capital Management, Inc., 590 Madison Avenue, 41st 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 AMVESCO, PLC, a
London-based financial services holding company.

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<PAGE>

Arnold Schneider from engaging in the investment advisory or investment
management business in competition with Wellington.

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

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.

EQUITY INCOME FUND

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

Trinity Investment Management Corporation, See: Diversified Equity Fund.

QUANTITATIVE EQUITY FUND

Barclays Global Investors, See: Diversified Equity Fund.

55
<PAGE>

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

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

The Boston Company Asset Management, Inc., One Boston Place, Boston, MA
02108, is 100% owned by Mellon Bank Corporation, a publicly held corporation.

EMERGING MARKETS FUND

Genesis Asset Managers, Ltd21 Knights Bridge, London, SW1X7LY, 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 International Ltd., is controlled 55% by
management and associated interests and the balance held by outside
shareholders, with the largest single holding being 15%.

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

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<PAGE>

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 Group Holdings, L.L.C. is
the sole limited partner. Montgomery Asset Management, Inc. and Montgomery
Group Holdings, L.L.C. may be deemed control persons of Montgomery Asset
Management, L.P.

REAL ESTATE SECURITIES FUND

AEW Capital Management, L.P., 225 Franking Street, Boston, MA 02110-2803, is
a wholly owned affiliate of New England Investment Companies, L.P. ("NEIC").
NEIC is a publicly-held limited partnership. Metropolitan Life Insurance
Company, a publicly held Corporation, owns approximately 53% of NEIC. AEW
Capital Management, Inc., a wholly-owned subsidiary of NEIC, is the general
partner, and NEIC is the sole limited partner, of AEW Capital Management, L.P.

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
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.

MULTISTRATEGY BOND FUND

57
<PAGE>

Pacific Investment Management Company, See: Diversified Bond Fund.

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

58
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001

MONEY MANAGERS

<TABLE>
<S> <C>
DIVERSIFIED EQUITY INTERNATIONAL SECURITIES
Alliance Capital Management L.P. J.P. Morgan Investment Management, Inc.
Barclays Global Investors Marathon Asset Management Limited
Columbus Circle Investors Oechsle International Advisors
Equinox Capital Management, Inc. Rowe Price-Fleming International, Inc.
INVESCO Capital Management, Inc. Sanford C. Bernstein & Co., Inc.
Lincoln Capital Management Company The Boston Company Asset Management, Inc.
Schneider Capital Management
Suffolk Capital Management, Inc. EMERGING MARKETS
Trinity Investment Management Corporation Genesis Asset Managers, Ltd.
J.P. Morgan Investment Management, Inc.
SPECIAL GROWTH Montgomery Asset Management, L.P.
Delphi Management, Inc.
Fiduciary International, Inc. REAL ESTATE SECURITIES
GlobeFlex Capital, L.P. Cohen & Steers Capital Management
Jacobs Levy Equity Management, Inc. AEW Capital Management L.P.
Sirach Capital Management, Inc.
Wellington Management Company LLP DIVERSIFIED BOND
Lincoln Capital Management Company
EQUITY INCOME Pacific Investment Management Company
Brandywine Asset Management, Inc. Standish, Ayer & Wood, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation VOLATILITY CONSTRAINED BOND
BlackRock Financial Management
QUANTITATIVE EQUITY Standish, Ayer & Wood, Inc.
Barclays Global Investors STW Fixed Income Management Ltd.
Franklin Portfolio Associates LLC
J.P. Morgan Investment Management, Inc. MULTISTRATEGY BOND
BEA Associates
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
</TABLE>

59
<PAGE>

<TABLE>
<S> <C>
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT INDEPENDENT ACCOUNTANTS
Frank Russell Investment Management Company Coopers & Lybrand L.L.P.
909 A Street One Post Office Square
Tacoma, Washington 98402 Boston, Massachusetts 02109

CONSULTANT LEGAL COUNSEL
Frank Russell Company Stradley, Ronon, Stevens & Young, LLP
909 A Street 2600-One Commerce Square
Tacoma, Washington 98402 Philadelphia, Pennsylvania 19103-7098

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<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001

Frank Russell Investment Company (the "Investment Company") is a "series
mutual fund" with 28 different investment portfolios referred to as the
"Funds." This Prospectus describes and offers shares of beneficial interest in
the Class D Shares of the five Funds listed below (the "LifePoints Strategy
Funds"). Each of the LifePoints Strategy Funds invests in different
combinations of other Funds (the "Underlying Funds") which, in turn, invest in
different combinations of stocks, bonds and cash equivalents. The Investment
Company believes that these combinations offer varying degrees of potential
risk and reward.

Equity Balanced Strategy Fund Moderate Strategy Fund
Aggressive Strategy Fund Conservative Strategy Fund
Balanced Strategy Fund

Frank Russell Investment Management Company ("FRIMCo") operates and
administers all of the Funds which comprise the Investment Company. FRIMCo is
a wholly owned subsidiary of Frank Russell Company, which researches and
recommends to FRIMCo, and to the Investment Company, one or more investment
management organizations to manage the portfolio of each of the Underlying
Funds in which the LifePoints Strategy Funds may invest.

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 D Shares of its five LifePoints Strategy Funds that a
prospective investor ought to know before investing. The Investment Company
has filed a Statement of Additional Information dated May 1, 1997, with the
Securities and Exchange Commission (the "SEC") which contains additional
information regarding the LifePoints Strategy Funds. The Statement of
Additional Information is incorporated herein by reference. The Statement of
Additional Information, or a paper copy of this Prospectus, if you have
received your Prospectus electronically, 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 D Shares of the LifePoints Strategy Funds.

PROSPECTUS DATED MAY 1, 1997,
AS REVISED JUNE 1, 1997
<PAGE>

Each LifePoints Strategy Fund diversifies its assets by investing, at
present, in the Class S Shares from six to eight Underlying Funds. Allocation
decisions reflect FRIMCo's outlook for the economy, financial markets and the
relative valuations of the Underlying Funds. Each LifePoints Strategy Fund
seeks to achieve a specific investment objective by investing in different
combinations of the Underlying Funds. Each LifePoints Strategy Fund and its
investment objective are set forth below. An investor can select investments
in one or more LifePoints Strategy Funds appropriate to the present investment
aims, lifestyle and economic status of the investor or the investor's clients,
and can use reallocation of assets among LifePoints Strategy Funds to reflect
changes in these factors which occur over time.

EQUITY BALANCED STRATEGY FUND seeks to achieve high, long-term capital
appreciation, while recognizing the possibility of high fluctuations in year-
to-year market values.

AGGRESSIVE STRATEGY FUND seeks to achieve high, long-term capital
appreciation, with low current income while recognizing the possibility of
substantial fluctuations in year-to-year market values.

BALANCED STRATEGY FUND seeks a moderate level of current income and, over
time, above-average capital appreciation with moderate risk.

MODERATE STRATEGY FUND seeks to achieve moderate long-term capital
appreciation with high current income, while recognizing the possibility of
moderate fluctuations in year-to-year market values.

CONSERVATIVE STRATEGY FUND seeks to achieve moderate total rate of return
through low capital appreciation and reinvestment of a high level of current
income.

This Prospectus describes and offers the Class D Shares of the five
LifePoints Strategy Funds. The LifePoints Strategy Funds were not offered for
public investment prior to the date of this Prospectus.

The Investment Company's Funds had aggregate net assets of approximately $10
billion on April 3, 1997.

The LifePoints Strategy Funds were not offered for public investment and
therefore had not assets subsequent to the date of this prospectus.

2
<PAGE>

HIGHLIGHTS AND TABLE OF CONTENTS

ANNUAL FUND OPERATING EXPENSES OF THE CLASS D SHARES OF THE LIFEPOINTS
STRATEGY FUNDS summarizes the fees paid by shareholders and provides an
example showing the effect of these fees and the indirect expenses of the
Underlying Funds on a $1,000 investment over time. PAGE 6.

THE PURPOSE OF THE LIFEPOINTS STRATEGY FUNDS is to provide a simple and
effective means for an Eligible Investor to employ a diversified mutual fund
investment allocation program suited to pursuing the long-term investment
goals of the investor or its clients. The LifePoints Strategy Funds are
especially useful for participants in tax-deferred retirement plans. The
LifePoints Strategy Funds take advantage of FRIMCo's asset allocation
technology, as well as the Underlying Funds' use of FRIMCo's and Frank Russell
Company's "multi-style, multi-manager diversification" techniques and money
manager evaluation services, on an economical and efficient basis. PAGE 9.

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. Each LifePoints
Strategy Fund provides an additional layer of "multi-asset" diversification by
allocating its assets among several Underlying Funds, most of which employ
multiple money managers in pursuit of their investment objectives. PAGE 9.

INVESTMENT OBJECTIVES AND ASSET ALLOCATION FRAMEWORKS OF THE LIFEPOINTS
STRATEGY FUNDS are designed to meet the investment goals of long-term Eligible
Investors. While the LifePoints Strategy Funds invest primarily in the
Underlying Funds, each LifePoints Strategy Fund pursues a different investment
objective by allocating its assets among a number of Underlying Funds which
pursue a variety of their investment objectives. PAGE 10.

INVESTMENT POLICIES, RESTRICTIONS AND RISKS OF THE LIFEPOINTS STRATEGY FUNDS
should be considered in deciding whether to invest in a LifePoints Strategy
Fund. "Fundamental" investment objectives, policies, and restrictions may not
be changed without the approval of a majority of the shareholders of an
affected LifePoints Strategy Fund. While the LifePoints Strategy Funds'
principal investment will be in the Class S Shares of Underlying Funds, they
may also invest in other types of securities. Risks associated with certain
investment policies of the Underlying Funds should be considered when
investing in the LifePoints Strategy Funds. PAGE 13.

ELIGIBLE INVESTORS are principally those institutional investors and
financial intermediaries which have entered into an Asset Management Services
Agreement with FRIMCo and institutions or individuals who have acquired shares
through such institutions or financial intermediaries and which are making a
minimum aggregate investment of $10 million. PAGE 15.

GENERAL MANAGEMENT OF THE UNDERLYING FUNDS AND THE LIFEPOINTS STRATEGY FUNDS
is provided by FRIMCo, which employs the officers and staff required to manage
and administer the Underlying Funds and the

3
<PAGE>

LifePoints Strategy Funds on a day-to-day basis. All services necessary for
the operation of the LifePoints Strategy Funds (including accounting, custody,
auditing, legal and shareholder servicing) are arranged for by FRIMCo pursuant
to the Special Services Agreement (the "Services Agreement") between FRIMCo
and each LifePoints Strategy Fund and each Underlying Fund in which it
invests. Frank Russell Company provides to the Underlying Funds and FRIMCo
comprehensive consulting and money manager evaluation services. PAGE 16.

OPERATING EXPENSES OF THE LIFEPOINTS STRATEGY FUNDS are allocated among and
borne by the Underlying Funds in which the LifePoints Strategy Funds invest or
by FRIMCo, in either case pursuant to the Services Agreement. Except as to a
0.25% Rule 12b-1 Fee and a 0.25% Shareholder Service Fee, the LifePoints
Strategy Funds are not subject to any expenses, because each LifePoints
Strategy Funds operating expense will be paid by the Underlying Fund to the
extent that the Underlying Funds receive an economic benefit. Any operating
expense of the LifePoints Strategy Fund in excess of the economic benefit to
the Underlying Fund will be paid by the Manager. FRIMCo does not receive a fee
for conducting the LifePoints Strategy Funds' general operations or for
providing investment supervision for any LifePoints Strategy Fund. However,
the LifePoints Strategy Funds will indirectly bear their proportionate share
of the management fees paid by the Underlying Funds in which they invest. PAGE
18.

THE MONEY MANAGERS FOR THE UNDERLYING FUNDS are evaluated and recommended by
FRIMCo and Frank Russell Company. The money managers have complete discretion
to purchase and sell portfolio securities for their segment of an Underlying
Fund consistent with the Underlying Fund's investment objectives, policies and
restrictions, and the specific strategies developed by Frank Russell Company
and FRIMCo. The LifePoints Strategy Funds do not employ money managers, other
than FRIMCo, and therefore, do not pay management fees. The determination of
how the LifePoints Strategy Funds' assets will be allocated among the
Underlying Funds is made by FRIMCo pursuant to each LifePoints Strategy Fund's
investment objectives and policies. The LifePoints Strategy Funds, as
shareholders of the Underlying Funds, benefit from the multi-style, multi-
manager services provided to the Underlying Funds. PAGE 19.

INVESTMENT OBJECTIVES, POLICIES AND RISKS OF THE UNDERLYING FUNDS should be
considered when deciding whether to invest in a LifePoints Strategy Fund.
"Fundamental" investment objectives, policies and restrictions may not be
changed without the approval of a majority of the shareholders of an affected
Underlying Fund. Risks associated with certain investment policies of the
Underlying Funds, such as market volatility risk, political risk, and credit
risk, are disclosed in connection with a description of the policies giving
rise to such risks. PAGE 20.

DIVIDENDS AND DISTRIBUTIONS may be reinvested in additional shares or
received in cash. Dividends from net investment income are declared quarterly
by each of the LifePoints Strategy Funds. All LifePoints Strategy Funds
declare distributions from net realized capital gains, if any, at least
annually. PAGE 25.

INCOME TAXES PAID BY THE LIFEPOINTS STRATEGY FUNDS should be nominal.
Taxable shareholders of the LifePoints Strategy Funds will be subject to
federal taxes on dividends and capital gains distributions and may also be
subject to state or local taxes. PAGE 26.

LIFEPOINTS STRATEGY FUND PERFORMANCE, including yields and total return
information, is calculated in accordance with formulas prescribed by the
Securities and Exchange Commission. PAGE 27.

4
<PAGE>

VALUATION OF LIFEPOINTS STRATEGY FUND SHARES occurs each business day. Class
D Shares are purchased or redeemed based upon the net asset value per share
next computed based upon current market value of the assets, less liabilities,
of each LifePoints Strategy Fund. Unless otherwise indicated, "shares" in this
Prospectus refers to the Class D Shares of the LifePoints Strategy Funds. PAGE
28.

PURCHASE OF LIFEPOINTS STRATEGY FUND SHARES may be accomplished on each
business day. The shares are presently subject to a Rule 12b-1 distribution
fee of .25%, and to a shareholder service fee of up to .25%. PAGE 29.

REDEMPTION OF LIFEPOINTS STRATEGY FUND SHARES may be requested on any
business day. There is no redemption charge. The redemption price is the net
asset value next computed after receipt of the redemption request. The
LifePoints Strategy Funds reserve the right to redeem in kind any portion of a
redemption request. PAGE 31.

The LifePoints Strategy Funds are authorized to offer two other classes of
shares, the Class S Shares and the Class E Shares, both of which are designed
to meet different investor needs. Shares of the two other classes of shares of
the LifePoints Strategy Funds are not, as of the date of this Prospectus,
being offered to investors. PAGE 33.

5
<PAGE>

ANNUAL FUND OPERATING EXPENSES OF THE CLASS D SHARES OF THE LIFEPOINTS
STRATEGY FUNDS

The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Class D
Shares of the LifePoints Strategy Funds will bear directly or indirectly. Each
LifePoints Strategy Fund will indirectly bear its pro rata share of the
expenses of the Underlying Funds in which the LifePoints Strategy Fund
invests. 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>
<CAPTION>
EQUITY
BALANCED AGGRESSIVE BALANCED MODERATE CONSERVATIVE
STRATEGY STRATEGY STRATEGY STRATEGY STRATEGY
FUND FUND FUND FUND FUND
-------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
CLASS D SHARES SHAREHOLDER
TRANSACTION EXPENSES:
Sales Load Imposed on
Purchases.................. None None None None None
Sales Load Imposed on
Reinvested Dividends....... None None None None None
Deferred Sales Load......... None None None None None
Redemption Fees............. None None None None None
Exchange Fees............... None None None None None
ANNUAL CLASS D SHARES
OPERATING EXPENSES:#
(as a percentage of average
net assets)
Asset Allocation Fees....... None None None None None
12b-1 Fees.................. 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (After
Reimbursement)**:
Custodian Fees (After
Reimbursement)**: None None None None None
Transfer Agent Fees (After
Reimbursement)**.......... None None None None None
Other Fees (After
Reimbursement) * **: 0.25% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (After
Reimbursement)**.......... 0.25% 0.25% 0.25% 0.25% 0.25%
Total Class D Operating
Expenses (After
Reimbursement)** ***....... 0.50% 0.50% 0.50% 0.50% 0.50%
</TABLE>
- ---------------------
# Annual Class D Shares operating expenses are estimated based on average net
assets expected to be invested during the fiscal year ending December 31,
1997. During the course of this period, expenses may be more or less than
the average amount shown.
* Class D Shares of each LifePoints Strategy Fund can pay up to .25% of
average net assets as a Shareholder Service Fee.
** The LifePoints Strategy Funds' operating expenses will be paid by the
Underlying Funds and/or FRIMCo, as more fully described below. If there
were no reimbursement of operating expenses by the Underlying Funds or
FRIMCo, the estimated "Total Other Expenses" would have been 1.64% for the
Aggressive Strategy Fund, 1.50% for the Balanced Strategy Fund, 3.17% for
the Moderate Strategy Fund, and 8.54% for the Conservative Strategy Fund,
and 8.54% for the Equity Balanced Strategy Fund, and the "Total Class D
Operating Expenses" would have been 1.89% for the Aggressive Strategy Fund,
1.75% for the Balanced Strategy Fund, 3.42% for the Moderate Strategy Fund,
and 8.79% for the Conservative Strategy Fund, and 8.79% for the Equity
Balanced Strategy Fund.

6
<PAGE>

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

Although the LifePoints Strategy Funds will be subject a 0.25% Rule 12b-1
Fee and a 0.25% Shareholder Service Fee, they will not bear any operating
expenses. The operational expenses will be paid by the Underlying Funds in
which they invest to the extent that an Underlying Fund receives a net
reduction in its otherwise anticipated operating expenses as a result of the
LifePoints Strategy Funds' investment in that Underlying Fund's shares. The
operating expense-savings that are expected to be realized by the Underlying
Funds from the LifePoints Strategy Funds result primarily from the assumed
reduction in the number of accounts that each Underlying Fund has to maintain
due to the existence of the LifePoints Strategy Funds (i.e., one account per
investor as opposed to one for each Underlying Fund per investor if the
investor duplicated a LifePoints Strategy Fund's investment program by
investing directly in the Underlying Funds). Any LifePoints Strategy Funds
operational expenses that are in excess of the estimated savings to the
Underlying Funds will be borne by FRIMCo, an arrangement that can be
terminated at any time by FRIMCo in its sole discretion without notice to
shareholders but which will not be terminated prior to April 30, 1998. (See
"Expenses of the LifePoints Strategy Funds" for an explanation of the Special
Service Agreement under which the LifePoints Strategy Funds' operating
expenses are allocated among and borne by the Underlying Funds in which the
LifePoints Strategy Funds invest.) However, while the LifePoints Strategy
Funds are expected to operate without expense (except as to a Rule 12b-1 Fee
and Shareholder Service Fee), shareholders in a LifePoints Strategy Fund will
bear indirectly the proportionate expenses of the Underlying Funds in which
the LifePoints Strategy Fund invests. The following table provides the expense
ratios for each of the Underlying Funds in which the LifePoints Strategy Funds
may invest (based on information as of December 31, 1996). Where applicable,
expense ratios are restated to reflect current fees. As explained in this
Prospectus, each LifePoints Strategy Fund intends to invest in some, but not
all, of the Underlying Funds.

<TABLE>
<CAPTION>
TOTAL OPERATING
UNDERLYING FUND EXPENSE RATIOS
- --------------- ---------------
<S> <C>
Diversified Equity Fund......................................... .94%
Special Growth Fund............................................. 1.19%
Quantitative Equity Fund........................................ .93%
International Securities Fund................................... 1.30%
Diversified Bond Fund........................................... .61%
Volatility Constrained Bond Fund................................ .76%
Multistrategy Bond Fund......................................... .80%
Real Estate Securities Fund..................................... 1.04%
Emerging Markets Fund........................................... 1.71%
</TABLE>

The following table illustrates the indirect expense ratio that each
LifePoints Strategy Fund would have incurred based on its allocation strategy
in the Underlying Funds for the year ended December 31, 1996 if it had been
operational:

<TABLE>
<CAPTION>
TOTAL OPERATING
LIFEPOINTS STRATEGY FUND EXPENSE RATIOS
- ------------------------ ---------------
<S> <C>
Equity Balanced Strategy Fund................................... 1.08%
Aggressive Strategy Fund........................................ 1.05%
Balanced Strategy Fund.......................................... .92%
Moderate Strategy Fund ......................................... .85%
Conservative Strategy Fund...................................... .80%
</TABLE>

7
<PAGE>

EXAMPLE:
You would pay the following expenses on a $1,000 investment in
each of the LifePoints Strategy Funds including the indirect
expenses of the Underlying Funds, assuming (1) 5% annual re-
turn and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
EQUITY BALANCED STRATEGY FUND.................................. $16 $50
AGGRESSIVE STRATEGY FUND....................................... $16 $49
BALANCED STRATEGY FUND......................................... $14 $45
MODERATE STRATEGY FUND......................................... $13 $43
CONSERVATIVE STRATEGY FUND..................................... $13 $41
</TABLE>

8
<PAGE>

THE PURPOSE OF THE LIFEPOINTS STRATEGY FUNDS

The LifePoints Strategy Funds have been organized to provide a simple and
effective means for Eligible Investors to structure a diversified mutual fund
investment allocation program that is suited to the long-term investment goals
of the investor or its clients, and that permits an investor to access and use
FRIMCo's and Frank Russell Company's "multi-style, multi-manager
diversification" method of investment. The LifePoints Strategy Funds, by
investing in the Class S Shares of the Underlying Funds, obtain FRIMCo's and
Frank Russell Company's money manager evaluation services, on a pooled and
cost-effective basis.

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 goals of
reducing risk and increasing returns.

MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION

FRIMCo and Frank Russell Company believe that 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.

9
<PAGE>

Similarly, FRIMCo and Frank Russell Company believe 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.

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, including the LifePoints Strategy Funds,
with different objectives and policies, FRIMCo believes that they are able to
provide its and Frank Russell Company's multi-style, multi-manager, multi-
asset diversification techniques and money manager evaluation services to
Eligible Investors on a basis which is both efficient and cost effective for
the investor, FRIMCo and Frank Russell Company.

The advantages of diversifying among a mixture of investment styles and
money managers are potentially even greater with the LifePoints Strategy
Funds, where each LifePoints Strategy Fund will typically invest in shares of
from six to eight Underlying Frank Russell Investment Company Funds. The
LifePoints Strategy Funds have been created in response to increasing demand
by mutual fund investors for a simple and effective means of structuring a
diversified mutual fund investment program suited to their general needs. The
proliferation of mutual funds has left many investors confused and in search
of a simpler means to manage their investments. FRIMCo has long stressed the
value of diversifying investments in a number of mutual funds (e.g., a money
market fund for liquidity and price stability, a growth fund for long-term
appreciation, an income fund for current income and relative safety of
principal, an international fund for greater potential diversification, etc.),
and has offered its advisory expertise in assisting investors to determine
such issues as which mutual funds to select, how much of their assets to
commit to each fund, and when to reallocate their selections.

INVESTMENT OBJECTIVES AND ASSET ALLOCATION FRAMEWORKS
OF THE LIFEPOINTS STRATEGY FUNDS

The investment objectives of the LifePoints Strategy Funds are subject to
the investment restrictions and asset allocation policies described in this
Prospectus. The investment objective of each LifePoints Strategy Fund is as
follows:

. EQUITY BALANCED STRATEGY FUND seeks to achieve high, long-term capital
appreciation, while recognizing the possibility of high fluctuations in
year-to-year market values.

. AGGRESSIVE STRATEGY FUND seeks to achieve high, long-term capital
appreciation, with low current income while recognizing the possibility
of substantial fluctuations in year-to-year market values.

. BALANCED STRATEGY FUND seeks a moderate level of current income and, over
time, above-average capital appreciation with moderate risk.

. MODERATE STRATEGY FUND seeks to achieve moderate long-term capital
appreciation with high current income, while recognizing the possibility
of moderate fluctuations in year-to-year market values.

. CONSERVATIVE STRATEGY FUND seeks to achieve moderate total rate of return
through low capital appreciation and reinvestment of a high level of
current income.

10
<PAGE>

The investment objectives of the LifePoints Strategy Funds are summarized
below in a chart that illustrates the degree to which each LifePoints Strategy
Fund seeks to obtain capital appreciation, income, and stability of principal:

<TABLE>
<CAPTION>
CAPITAL POSSIBILITY
LIFEPOINTS STRATEGY FUND NAME APPRECIATION INCOME OF FLUCTUATION
----------------------------- ------------ -------- --------------
<S> <C> <C> <C>
Equity Balanced Strategy Fund.............. High Low High
Aggressive Strategy Fund................... High Low High
Balanced Strategy Fund..................... Moderate Moderate Moderate
Moderate Strategy Fund..................... Moderate High Moderate
Conservative Strategy Fund................. Low High Low
</TABLE>

There is no assurance that a LifePoints Strategy Fund will achieve its
stated objective. The investment objective of each LifePoints Strategy Fund is
fundamental and cannot be changed without the approval of a majority of
shareholders of the particular LifePoints Strategy Fund.

Each of the LifePoints Strategy Funds allocates its assets by investing in
shares of a diversified group of from six to eight Underlying Funds. Each of
the LifePoints Strategy Funds will adjust its investments within set limits
based on FRIMCo's outlook for the economy, financial markets and relative
market valuation of the asset classes represented by each Underlying Fund.
However, the LifePoints Strategy Funds may deviate from set limits when, in
FRIMCo's opinion, it is necessary to do so to pursue a LifePoints Strategy
Fund's investment objective. The amounts allocated to each Underlying Fund by
each LifePoints Strategy Fund will generally vary within 10% of the ranges
specified below:

<TABLE>
<CAPTION>
EQUITY
BALANCED AGGRESSIVE BALANCED MODERATE CONSERVATIVE
STRATEGY STRATEGY STRATEGY STRATEGY STRATEGY
UNDERLYING FUND FUND FUND FUND FUND FUND
--------------- -------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Diversified Equity Fund.... 30% 21% 16% 11% 5%
Special Growth Fund........ 10% 11% 5% 2% --
Quantitative Equity Fund... 30% 21% 16% 11% 6%
International Securities
Fund...................... 20% 19% 14% 9% 5%
Diversified Bond Fund...... -- -- 25% 27% 18%
Volatility Constrained Bond
Fund...................... -- -- -- 33% 60%
Multistrategy Bond Fund.... -- 18% 16% -- --
Real Estate Securities
Fund...................... 5% 5% 5% 5% 5%
Emerging Markets Fund...... 5% 5% 3% 2% 1%
</TABLE>

11
<PAGE>

[GRAPHIC APPEARS HERE]
Equity Balanced Strategy Fund
[GRAPHIC APPEARS HERE]
Moderate Strategy Fund
[GRAPHIC APPEARS HERE]
Aggressive Strategy Fund
[GRAPHIC APPEARS HERE]
Conservative Strategy Fund
[GRAPHIC APPEARS HERE]
Balanced Strategy Fund

12
<PAGE>

INVESTMENT POLICIES, RESTRICTIONS
AND RISKS OF THE LIFEPOINTS STRATEGY FUNDS

Each LifePoints Strategy Fund's investment policies and practices are
subject to further restrictions and risks which are described in the Statement
of Additional Information. The LifePoints Strategy Funds will not make a
material change in their investment objectives or their fundamental policies
without obtaining shareholder approval. The LifePoints Strategy Funds'
allocation ranges, as described in the previous section, unless otherwise
specified, are not fundamental policies and may be changed without shareholder
approval. Shareholders will be notified of any material change in such
investment programs.

Cash Reserves. Each LifePoints Strategy Fund is authorized to invest its
cash reserves (i.e., funds awaiting investment in the Underlying Funds) in
money market instruments and in debt securities which are at least comparable
in quality to the permitted investments of the Underlying Funds which may be
acquired by that LifePoints Strategy Fund.

Repurchase Agreements. Each LifePoints Strategy 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 LifePoints Strategy
Fund as collateral (102% of the amount of cash paid by the LifePoints Strategy
Fund to such party at time of the agreement) should fall below the repurchase
price, the LifePoints Strategy Fund could incur a loss. Subject to the overall
limitations described in "Illiquid Securities" below, no LifePoints Strategy
Fund will invest more than 15% of its net assets (taken at current market
value) in repurchase agreements maturing in more than seven days.

Reverse Repurchase Agreements. Each LifePoints Strategy Fund may enter into
reverse repurchase agreements to meet redemption requests where the
liquidation of portfolio securities is deemed by FRIMCo to be inconvenient or
disadvantageous. A reverse repurchase agreement is a transaction whereby a
LifePoints Strategy 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 LifePoints Strategy Fund retains record ownership of the
security involved, including the right to receive interest and principal
payments. At an agreed upon future date, the LifePoints Strategy Fund
repurchases the security by paying an agreed upon purchase price plus
interest. Liquid assets of the LifePoints Strategy 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 LifePoints Strategy Fund may lend
portfolio securities with a value of up to one-third of its total assets. Such
loans may be terminated at any time. A LifePoints Strategy 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 LifePoints Strategy 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 LifePoints

13
<PAGE>

Strategy Funds will not invest more than 15% 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").
There may be undesirable delays in selling illiquid securities at prices
representing their fair value. Investing in illiquid securities that are
considered to be SEC Rule 144A securities could have the effect of increasing
the level of a LifePoints Strategy Fund's illiquidity to the extent that
qualified institutional buyers became, for a time, uninterested in purchasing
such securities.

Diversification. Each LifePoints Strategy Fund is a "nondiversified"
investment company for purposes of the Investment Company Act of 1940, as
amended (the "1940 Act") because it invests in the securities of a limited
number of mutual funds. Each of the Underlying Funds in which the LifePoints
Strategy Funds may invest is a diversified investment company. Each LifePoints
Strategy Fund intends to qualify as a diversified investment company for
purposes of Subchapter M of the Internal Revenue Code.

INVESTMENT RESTRICTIONS OF THE LIFEPOINTS STRATEGY FUNDS

The LifePoints Strategy 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 LifePoints Strategy Fund will:

1. Invest in any security if, as a result of such investment, less than
50% 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 (including the Underlying Funds);
and other securities limited in respect of each issuer to an amount not
greater in value than 5% of the total assets of such LifePoints Strategy
Fund.

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

3. Acquire more than 5% of the outstanding voting securities, or 10% of
all of the securities, of any one issuer, as noted below, except with
respect to shares of Funds that are investment portfolios of the Investment
Company.

4. Borrow amounts in excess of 5% of its total assets taken at cost or at
market value, whichever is lower, and then only from banks as a temporary
measure for extraordinary or emergency purposes (reverse repurchase
agreements are not deemed to be borrowings for the purposes of this
limitation).

5. Invest more than 15% of its net assets in illiquid securities,
provided that each LifePoints Strategy Fund will not invest more than 5% of
its net assets in restricted securities (other than securities eligible for
resale under Rule 144A of the 1933 Act.

14
<PAGE>

SPECIAL RISKS AND CONSIDERATIONS OF THE LIFEPOINTS STRATEGY FUNDS

Investors should consider the following factors when investing in the
LifePoints Strategy Funds:

. The investments of each LifePoints Strategy Fund are directed primarily
to Underlying Funds, so each LifePoints Strategy Fund's investment
performance is directly related to the investment performances of the
Underlying Funds in which the LifePoints Strategy Fund invests.

. As a matter of policy, the LifePoints Strategy Funds will generally
allocate their investments among the Underlying Funds within certain
ranges. As a result, the LifePoints Strategy Funds may have less
flexibility to invest than a mutual fund without such constraints.

. In addition to their principal investments, some or all of the Underlying
Funds may: invest varying percentages of their assets in foreign
securities; enter into forward currency transactions; lend their
portfolio securities; enter into stock index, interest rate and currency
futures contracts, and options on such contracts; engage in options
transactions; make short sales; purchase zero coupon bonds and payment-
in-kind bonds; and engage in various other investment practices which
result in market risk, currency risk, and the risks of investing in
foreign securities.

. The officers, the Trustees, and FRIMCo (the investment manager of the
LifePoints Strategy Funds) presently serve as officers, Trustees and
investment manager of the Underlying Funds. Therefore, conflicts may
arise as those persons and FRIMCo fulfill their fiduciary
responsibilities to the LifePoints Strategy Funds and to the Underlying
Funds.

. Some of the LifePoints Strategy Funds may invest in the Emerging Markets
Fund, and the Aggressive Strategy Fund may invest in the Multistrategy
Bond Fund. The Emerging Markets Fund may invest up to 5% of its net
assets, and the Multistrategy Bond Fund may invest up to 25% of its net
assets, in lower-rated securities, which are subject to the risks
resulting from high yield investing.

ELIGIBLE INVESTORS

Shares of the LifePoints Strategy Funds are currently offered only to
Eligible Investors. These investors are principally institutional investors
and financial intermediaries that have entered into Asset Management Services
Agreements (collectively, the "Agreements," and each, an "Agreement") with
FRIMCo or distribution agreements with the Investment Company's distributor,
and institutions or individuals who acquire shares through such institutions
or financial intermediaries. Employees, officers, trustees and directors of
FRIMCo or of its affiliates may also invest in the LifePoints Strategy Funds.
The initial minimum aggregate investment in Class D Shares of any combination
of the LifePoints Strategy Funds is $10 million. An investor may be eligible
to purchase Class D Shares of the LifePoints Strategy Funds if it does not
meet the required initial minimum investment. FRIMCo, at its discretion, may
waive the initial minimum investment for some employee benefit plans and other
plans or if the requirements are met for a combined purchase privilege,
cumulative quantity discount, or statement of intention. Investors should
consult their financial intermediary for details. Each Fund reserves the right
to change, as to any Fund or any class of that Fund, the categories of
investors eligible to purchase shares of that Fund or class of that Fund.
Institutions and financial intermediaries which may have a particular interest
in the LifePoints Strategy Funds include:

. Bank trust departments managing discretionary institutional or personal
trust accounts

. Banks, other than through their trust departments

. Registered investment advisors

15
<PAGE>

. 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 FRIMCo,
using the facilities and resources of Frank Russell Company, to assist the
Eligible Investor or its 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 and different Underlying Funds by
identifying the LifePoints Strategy Funds that are best suited to the Eligible
Investor's long-term investment goals. Once these decisions have been made,
the assets are then invested in one or more of the Funds, which may include
one or more LifePoints Strategy Funds. A client may change the allocation of
its assets among the Funds, including the LifePoints Strategy 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" directly to
individual investors, although FRIMCo 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 FRIMCo may acquire shares of the Funds for
their customers. FRIMCo 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 may charge their customers a fee for providing these
and possibly other trust or investment-related services. LifePoints Strategy
Funds may be made available to investors other than under the terms of an
Agreement, for instance, pursuant to a distribution agreement with the
Investment Company's distributor.

GENERAL MANAGEMENT OF THE UNDERLYING
FUNDS AND THE LIFEPOINTS STRATEGY FUNDS

The Investment Company's Board of Trustees is responsible for overseeing
generally the operation of the Funds and the LifePoints Strategy Funds,
including reviewing and approving the Funds' contracts with FRIMCo, Frank
Russell Company and the money managers. The Investment Company's officers, all
of whom are employed by and are officers of FRIMCo 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 in the Underlying Funds assigned to them.

16
<PAGE>

or as cash reserves for the Funds; and (v) provides the Funds with transfer
agent, dividend disbursing and shareholder recordkeeping services. FRIMCo
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.

. Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
1989.

. James M. Imhof, Manager of Portfolio Trading of FRIMCo, who has
supervised the day to day management of the Funds and ongoing analysis
and monitoring of Fund money managers since 1989.

. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed as a
Senior Research Analyst with Frank Russell Company. Mr. Jornlin jointly
with another portfolio manager identified herein has primary responsible
for management of the Real Estate Securities Fund.

. Randal C. Burge, who has been a Portfolio Manager of FRIMCo since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank
Russell Australia. Mr. Burge has primary responsibility for management of
the Fixed I, Fixed Income II, Fixed Income III, Diversified Bond,
Volatility Constrained Bond, Multistrategy Bond, Limited Volatility Tax
Free, International, International Securities and Emerging Markets Funds.

. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of the US
Equity Manager Research Department with Frank Russell Company. Mr.
Trittin jointly with another portfolio manager identified herein has
primary responsibility for management of the Equity I, Equity II, Equity
III, Equity Q, Equity T, Diversified Equity, Quantitative Equity, Special
Growth and Equity Income Funds.

Frank Russell Company provides to the Funds and FRIMCo 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 FRIMCo for its consulting
services. Frank Russell Company and FRIMCo 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 FRIMCo.

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The Investment Company has received an exemptive order from 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
underlying 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.

For its services, FRIMCo receives a management fee from each Underlying
Fund. From this fee, FRIMCo, acting as agent for the Investment Company, is
responsible for paying the money managers for their investment selection
services. The remainder is retained by FRIMCo as compensation for the services
described above and to pay expenses. The annual rate of the management fees,
payable to FRIMCo monthly on a pro rata basis, are the following percentages
of the average daily net assets of each Underlying Fund: Diversified Equity
Fund, .78%; Special Growth Fund, .95%; Quantitative Equity Fund, .78%;
International Securities Fund, .95%; Diversified Bond Fund, .45%; Volatility
Constrained Bond Fund, .50%; Multistrategy Bond Fund, .65%; Real Estate
Securities Fund, .85%; and Emerging Markets Fund, 1.20%. The fees of the
Underlying Funds, other than the Diversified Bond, Volatility Constrained
Bond, and Multistrategy Bond Funds, may be higher than the fees charged by
some mutual funds with similar objectives which use only a single money
manager. FRIMCo has voluntarily agreed to waive all or a portion of its
management fee with respect to certain Underlying Funds.

OPERATING EXPENSES OF THE LIFEPOINTS STRATEGY FUNDS

Each LifePoints Strategy Fund seeks to operate at an extremely low operating
expense ratio. While each LifePoints Strategy Fund will incur its pro rata
share of the fees and expenses of the Underlying Funds in which it invests,
each Underlying Fund has agreed to pay a pro rata share of the operational
expenses of the LifePoints Strategy Funds that invest in the Underlying Fund,
but only to the extent that the Underlying Fund receives a net reduction in
its otherwise anticipated expenses. This arrangement is subject to a Special
Service Agreement (the "Service Agreement") between FRIMCo, each LifePoints
Strategy Fund and the Underlying Funds in which it invests, as well as to
certain voluntary expense reimbursement undertakings made by FRIMCo, which can
be terminated by FRIMCo in its sole discretion, but which will not be
terminated prior to April 30, 1998. Each LifePoints Strategy Fund has entered
into an Investment Management Agreement with FRIMCo, as well as a Portfolio
Management Agreement which governs the providing of sub-advisory services.

The Services Agreement is entered into, on a yearly basis, between FRIMCo,
the LifePoints Strategy Funds and the Underlying Funds. The Services Agreement
provides that all services necessary for the operation of a LifePoints
Strategy Fund (including expenses for accounting, custody, auditing, legal and
shareholder services (collectively, "Operating Expenses") but not including
services covered by a Rule 12b-1 Fee or Shareholder Service Fee) will be paid
by the Underlying Funds in which the LifePoints Strategy Fund invests and/or
FRIMCo. In consideration of the benefits derived by the Underlying Funds from
the establishment and operation of the LifePoints Strategy Funds, each of the
Underlying Funds will agree to pay a portion of the Operating Expenses. The
Operating Expenses will be allocated among and borne by the Underlying Funds
in proportion to the average daily value of shares of the Underlying Funds
owned by each LifePoints Strategy Fund, but in no event will any Underlying
Fund bear Operating Expenses in excess of its estimated cost savings. Such
savings

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are expected to result primarily from the elimination of numerous separate
shareholder accounts which would have been established to hold the LifePoints
Strategy Funds' assets if they are expected to result primarily from the
elimination of numerous separate shareholder accounts which would have been
established to hold the LifePoints Strategy Funds' assets if they had been
invested directly in the Underlying Funds and the resulting reduction in
shareholder servicing costs. Although such cost savings cannot be computed
precisely at this time, the estimated savings to the Underlying Funds
generated by the operation of the LifePoints Strategy Funds, and the
consequent payments by the Underlying Funds, are expected to be sufficient to
offset most, if not all, of the Operating Expenses incurred by the LifePoints
Strategy Funds. Under the Services Agreement, FRIMCo has agreed to pay any
Operating Expenses of the LifePoints Strategy Funds which exceed the estimated
savings to each of the Underlying Funds. Thus, the LifePoints Strategy Funds
are expected to operate at an extremely low expense ratio.

THE MONEY MANAGERS FOR THE UNDERLYING FUNDS

The assets of each Underlying Fund are allocated currently among the money
managers listed in the section "Money Manager Profiles." THE ALLOCATION OF AN
UNDERLYING FUND'S ASSETS AMONG MONEY MANAGERS MAY BE CHANGED AT ANY TIME BY
FRIMCO. THE MONEY MANAGERS MAY BE EMPLOYED OR THEIR SERVICES MAY BE TERMINATED
AT ANY TIME BY FRIMCO, SUBJECT TO APPROVAL BY THE BOARD OF TRUSTEES OF THE
INVESTMENT COMPANY.

From its management fees, FRIMCo, as agent for the Investment Company, pays
all fees to the money managers for their services to the Underlying Funds.
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 fiscal year ended December 31, 1996, 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 Underlying Fund:
Diversified Equity Fund, .24%; Special Growth Fund, .40%; Quantitative Equity
Fund, .21%; International Securities Fund, .42%; Diversified Bond Fund, .08%;
Volatility Constrained Bond Fund, .18%; Multistrategy Bond Fund, .21%; Real
Estate Securities Fund, .31%; and Emerging Markets Fund, .72%.

Fees paid to the money managers are not affected by any voluntary 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 Underlying Funds
through broker-dealer affiliates. Each money manager has agreed that once the
Investment Company has advanced fees to FRIMCo as agent to make payment of the
money manager's fee, the money manager will look only to FRIMCo for the
payment of its fee.

The money managers are selected for the Underlying 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 an Underlying Fund within the Underlying Fund's
investment objectives, restrictions and policies, and the more specific
strategies developed by Frank Russell Company and FRIMCo. 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,
FRIMCO, NOR FRANK RUSSELL COMPANY EVALUATE THE INVESTMENT MERITS OF THE MONEY
MANAGERS' INDIVIDUAL SECURITY SELECTIONS.

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INVESTMENT OBJECTIVES, POLICIES AND
RISKS OF THE UNDERLYING FUNDS

Each Underlying Fund has certain "fundamental" investment objectives,
restrictions and policies which may be changed only with the approval of a
majority of the Underlying Fund's shareholders. Other policies reflect current
practices of the Underlying Funds, and may be changed by the Underlying Funds
without the approval of shareholders. Certain of the objectives, policies, and
risks are described in this section, and further information about the
Underlying Funds is contained in the Statement of Additional Information as
well as in the prospectuses of the Underlying Funds. Because the LifePoints
Strategy Funds invest in the Underlying Funds, investors of the LifePoints
Strategy Funds will be affected by the Underlying Funds' investment policies
in direct proportion to the amount of assets each LifePoints Strategy Fund
allocates to the Underlying Fund pursuing such policies. To request a copy of
a prospectus for an Underlying Fund, contact the Investment Company at
800/972-0700 (in Washington, 253/627-7001).

Each Underlying Fund's objective is "fundamental," as are the types of
securities in which it will invest. Ordinarily, each Underlying Fund will
invest more than 65% of its total assets in the types of securities identified
in its statement of objectives. However, the Underlying 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.

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.

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. The Fund will

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<PAGE>

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. 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.

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.

The Fund may invest up to 5% of its net assets in debt securities that are
rated below "investment grade" (i.e., rated lower than BBB by Standard &
Poor's Rating Group ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's") or in unrated securities judged by the money managers of the Fund
to be of comparable quality. 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, see "Investment Policies and
Risks of the Underlying Funds -- High Risk Bonds" and refer to the Statement
of Additional Information.

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. 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

21
<PAGE>

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 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 S&P or A or Prime-2 by
Moody's, or judged by the money manager to be of at least equal credit quality
to those designations.

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. 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.

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.

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<PAGE>

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. The Fund will invest
primarily in fixed-income securities, including: 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 and floating rate and zero coupon
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 invest up to 25% of its net assets in debt securities that are
rated below "investment grade" or in unrated securities judged by the money
managers of the Fund to be of comparable quality. For a description of lower
rated debt securities, see "Investment Policies and Risks of the Underlying
Funds -- High Risk Bonds" and refer to the Statement of Additional
Information.

INVESTMENT POLICIES AND RISKS OF THE UNDERLYING FUNDS

Investment in Foreign Securities. The Underlying 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.

Depository Receipts. The Underlying Funds may invest in securities of
foreign issuers in the form of American Depository Receipts ("ADRs") or other
similar securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically
issued by a United States bank or trust company evidencing ownership of the
underlying securities. Generally, ADRs in registered form are designed for use
in U.S. securities markets.

Forward Foreign Currency Exchange Contracts ("forward currency
contracts"). The International Securities, Diversified Bond, Volatility
Constrained Bond, Multistrategy Bond and Emerging Markets 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

23
<PAGE>

(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 an Underlying Fund enters into a contract. The Underlying 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 Underlying Funds may,
however, enter into forward currency contracts containing either or both
deposit requirements and commissions. In order to assure that the Underlying
Funds' forward currency contracts are not used to achieve investment leverage,
the Funds will segregate liquid assets in an amount at all times equal to or
exceeding the Funds' commitment with respect to these contracts.

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 an Underlying Fund's portfolio securities or adversely affect the
price of securities which the Funds intend to purchase at a later date. The
amount the Underlying Funds may invest in forward currency contracts is
limited to the amount of the Funds' aggregate investments in foreign
currencies.

Options. The Underlying 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
Underlying Funds may also purchase and sell put and call options on foreign
currencies.

An Underlying Fund may invest up to 5% of its net assets, represented by the
premium paid, in call and put options. An Underlying 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.

The purchase and writing of options involves certain risks. If a put or call
option purchased by an Underlying 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 an Underlying 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 an Underlying 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 an Underlying
Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, an Underlying
Fund may be unable to close out a position.

Futures Contracts and Options on Futures Contracts. The Underlying 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>

Each Underlying 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 an Underlying Fund and the hedging
vehicle so that the portfolio return might have been greater had hedging not
been attempted.

High Risk Bonds. The Emerging Markets Fund may invest up to 5% of its net
assets, and the Multistrategy Bond Fund may invest up to 25% of its net
assets, in lower rated securities or in unrated securities judged by their
money managers to be of comparable quality. While lower rated securities
generally offer a higher yield than that available from higher grade issues,
lower rated debt securities also 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 fluctuations in response to changes in
interest rates. For additional information, please refer to the Statement of
Additional Information.

DIVIDENDS AND DISTRIBUTIONS

INCOME DIVIDENDS

The Board of Trustees presently intends that dividends will be declared from
net investment income and net short-term capital gains, if any, for each
LifePoints Strategy Fund on a quarterly basis, with payment being made
sometimes in: April, July, October and December.

CAPITAL GAINS DISTRIBUTIONS

The Board intends that distributions will be declared 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 LifePoints Strategy 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
LifePoints Strategy 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.

In addition, the LifePoints Funds receive capital gains distributions from
the Underlying Funds. Consequently, capital gains distributions may be
expected to vary considerably from year to year. Also, the LifePoints Funds
may generate capital gains through rebalancing the portfolios to meet the
Funds' allocation percentages.

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<PAGE>

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 LifePoints Strategy 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 LifePoints Strategy 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.

TAXES

Each LifePoints Strategy 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 LifePoints
Strategy Fund will generally not be liable for federal income or excise taxes.
The LifePoints Strategy Funds may be subject to nominal, if any, state and
local 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. 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 LifePoints Strategy 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.

The sale of shares of a LifePoints Strategy 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 LifePoints Strategy 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.

Shareholders of the LifePoints Strategy 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.

A LifePoints Strategy 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 LifePoints Strategy 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 advisors regarding the
applicability of income, estate or other taxes (including income tax
withholding) on their investment in a LifePoints Strategy Fund or on dividends
and distributions received by them from a LifePoints Strategy Fund and the
application of foreign tax laws.

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<PAGE>

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

Additional information on these and other tax matters relating to the
LifePoints Strategy 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 LifePoints Strategy 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 Moderate and Conservative Strategy 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
LifePoints Strategy Fund's portfolio. The calculation includes all recurring
fees that are charged to all shareholder accounts.

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

FRIMCO'S HISTORICAL PERFORMANCE

Since the LifePoints Strategy Funds are new portfolios, there is no
information regarding their past investment performance. However, FRIMCo has a
history of investment performance managing model investment portfolios with
investment objectives, strategies, policies, and restrictions substantially
similar to those of the LifePoints Strategy Funds. Set forth below are
historical performance data provided by FRIMCo pertaining to those model
investment portfolios. The data is provided to illustrate FRIMCo's past
performance in managing similar portfolios. The results presented are not
intended to predict or suggest the return to be experienced by any LifePoints
Strategy Fund or the return an individual investor might achieve by investing
in a LifePoints Strategy Fund. A LifePoints Strategy Fund's investment returns
may differ from those of the relevant model portfolio because, among other
things, the LifePoints Strategy Fund's fees and expenses may differ from those
of the applicable portfolio.

27
<PAGE>

PERCENTAGE TOTAL RETURNS/1/
PERIODS ENDING DECEMBER 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
ANNUALIZED
------------------------------------
ONE FIVE TEN INCEPTION INCEPTION
YEAR YEARS YEARS TO DATE DATE
---- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
FRANK RUSSELL INVESTMENT COMPANY
ASSET ALLOCATION MODEL
[FRIC Equity Balanced Fund comparable]
EQUITY BALANCED MODEL.................... 19.7 13.8 13.1 -- 9/5/85
[FRIC Aggressive Strategy Fund comparable]
AGGRESSIVE STRATEGY MODEL................ 16.5 12.5 12.5 -- 9/5/85
[FRIC Balanced Strategy Fund comparable]
BALANCED STRATEGY MODEL.................. 13.1 10.8 11.3 -- 9/5/85
[FRIC Moderate Strategy Fund comparable]
MODERATE STRATEGY MODEL.................. 10.5 9.3 10.0 -- 9/5/85
[FRIC Conservative Strategy Fund
comparable]
CONSERVATIVE STRATEGY MODEL.............. 8.1 -- -- 8.1 1/1/96
</TABLE>
- ---------------------
/1/ Performance is calculated based on the SEC standardized method. Periods of
12 months and over are annualized. Total returns of model portfolios are
presented gross of fees and expenses, and do not reflect deductions of Rule
12b-1 distribution or shareholder services fees, which are deducted from net
asset value of the Class D Shares of the LifePoints Strategy Funds. The
performance for a model portfolio would have been reduced if such Fees had
been deducted. Model portfolio performance is based upon the actual mix of
Underlying Funds recommended at each specific point in time, which may
differ slightly from the current mix. Detail of the changes is available
upon request. The Underlying Funds in existence for less than the time
periods shown were added to the mix on the following dates: Quantitative
Equity Fund, 07/01/87; Real Estate Securities Fund, 01/01/90; Multistrategy
Bond Fund, 02/01/93; and Emerging Markets Fund, 04/01/95 (Fund performance
for the Emerging Markets Fund is calculated gross of investment services
fees, descriptions of which can be obtained from FRIMCo. Investment services
fees will reduce performance). Equity Income Fund was removed from the
Conservative, Moderate, Balanced, and Aggressive model portfolios as of
January 1, 1996.

VALUATION OF LIFEPOINTS STRATEGY FUND SHARES

NET ASSET VALUE PER SHARE

The net asset value per share is calculated for shares of each class of each
LifePoints Strategy Fund on each business day on which shares are offered or
orders to redeem are tendered. 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 LifePoints Strategy Fund's Class D Shares by dividing the
current value of the LifePoints Strategy Fund's assets (i.e., shares of the
Underlying Funds plus any other assets held in the portfolio) attributable to
the Class D Shares, less liabilities attributable to the Class D Shares, by
the number of Class D Shares of the LifePoints Strategy 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
determination is made by appraising each

28
<PAGE>

LifePoints Strategy Fund's underlying investments on each business day (i.e.,
the Underlying Funds at the current net asset value per share of such
Underlying Fund).

VALUATION OF PORTFOLIO SECURITIES

Money market instruments held by a LifePoints Strategy Fund and maturing
within 60 days of the valuation date 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 LifePoints Strategy 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 LifePoints
Strategy Fund would receive if it sold the instrument.

PURCHASE OF LIFEPOINTS STRATEGY FUND SHARES

Shares of the LifePoints Strategy Funds are sold on each business day 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
LifePoints Strategy Funds reserve the right to reject any purchase order.

DISTRIBUTION AND SHAREHOLDER SERVICES PLANS

Under a distribution plan (the "Distribution Plan") for the Class D Shares,
the Investment Company may pay to the distributor, or any banks, broker-
dealers or other financial institutions that have entered into sales support
agreements ("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 D Shares of the LifePoints Strategy Funds 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 LifePoints Strategy Fund's Class D Shares. At the present time,
the Board of Trustees has presently determined to limit payments under the
Distribution Plan to .25% 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 the Class D Shares of the LifePoints Strategy Funds 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 D 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. 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 may earn a profit from future payments made
by the Investment Company under the Distribution Plan.

29
<PAGE>

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 D Shares of the
LifePoints Strategy 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 LifePoints Strategy Fund's Class D
Shares.

ORDER PROCEDURES

Orders by all eligible investors (except for participants in the Three Day
Settlement Program described below) to purchase LifePoints Strategy 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 the close of the
New York Stock Exchange (currently 4:00 p.m. Eastern time).

Payment Procedures: Payment for the purchase of Fund shares must be received
by the Funds' Transfer Agent or custodian, 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
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 (the
"Custodian").

Automated Clearing House ("ACH"). Payment for orders may be made through the
ACH to the Custodian. 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 on 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.

Check. Payment for orders may be made by check or other negotiable bank
draft payable to "Frank Russell Investment Company" and mailed to a Financial
Intermediary or 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.

THREE DAY SETTLEMENT PROGRAM

The Investment Company will accept orders from financial institutions to
purchase Class D Shares of the LifePoints Strategy Funds for settlement on the
third business day following the receipt of an order to be paid by federal
wire if the financial institution has agreed in writing to indemnify the
LifePoints Strategy 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 LifePoints Strategy Fund shares through a program of
services offered by a Financial Intermediary, such as a bank, broker-dealer,
or others, may be required to pay additional fees by such

30
<PAGE>

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 LifePoints Strategy Fund offered by
this Prospectus for shares of another LifePoints Strategy Fund offered by this
Prospectus on the basis of current net asset value per share at the time of
the exchange. Shares of a LifePoints Strategy 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 LIFEPOINTS STRATEGY FUND SHARES

SHAREHOLDERS UNCERTAIN OF REQUIREMENTS FOR REDEMPTION SHOULD TELEPHONE THE
FINANCIAL INTERMEDIARY FROM WHOM THEY RECEIVED THIS PROSPECTUS OR THE FUNDS AT
(800) 972-0700; IN WASHINGTON (253) 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 recent
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 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 the close of the New York Stock Exchange (currently 4:00 p.m. Eastern
time).

31
<PAGE>

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 as are 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.

Redemption in Kind. A Fund may pay any portion of the redemption amount by a
distribution in kind of securities from the Fund's portfolio, in lieu of cash.
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.

32
<PAGE>

ADDITIONAL INFORMATION

DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS

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
LifePoints Strategy Funds.

ORGANIZATION, CAPITALIZATION, AND VOTING

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.

In addition to offering Class D Shares, the LifePoints Strategy Funds are
authorized to offer beneficial interests in Class S Shares and Class E Shares.
Class S Shares and Class E Shares are, as of the date of this Prospectus, not
offered for public investment.

33
<PAGE>

MONEY MANAGER PROFILES

The money managers have no other affiliations with the Underlying Funds,
FRIMCo, 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

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

Equinox Capital Management, Inc., 590 Madison Ave., 41st Floor, New York, NY
10022. Equinox is a registered investment advisor 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 AMVESCO, PLC, 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 advisor with
majority ownership held by John Croghan, Parker Hall, Ken Meyer, Tim Ubben and
Ray Zemon.

Schneider Capital Management, 460 E. Swedesford Road, Suite 1080, Wayne, PA
19087, is a registered investment advisor owned by Arnold Schneider. As of the
date of this Prospectus, the Investment Company understands that an injunction
is being sought against Arnold Schneider in Massachusetts Middlesex County
Superior Court by partners of Wellington Management Company L.L.P.
("Wellington"). The proceedings were instituted on December 13, 1996. The
Investment Company believes that the injunction request seeks to prevent Mr.
Schneider from engaging in the investment advisory or investment management
business in competition with Wellington.

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

34
<PAGE>

SPECIAL GROWTH 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 advisor 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
advisor. 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, LLP, 75 State Street, Boston, MA 02109, is a
private Massachusetts limited liability partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John
R. Ryan

QUANTITATIVE EQUITY FUND

Barclays Global Investors, 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

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

Marathon Asset Management Limited, Orion House, 5 Upper St. Martins Lane.,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.

35
<PAGE>

Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, New York, NY 10153, is a
registered investment adviser. Founded in 1967, Bernstein is controlled by its
Board of Directors, which consists of the following individuals: Andrew S.
Adelson, Zalman C. Bernstein, Kevin R. Rine, Charles C. Cahn, Jr., Marilyn
Goldstein Fedak, Michael L. Goldstein, Roger Hertog, Lewis A. Sanders and
Francis H. Trainer, Jr.

The Boston Company Asset Management, Inc., One Boston Place, Boston, MA
02108, is 100% owned by Mellon Bank Corporation, a publicly held corporation.

EMERGING MARKETS FUND

Genesis Asset Managers, Ltd., 21 Knights Bridge, London, SW1X 7LY, 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
advisor 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 International Ltd., is controlled 55% by
management and associated interests and the balance held by outside
shareholders, with the largest single holding being 15%.

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 advisor. Montgomery Asset Management, Inc. is the general partner
of Montgomery Asset Management, L.P. and Montgomery Group Holdings L.L.C. is
the sole limited partner. Montgomery Asset Management, Inc. and Montgomery
Group Holdings L.L.C. may be deemed control persons of Montgomery Asset
Management, L.P.

REAL ESTATE SECURITIES FUND

AEW Capital Management, L.P., 225 Franklin Street, Boston, MA 02110-2803, is
a wholly-owned affiliate of New England Investment Companies, L.P. ("NEIC").
NEIC is a publicly-held limited partnership. Metropolitan Life Insurance
Company, a publicly-held corporation, owns approximately 53% of NEIC. AEW
Capital Management, Inc., a wholly-owned subsidiary of NEIC, is the general
partner, and NEIC is the sole limited partner, of AEW Capital Management, L.P.

DIVERSIFIED BOND FUND

Lincoln Capital Management Company, See: Diversified Equity Fund.

36
<PAGE>

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
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.

MULTISTRATEGY BOND FUND

BEA Associates, 153 East 53rd Street, 58th Floor, 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 advisor.

Pacific Investment Management Company, See: Diversified Bond Fund.

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

37
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001

MONEY MANAGERS

<TABLE>
<S> <C>
DIVERSIFIED EQUITY DIVERSIFIED BOND
Alliance Capital Management L.P. Lincoln Capital Management Company
Barclays GlobalInvestors Pacific Investment Management Company
Columbus Circle Investors Standish, Ayer & Wood, Inc.
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc. VOLATILITY CONSTRAINED BOND
Lincoln Capital Management Company BlackRock Financial Management
Schneider Capital Management Standish, Ayer & Wood, Inc.
Suffolk Capital Management, Inc. STW Fixed Income Management Ltd.
Trinity Investment Management Corporation
MULTISTRATEGY BOND
SPECIAL GROWTH BEA Associates
Delphi Management, Inc. Pacific Investment Management Company
Fiduciary International, Inc. Standish, Ayer & Wood, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc. REAL ESTATE SECURITIES
Sirach Capital Management, Inc. Cohen & Steers Capital Management
Wellington Management Company, LLP AEW Capital Management, L.P.

QUANTITATIVE EQUITY EMERGING MARKETS
Barclays Global Investors Genesis Asset Managers, Ltd.
Franklin Portfolio Associates LLC J.P. Morgan Investment Management, Inc.
J.P. Morgan Investment Management, Inc. Montgomery Asset Management, L.P.

INTERNATIONAL SECURITIES MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
J.P. Morgan Investment Management, Inc. Frank Russell Investment Management Company
Marathon Asset Management Limited 909 A Street
Oechsle International Advisors Tacoma, Washington 98402
Rowe Price-Fleming International, Inc.
Sanford C. Bernstein & Co., Inc.
The Boston Company Asset Management, Inc.
</TABLE>

38
<PAGE>

<TABLE>
<S> <C>
CONSULTANT LEGAL COUNSEL
Frank Russell Company Stradley, Ronon, Stevens & Young, LLP
909 A Street 2600-One Commerce Square
Tacoma, Washington 98402 Philadelphia, Pennsylvania 19103-7098

DISTRIBUTOR OFFICE OF SHAREHOLDER INQUIRIES
Russell Fund Distributors, Inc. 909 A Street
909 A Street Tacoma, Washington 98402
Tacoma, Washington 98402 (800) 972-0700
In Washington (253) 627-7001
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
</TABLE>

39
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (253) 627-7001

STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1997,
As Revised June 1, 1997

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 five separate Prospectuses, each as set
forth below.

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:

Fund Inception
Fund Date Prospectus Date
---- -------------- ---------------
<S> <C> <C>
Equity I Fund October 15, 1981 May 1, 1997
Equity II Fund December 28, 1981 May 1, 1997
Equity III Fund November 27, 1981 May 1, 1997
Equity Q Fund May 29, 1987 May 1, 1997
Equity T Fund October 7, 1996 May 1, 1997
International Fund January 31, 1983 May 1, 1997
Emerging Markets Fund January 29, 1993 May 1, 1997
Fixed Income I Fund October 15, 1981 May 1, 1997
Fixed Income II Fund October 30, 1981 May 1, 1997
Fixed Income III Fund January 29, 1993 May 1, 1997
Money Market Fund October 15, 1981 May 1, 1997
Diversified Equity Fund September 5, 1985 May 1, 1997
Special Growth Fund September 5, 1985 May 1, 1997
Equity Income Fund September 5, 1985 May 1, 1997
Quantitative Equity Fund May 15, 1987 May 1, 1997
International Securities Fund September 5, 1985 May 1, 1997
Real Estate Securities Fund July 28, 1989 May 1, 1997
Diversified Bond Fund September 5, 1985 May 1, 1997
Volatility Constrained Bond Fund September 5, 1985 May 1, 1997
Multistrategy Bond Fund January 29, 1993 May 1, 1997
Limited Volatility Tax Free Fund September 5, 1985 May 1, 1997
U.S. Government Money Market Fund September 5, 1985 May 1, 1997
Tax Free Money Market Fund May 8, 1987 May 1, 1997
</TABLE>

The Funds had aggregate net assets of $10,045,109,140 on April 3, 1997.

A shareholder of the Equity I Fund, Equity II Fund, Equity III Fund, Equity Q
Fund, Equity T Fund, International Fund, Emerging Markets Fund, Fixed Income I
Fund, Fixed Income II Fund, Fixed Income III Fund, and Money Market Fund may
enter into a separate agreement with Frank Russell Investment Management Company
("FRIMCo") to obtain certain services from, and pay a separate quarterly
individual shareholder investment services fee directly to, FRIMCo. The amount
of the fee is based upon the assets subject to the applicable agreement and the
services obtained under that agreement. A shareholder of the other Funds
described herein does not execute such an agreement to acquire such services and
pays no such
<PAGE>

fees. In each case, FRIMCo may charge fees to a shareholder for non-investment
services provided directly to that shareholder.

Each of the Funds presently offers interests in Class S Shares. Nine of the
Funds--the Diversified Equity, Special Growth, Equity Income, Quantitative
Equity, International Securities, Real Estate Securities, Diversified Bond,
Volatility Constrained Bond, Multistrategy Bond, and Emerging Markets Funds--
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 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, 1996. Copies of the Funds'
Annual Reports accompany this Statement.

-2-
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
STRUCTURE AND GOVERNANCE.............................................. 4
Organization and Business History................................ 4
Shareholder Meetings............................................. 4
Controlling Shareholders......................................... 4
Trustees and Officers............................................ 6

OPERATION OF THE INVESTMENT COMPANY................................... 8
Service Providers................................................ 8
Consultant....................................................... 8
Manager.......................................................... 9
Money Managers................................................... 10
Distributor...................................................... 11
Custodian........................................................ 11
Transfer and Dividend Disbursing Agent........................... 11
Independent Accountants.......................................... 11
Fund Expenses.................................................... 14
Valuation of Fund Shares......................................... 14
Portfolio Transaction Policies................................... 14
Portfolio Turnover Rate.......................................... 15
Brokerage Allocations............................................ 15
Brokerage Commissions............................................ 16
Yield and Total Return Quotations................................ 18

INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS............. 20
Investment Restrictions.......................................... 20
Investment Policies.............................................. 22
Certain Investments.............................................. 23

TAXES................................................................. 38

RATINGS OF DEBT INSTRUMENTS........................................... 42

FINANCIAL STATEMENTS.................................................. 49

FINANCIAL HIGHLIGHTS.................................................. 50
</TABLE>

-3-
<PAGE>

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 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
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 March 31, 1997:

Money Market: Lincoln Capital Management, c/o Frank Russell Investment Company,
Attn: Operations Dept., P.O. Box 1591, Tacoma, WA 98401-1591, 5.77%, record.

Equity I: U.S. National Bank of Oregon, Bancorp Tower Building, 111 S.W. Fifth
Avenue,Suite 1, Portland, OR 97204, 24.73%, record.

Equity II: U.S. National Bank of Oregon, Bancorp Tower Building, 7.80%, record;
National City Bank of Minneapolis, Sixth on the Mall, 651 Nicollet Mall,
Minneapolis, MN 55402, 6.39%, record.

Equity III: U.S. National Bank of Oregon, 20.49%, record; Firstar Trust Company,
P.O. Box 1787, Milwaukee, WI 33201, 11.44%, record.

Equity Q: U.S. National Bank of Oregon, 35.53%, record.

Equity T: Indiana Trust & Investment Company, P.O. Box 5149, Mishawaka, IN
46545, 29.89%, record; Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104, 11.79%, record; Miller/Russell and Associates, Inc., 2929
E. Camelback Road, Suite 223, Phoenix AZ 85016, 7.26%, record.

International: U.S. National Bank of Oregon, 31.21%, record.

Emerging Markets: U.S. National Bank of Oregon, 18.52%, record.

Fixed Income I: U.S. National Bank of Oregon, 16.12%, record; National City
Bank of Minneapolis, 14.20%, record; First Union National Bank, 401 South Tryon
Street, Charlotte, NC 28288-1151, 10.08%, record.

Fixed Income II: First Tennessee Bank, N.A., FBO Knox County, Plaza Tower, 5th
Floor, 800 South Gay Street, Knoxville, TN 37995, 8.91%, record; U.S. National
Bank of Oregon, 7.76%, record.

Fixed Income III: U.S. National Bank of Oregon, 31.57%, record.

Diversified Equity: FMB Trust, One Financial Plaza, 10717 Adams Street, Holland,
MI 49423, 5.84%, record.

Special Growth - Class S: FMB Trust, 10.01%, record.

Special Growth - Class C: FMB Trust, 99.94%, record.

Equit Income - Class S: FMB Trust, 9.97%, record; Citizens Bank (Saginaw), 101
N. Washington, Saginaw, MI 48607-1207, 6.68%, record.

Equity Income - Class C: FMB Trust, 95.92%, record.

Quantitative Equity - Class S: FMB Trust, 8.48%, record.

Quantitative Equity - Class C: FMB Trust, 99.86%, record.

International Securities - Class S: FMB Trust, 5.70%, record.

International Securities - Class C: FMB Trust, 99.90%, record.

Real Estate Securities - Class S: U.S. National Bank of Oregon, 12.97%,
record.

Real Estate Securities - Class C: FMB Trust, 99.56%, record.

Diversified Bond - Class S: Citizens Bank (Saginaw) 14.44%, record; FMB Trust,
10.02%, record; Hawaiian Trust Investment Services, 130 Merchant Street, 10th
Floor Tower, Honolulu, HI 96813, 5.96%, record; Key Trust Company, P.O. Box
94871, Cleveland, OH 44101-4871, 5.42%, record.

Diversified Bond - Class C: FMB Trust, 99.96%, record.

Multistrategy Bond: Empire National Bank, 1227 East Front Street, Traverse City,
MI 49684, 5.12%, record.

Limited Volatility Tax Free: Norwest Bank Iowa, N.A., 666 Walnut Street, 3rd
Floor, Des Moines, IA 50309, 5.75% record; Zions First National Bank, One South
Main Street, Salt Lake City, UT 84111, 5.47%, record.

U.S. Government Money Market: Winona National and Savings Bank, P.O. Box 499,
Winona, MN 55987, 10.45%, record.

Tax Free Money Market: Citizens Bank (Saginaw), 39.01%, record; Miller/Russell
and Associates, Inc., 20.42%, 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 Investment Management Company or its
affiliates, are responsible for the day-to-day management and administration of
the Funds' operations.

-4-
<PAGE>

The Investment Company paid $103,244 for the year ended December 31, 1996 to the
Trustees as a group who are not officers or employees of FRIMCo 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.--64 years old--Trustee and Chairman of the Board.
Trustee and Chairman of the Board, Russell Insurance Funds, Inc. 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; Chairman of
the Board, Director, Frank Russell Investments (Delaware), Inc.; January 1957 to
March 1993, President and 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.
Trustee, President and Chief Executive Officer, Russell Insurance Funds, Inc.
Director, Chief Executive Officer and Chairman of the Board, Russell Fund
Distributors, Inc. Trustee, Chairman and President, the SSgA Funds (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, Frank Russell Company;
November 1995 to February 1997, Director and Chairman of the Board, Frank
Russell Company (Delaware); Director, Frank Russell Company; 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--65 years old--Trustee. 23 Forest Glen Lane, Tacoma, Washington
98409. Trustee, Russell Insurance Funds; 1996 to Present, President, Forest
Limited Partnership. 1984 to 1996, President, Vancouver Door Company, Inc.

Paul Anton, Ph.D.--77 years old--Trustee. 2218 55th Street, N.W., Gig Harbor,
Washington 98335. Trustee, Russell Insurance Funds. 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, Portland, Oregon; 1991-1994, Adjunct Professor,
International Marketing, University of Washington, Tacoma, Washington.

William E. Baxter--71 years old--Trustee. Trustee, Russell Insurance Funds, 800
North C Street, Tacoma, Washington 98403. Retired.

Lee C. Gingrich--66 years old--Trustee. 1730 North Jackson, Tacoma, Washington
98406. Trustee, Russell Insurance Funds. President, Gingrich Enterprises, Inc.
(Business and Property Management).

-5-
<PAGE>

Eleanor W. Palmer--70 years old--Trustee. 2025 Narrows View Circle, P. O. Box
1057, Gig Harbor, Washington 98335. Trustee, Russell Insurance Funds. Retired.

*George W. Weber--45 years old--Treasurer and Chief Accounting Officer.
Treasurer and Chief Accounting Officer, Russell Insurance Funds; 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.; Senior Vice President and Fund Treasurer of the
SSgA Funds (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--43 years old--Director of Investments. Director, Investments
of Russell Insurance Funds; 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--55 years old--Secretary and General Counsel. Secretary and General
Counsel, Russell Insurance Funds, Inc.; Director, Secretary and General Counsel
of Frank Russell Company; and A Street Investment Associates, Inc.; 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 Investments
(Delaware), Inc. 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; Russell Investment Nominee Co. PTY
Ltd., Frank Russell Company PTY Limited and Frank Russell Investments (UK) Ltd.,
Director and Secretary, Russell 20-20 Association. November 1995 to February
1997, Director and Secretary, Frank Russell Company (Delaware). From July 1992
to June 1994, Director, President and Secretary of Frank Russell Shelf
Corporation.

*Peter Apanovitch--51 years old--Manager of Short-Term Investment Funds.
Manager of Short-Term Investment Funds, Russell Insurance Funds; Manager of
Short-Term Investment Funds, Frank Russell Investment Management Company and
Frank Russell Trust Company.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE*
- ----------------------------------------------------------------------------------------------------------------------------
PENSION OR RETIREMENT
BENEFITS ACCRUED AS
AGGREGATE PART OF THE ESTIMATED ANNUAL TOTAL COMPENSATION FROM
COMPENSATION FROM THE INVESTMENT COMPANY BENEFITS UPON THE INVESTMENT COMPANY
TRUSTEE INVESTMENT COMPANY EXPENSES RETIREMENT PAID TO TRUSTEES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

Lynn L. Anderson $ 0 $0 $0 $ 0

Paul E. Anderson $20,000 $0 $0 $20,000

Paul Anton, PhD. $20,000 $0 $0 $20,000

William E. Baxter $20,000 $0 $0 $20,000

Lee C. Gingrich $20,000 $0 $0 $20,000

Eleanor W. Palmer $20,000 $0 $0 $20,000

George F. Russell $ 0 $0 $0 $ 0
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

-6-
<PAGE>

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 FRIMCo, was
- ----------
responsible for organizing the Investment Company and provides ongoing
consulting services, described in the Prospectuses, to the Investment Company
and FRIMCo.

Frank Russell Company provides comprehensive consulting and money manager
evaluation services to institutional clients, including FRIMCo 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 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), Frank Russell Investments (Delaware), Inc.
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. FRIMCo 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. FRIMCo 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.") FRIMCo 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. FRIMCo, 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 Equity I, Equity II, Equity III, Equity Q, Equity T,
International, Emerging Markets, Fixed Income I, Fixed Income II, Fixed Income
III and Money Market Funds paid no management

-7-
<PAGE>

fee to FRIMCo. Each shareholder entered into a written Asset Management Services
Agreement with FRIMCo 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 of those Funds will pay an annual management fee directly to
FRIMCo, billed monthly on a pro rata basis and calculated as a specified
percentage of the average daily net assets of each of those Funds. (See the
applicable Prospectus for annual percentage rates.) A shareholder of any of
those Funds would continue to enter into a written Asset Management Services
Agreement with FRIMCo 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 FRIMCo's provision
of individual shareholder investment services with respect to that shareholder.

Each of the Funds pays an annual management fee directly to FRIMCo, 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 Funds paid FRIMCo the listed management fees for the years ended
December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>

YEARS ENDED
------------------------------------
12/31/96 12/31/95 12/31/94
---------- ---------- ----------
<S> <C> <C> <C>
Diversified Equity $4,728,098 $3,842,471 $3,156,276
Special Growth 3,307,757 2,588,270 2,028,150
Equity Income 1,504,154 1,314,461 1,196,187
Quantitative Equity 4,455,041 3,469,134 2,712,324
International Securities 6,497,848 5,723,534 5,096,797
Real Estate Securities 2,943,293 2,065,552 1,541,758
Diversified Bond 2,360,392 2,308,823 2,263,561
Volatility Constrained Bond 836,818 985,215 1,094,128
Multistrategy Bond 1,673,473 1,217,039 945,756
Limited Volatility Tax Free 312,456 294,007 290,090
U.S. Government Money Market 481,642 338,745 207,926
Tax Free Money Market 234,929 214,949 228,123
</TABLE>

For the year ended December 31, 1996 and the period from April 1, 1995 through
December 31, 1995, the following Funds paid FRIMCo the following management
fees:
<TABLE>
<CAPTION>

12/31/96 12/31/95
---------- ----------
<S> <C> <C>
Equity I $5,261,927 $3,021,465
Equity II 2,448,618 1,456,132
Equity III 1,340,374 945,888
Equity Q 4,392,254 2,434,051
Equity T 21,443 --
International 6,569,285 4,112,338
Emerging Markets 2,773,817 1,380,549
Fixed Income I 1,977,178 1,330,021
Fixed Income II 988,312 626,548
Fixed Income III 1,483,876 892,253
Money Market 1,437,186 980,668
</TABLE>

The Equity T Fund commenced operations on October 7, 1996.

Through March 31, 1995, FRIMCo 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. 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.

Effective April 1, 1995 through April 30, 1996, FRIMCo 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

-8-
<PAGE>

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, FRIMCo 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.

Effective May 1, 1996, FRIMCo agreed to waive its management fee for the
Equity T, Emerging Markets, Fixed Income III and Multistrategy Bond Funds, to
the extent expenses of these Funds exceed 1.00%, 1.95%, 0.75% and 0.80% of
average daily net asset on an annual basis, respectively. In addition, FRIMCo
has agreed to reimburse Equity T for all remaining expenses after Manager
waivers which exceed 1.00% of average daily net assets on an annual basis. In
1996, waivers and reimbursements for Equity T and Multistrategy amounted to
$51,582 and $157,752, respectively. No waiver nor reimbursement was necessary
for the Emerging Markets and Fixed III Funds. As a result of the waivers and
reimbursements, management fees paid by the Equity T and Multistrategy Bond
Funds amounted $0 and $1,515,721, respectively. Additionally, FRIMCo waived fees
of $481,642 and $1,437,186 for the U.S. Government Money Market and Money Market
Funds, respectively. As a result of these waivers, no management fees were paid
by the U.S. Government Money Market and Money Market Funds.

FRIMCo also provides, through its Russell Private Investment Division,
investment advisory, consulting and money manager evaluation services to high
net work individuals and families.

FRIMCo is a wholly owned subsidiary of Frank Russell Company. FRIMCo'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 FRIMCo 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.

From its management fees, FRIMCo, 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
average for the quarter of all the assets allocated to the money manager. For
the period ended December 31, 1996, management fees paid to the money managers
were: Equity I $2,091,763; Equity II $1,304,152; Equity III $442,642; Fixed
Income I $525,055; Fixed Income II $350,543; Fixed Income III $578,529;
International $3,712,760; Equity Q $1,506,127; Equity T $11,421; Emerging
Markets $1,663,462; Diversified Equity $1,445,809; Special Growth $1,390,844;
Equity Income $372,546; Diversified Bond $417,658; Volatility Constrained Bond
$296,809; International Securities $2,898,644; Multistrategy Bond $552,072;
Quantitative Equity $1,175,120; Real Estate Securities $1,072,356; Limited
Volatility Tax Free $155,995 and Tax Free Money Market $90,736. 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 FRIMCo 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. Fee these services, State Street is paid an
annual fee, in accordance with the following: domestic custody - (i) an annual
fee of $3,000 per portfolio per fund, (ii) an annual fee, payable monthly on a
pro rata basis, based on the following percentages of the month end net

-9-
<PAGE>

assets of all domestic funds; $0 up to and including $10 billion - .0075%; over
$10 billion - .0065%; global custody - an annual fee, payable monthly on a pro
rata basis, based on the month-end net assets and geographic classification of
the investments in the international funds; fund accounting - (i) an annual fee
of $10,000 - $24,000 per portfolio per fund, (ii) an annual fee of 0.015% -
0.030%, payable monthly on a pro rata basis, based on daily average net assets
of each Fund; securities transaction charges from $6.50 to $100.00 per
transaction; monthly pricing fees of $375.00 per portfolio and $6.00 to $12.00
per security; multiple class fee of $15,000 per year for each additional class
of shares; and yield calculation fees of $4,200 per fixed income fund per year.
State Street is reimbursed by the funds for supplying certain out-of-pocket
expenses including postage, transfer fees, stamp duties, taxes, wire fees,
telexes and freight. In addition, interest earned on invested cash balances is
used to offset the Funds' custodian expense. The mailing address for State
Street Bank and Trust Company is 1776 Heritage Drive, North Quincy, MA 02171.

Transfer and Dividend Disbursing Agent. FRIMCo serves as Transfer Agent for the
- --------------------------------------
Investment Company. For this service, FRIMCo 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.
FRIMCo is also reimbursed by the Investment Company for certain out-of-pocket
expenses including postage, taxes, wires, stationery and telephone. FRIMCo's
mailing address is 909 A Street, Tacoma, WA 98402.

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

-10-
<PAGE>

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
connection with the Distribution Plan (the "Independent 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 Independent Trustees. While the Distribution Plan is in
effect, the selection and nomination of the Independent Trustees shall be
committed to the discretion of such Independent 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 Independent 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."

Under the Distribution Plan, the following Multiple Class Funds Class C Shares
accrued expenses in the following amounts to Russell Fund Distributors, Inc., as
Distributor, for the period November 4, 1996 through December 31, 1996 (these
amounts were for compensation to dealers):
<TABLE>

<S> <C>
Special Growth $447
Equity Income 82
Quantitative Equity 212
International Securities 326
Real Estate Securities 60
Diversified Bond 555
</TABLE>

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

-11-
<PAGE>

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.

Under the Shareholder Services Plan, the following Multiple Class Funds Class C
Shares accrued expenses in the following amounts to Russell Fund Distributors,
Inc., under a Service Agreement pursuant to Rule 12b-1, for the period November
4, 1996 through December 31, 1996:
<TABLE>
<CAPTION>

<S> <C>
Special Growth $279
Equity Income 51
Quantitative Equity 132
International Securities 204
Real Estate Securities 37
Diversified Bond 347
</TABLE>

Fund Expenses. The Funds will pay all their expenses other than those expressly
- -------------
assumed by FRIMCo. The principal expense of the Funds is the annual management
fee payable to FRIMCo. The Funds' other expenses include: fees for independent
accountants, legal, transfer agent, registrar, custodian, dividend disbursement,
and portfolio and shareholder recordkeeping services, and maintenance of tax
records payable to Frank Russell Company (except for 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, FRIMCo 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.)

-12-
<PAGE>

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 FRIMCo 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 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:

-13-
<PAGE>

<TABLE>
<CAPTION>
YEARS ENDED
---------------------
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Equity I 100% 92%
Equity II 121 89
Equity III 101 103
Equity Q 75 74
Equity T* 9 --
International 43 37
Emerging Markets 35 71
Fixed Income I 147 138
Fixed Income II 264 269
Fixed Income III 144 141
Diversified Equity 100 93
Special Growth 118 88
Equity Income 106 92
Quantitative Equity 74 79
International Securities 42 43
Real Estate Securities 52 23
Diversified Bond 139 136
Volatility Constrained Bond 312 257
Multistrategy Bond 145 142
Limited Volatility Tax Free 74 74
</TABLE>

* The Equity T Fund commenced operations on October 7, 1996.

A high profile turnover generally will result in higher brokerage transaction
costs and may result in higher levels of realized capital gains or losses with
respect to a Fund's portfolio securities (see "Taxes").

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 FRIMCo and the money managers
provide, in substance and subject to specific directions from officers of the
Investment Company or FRIMCo, 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 FRIMCo 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) provided to the Fund, FRIMCo and/or to the
money manager (or their affiliates). FRIMCo 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. FRIMCo 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 FRIMCo 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.

-14-
<PAGE>

FRIMCo arranges for the purchase and sale of Investment Company's securities and
selects brokers and dealers (including affiliates), which in its best judgment
provide prompt and reliable execution at favorable prices and reasonable
commission rates. FRIMCo may select brokers and dealers which provide it with
research services and may cause Investment Company to pay such brokers and
dealers commissions which exceed those other brokers and dealers may have
charged, if it views the commissions as reasonable in relation to the value of
the brokerage and/or research services. In selecting a broker, including
affiliates, for a transaction, the primary consideration is prompt and effective
execution of orders at the most favorable prices. Subject to that primary
consideration, dealers may be selected for research, statistical or other
services to enable FRIMCo to supplement its own research and analysis.

Frank Russell Securities, Inc., an affiliate of FRIMCo, refunds up to 70% of the
commissions paid to the Funds effecting such transactions, after reimbursement
for research services provided to FRIMCo. 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 the Equity I, Equity II, Equity III, Equity Q, Equity T,
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 FRIMCo 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 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,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Equity I 1,988,671 $1,492,270 $1,102,030
Equity II 863,209 452,355 327,972
Equity III 616,005 470,068 482,877
Equity Q 950,684 663,851 351,400
Equity T* 10,305 -- --
International 1,770,839 1,467,692 2,130,525
Emerging Markets 964,725 1,039,478 635,093
Diversified Equity 1,360,214 1,118,548 807,894
Special Growth 893,203 467,162 382,307
Equity Income 507,754 413,220 388,380
Quantitative Equity 744,245 561,459 284,366
International Securities 1,284,042 1,251,533 1,896,734
Real Estate Securities 915,952 419,508 627,282
----------- ---------- ----------
Total $12,869,848 $9,817,144 $9,416,860
=========== ========== ==========
</TABLE>

* The Equity T commenced operations on October 7, 1996.

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.

-15-
<PAGE>

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, 1996, approximately $1,346,000 of the
brokerage commissions of the Funds were directed to brokers who provided
research services to FRIMCo. The research services included industry and company
analysis, portfolio strategy reports, economic analysis, and statistical data
pertaining to the capital markets.

Gross brokerage commissions received by affiliated broker/dealers from
affiliated and non-affiliated money managers for the year ended December 31,
1996 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. $ 4,016 0.03%
Barclays De Zoete Wedd 845 0.01
Donaldson, Lufkin & Jenrette 137,822 1.07
Dresdner Bank AG 1,562 0.01
Frank Russell Securities 998,692 7.76
Jardine-Fleming Securities 15,154 0.12
J.P. Morgan Securities, Inc. 26,846 0.21
Kleinwort Benson North America 18,665 0.15
Morgan Guarantee Trust 176 0.00
Ord Minnett, Inc. 8,156 0.06
Robert Fleming, Inc. 11,814 0.09
Total Affiliated Commissions $1,223,748 9.51%
</TABLE>

The percentage of total affiliated transactions (relating to trading activity)
to total transactions during fiscal 1996 for the Funds was 10.15%.

During the year ended December 31, 1996, 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, 1996, was as
follows:

HOLDINGS OF TOP 10 BROKER-DEALERS AT 12/31/96
<TABLE>
<CAPTION>

DONALDSON, GOLDMAN MERRILL MORGAN PAINE SALOMON
LUFKIN &
FUND BEAR STEARNS JENRETTE SACHS & CO. LYNCH STANLEY WEBBER BROTHERS
- ----------------------- ------------ --------- ----------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity I $ 548,000 $ 5,240,000 $2,502,000 $1,524,000 $1,909,000
Equity II $1,567,000 $832,000
Equity III $1,225,000
Equity Q $1,689,000 $ 1,809,000 $2,354,000 $ 236,000 $1,918,000
Equity T $ 39,000 $ 127,000
Fixed Income I $ 1,957,000 $ 900,000 $2,210,000 $2,318,000
Fixed Income II $ 925,000 $ 594,000 $ 1,858,000 $2,115,000
Fixed Income III $ 1,043,000 $ 1,352,000 $ 276,000 $ 722,000 $2,742,000
Money Market Fund $25,000,000 $ 24,998,000
Diversified Equity $ 397,000 $ 3,985,000 $1,845,000 $1,015,000 $1,381,000
Special Growth $1,791,000 $994,000
Equity Income $1,056,000
Quantitative Equity $1,408,000 $ 1,646,000 $2,159,000 $ 186,000 $ 975,000
Diversified Bond $ 1,144,000 $ 762,000
Volatility Constrained Bond $ 750,000 $ 1,719,000 $1,502,000
Multistrategy Bond $ 692,000 $ 642,000 $ 276,000 $ 723,000 $3,255,000
</TABLE>

-16-
<PAGE>

At 12/31/96, the Funds [did not have any] holdings in the following top 10
broker-dealers:
- - Frank Russell Securities
- - Investment Technology Group
- - Instinet Corp.

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:

P(1+T)/n/ = ERV

Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
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, except for the Funds listed below, are reported in the respective
Prospectuses.

The following Class C Shares were not issued prior to the date of this
prospectus. The returns shown below represent results of these Funds' Class S
Shares for the periods shown. The deduction of their Rule 12b-1 fees and
Shareholder Servicing Fee are not related in the returns shown below. Had such
fees been related in the returns above, the returns would have been lower.
<TABLE>
<CAPTION>

5 YEARS ENDED DEC. 10 YEARS ENDED INCEPTION TO DEC.
1 YEAR ENDED 31, 1996 DEC. 31, 1996 31, 1996 INCEPTION
DEC. 31, 1996 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
------------- ------------------ -------------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Diversified Equity 23.29 14.81 14.59 15.77 09/05/85
Emerging Markets 12.26 --- --- 8.50 01/29/93
Equity T Fund* --- --- --- 6.10 10/07/96
Volatility Constrained Bond 4.66 4.64 6.64 6.88 09/05/85
Multistrategy Bond 4.97 --- --- 6.66 01/29/93
</TABLE>

* The Equity T Fund commenced operations on October 7, 1996.

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

-17-
<PAGE>

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.

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.

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<PAGE>

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 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.

-19-
<PAGE>

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 FRIMCo 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 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, 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.

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<PAGE>

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.

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 FRIMCo 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 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

-21-
<PAGE>

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.
Liquid assets 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
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 growth of the market for lower rated debt securities 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

-22-
<PAGE>

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 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, liquid assets 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 use those instruments,

-23-
<PAGE>

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, liquid assets 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 liquid assets 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 liquid assets in a segregated account with its
custodian. A put option on a security or an index is "covered" if the Fund
maintains liquid assets 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 liquid assets 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 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

-24-
<PAGE>

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.

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.

-25-
<PAGE>

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.

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 "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) liquid assets 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.

-26-
<PAGE>

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) liquid assets 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) liquid assets 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 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

-27-
<PAGE>

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 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.

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.

-28-
<PAGE>

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 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

-29-
<PAGE>

enters into this type of hedging transaction, liquid assets 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 liquid assets
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 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.

Depository Receipts. Each Fund may hold securities of foreign issuers in the
- -------------------
form of American Depository Receipts ("ADRs"), American Depository Shares
("ADSs") and European Depository Receipts ("EDRs"), or other securities
convertible into securities of eligible European or Far Eastern issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they maybe exchanged. ADRs and ADSs typically are issued by
an American bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continential Depository Receipts ("CDRs"), are issued in Europe typically
by foreign banks and trust companies and evidence ownership of either foreign or
domestic securities. Generally, ADRs and ADSs in

-30-
<PAGE>

registered form are designed for use in United States securities markets and
EDRs in bearer form are designed for use in European securities markets. For
purposes of a Fund's investment policies, the Fund's investments in ADRs, ADSs
and EDRs will be deemed to be investments in the equity securities representing
securities of foreign issuers into which they may be converted.

ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually charges
fees upon the deposit and withdrawal of the deposited securities, the conversion
of dividends into U.S. dollars, the disposition of non-cash distributions, and
the performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders with respect to the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depository), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
Funds may invest in sponsored and unsponsored ADRs.

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 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 liquid assets
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

-31-
<PAGE>

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 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 residential
mortgage loans. Such issuers may be the originators of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities.

-32-
<PAGE>

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.

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.

-33-
<PAGE>

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.

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 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

-34-
<PAGE>

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 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
-35-
<PAGE>

using this technique is incorrect in its forecast of market values, interest
rates and other applicable factors, the investment performance of a 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 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 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 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.

-36-
<PAGE>

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, 1996, 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:
<TABLE>
<CAPTION>
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Fixed Income I -- -- -- -- -- (11,500,516) -- --
Fixed Income II -- -- -- -- (948,478) (3,534,633) (698,949) (1,824,408)
Fixed Income III -- -- -- -- -- (2,010,657) -- (518,716)
Emerging Markets -- -- -- -- -- -- (5,407,487) --
Money Market -- -- -- -- -- -- (42,377) (814)
Diversified Bond -- -- -- -- -- (4,997,596) -- --
Volatility Constrained -- -- -- -- -- (5,583,410) (1,871,605) (2,088,774)
Bond
Limited Volatility Tax (103,283) (26,604) (383,404) -- -- (345,504) (110,634) (15,075)
Free
U.S. Government -- -- -- -- -- (1,309) (4,913) (3,331)
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.

-37-
<PAGE>

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
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.

-38-
<PAGE>

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 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.

-39-
<PAGE>

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.

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.

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

-40-
<PAGE>

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.

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.

-41-
<PAGE>

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.

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.

-42-
<PAGE>

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.

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

-43-
<PAGE>

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.

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.

-44-
<PAGE>

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.

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.

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

-45-
<PAGE>

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 1996 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.

-46-
<PAGE>

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.
<TABLE>
<CAPTION>

EMERGING MARKETS FUND

1996 1995 1994 1993++
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................ $ 11.16 $ 12.25 $ 13.90 $ 10.00
-------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... .10 .11 .15 .07
Net realized and unrealized gain
(loss) on investments...................................... 1.26 (1.12) (1.24) 4.09
-------- -------- -------- -------
Total From Investment Operations.......................... 1.36 (1.01) (1.09) 4.16
-------- -------- -------- -------
Less Distributions:
Net investment income....................................... (.08) (.03) (.10) (.07)
In excess of net investment income.......................... (.09) (.02) (.10) (.01)
Net realized gain on investments............................ -- -- (.31) (.18)
In excess of net realized gain on investments............... -- (.03) (.05) --
-------- -------- -------- -------
Total Distributions....................................... (.17) (.08) (.56) (.26)
-------- -------- -------- -------
NET ASSET VALUE, END OF YEAR.................................. $ 12.35 $ 11.16 $ 12.25 $ 13.90
======== ======== ======== =======
TOTAL RETURN (%)(A)(C)........................................ 12.26 (8.21) (5.83) 41.83

RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average net assets (b)(c)....... 1.71 1.75 .80 .80
Operating expenses, gross, to average net assets (b)(c)..... 1.72 1.80 .83 1.60
Net investment income to average net assets (b)(c).......... .77 .88 1.10 1.33
Portfolio turnover (b)...................................... 34.62 71.16 57.47 89.99
Net assets, end of year ($000 omitted)...................... 271,490 172,673 127,271 65,457
Per share amount of fees waived ($ omitted)................. .0006 .0022 .0044 .0016
Per share amount of fees reimbursed ($ omitted)............. -- .0032 .0017 .0420
Average commission rate paid per share of
security ($ omitted) (e)................................... .0007 N/A N/A N/A
- ---------------------------------------------------------------------------------------
</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. See
Note 4
(d) See Note 4 for current period amounts.
(e) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.

* 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.

-47-
<PAGE>

FINANCIAL HIGHLIGHTS OF THE DIVERSIFIED EQUITY 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.

DIVERSIFIED EQUITY FUND
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......... $ 38.62 $ 32.26 $ 34.88 $ 35.60 $ 36.36 $ 30.66
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... .48 .60 .58 .56 .60 .81
Net realized and unrealized gain
(loss) on investments.................. 8.15 10.63 (.49) 3.03 2.30 8.36
-------- -------- -------- -------- -------- --------
Total From Investment Operations....... 8.63 11.23 .09 3.59 2.90 9.17
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income.................... (.48) (.60) (.58) (.55) (.61) (.82)
Net realized gain on investments......... (5.32) (4.27) (1.87) (3.76) (3.05) (2.65)
In excess of net realized gain on
investments............................ -- -- (.26) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions.................... (5.80) (4.87) (2.71) (4.31) (3.66) (3.47)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR............... $ 41.45 $ 38.62 $ 32.26 $ 34.88 $ 35.60 $ 36.36
======== ======== ======== ======== ======== ========
TOTAL RETURN (%)........................... 23.29 35.17 (0.01) 10.53 8.32 31.05
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets................................. .94 .95 .95 .96 .98 .98
Net investment income to average
net assets............................. 1.18 1.56 1.73 1.54 1.69 2.28
Portfolio turnover....................... 99.90 92.53 57.53 99.80 77.02 116.53
Net assets, end of year ($000 omitted)... 699,691 530,645 414,036 388,420 337,549 325,746
Average Commission rate paid per
share of security ($ omitted).......... .0465 N/A N/A N/A N/A N/A
</TABLE>

<TABLE>
<CAPTION>
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR........... $ 35.22 $ 30.46 $ 27.22 $ 31.20
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... .99 .94 .89 1.37
Net realized and unrealized gain
(loss) on investments.................... (3.45) 7.68 3.57 1.05
-------- -------- -------- --------
Total From Investment Operations......... (2.46) 8.62 4.46 2.42
-------- -------- -------- --------

LESS DISTRIBUTIONS:
Net investment income...................... (.96) (1.11) (.81) (.97)
Net realized gain on investments........... (1.14) (2.75) (.41) (5.43)
In excess of net realized gain on
investments.............................. -- -- -- --
-------- -------- -------- --------
Total Distributions...................... (2.10) (3.86) (1.22) (6.40)
-------- -------- -------- --------
NET ASSET VALUE, END OF YEAR................. $ 30.66 $ 35.22 $ 30.46 $ 27.22
======== ======== ======== ========
TOTAL RETURN (%)............................. (7.01) 29.06 16.37 6.94

RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net
assets................................... 1.03 1.01 1.00 .97
Net investment income to average
net assets............................... 2.97 2.65 2.92 2.27
Portfolio turnover......................... 96.90 61.80 66.02 87.69
Net assets, end of year ($000 omitted)..... 251,254 234,988 202,948 198,902
Average Commission rate paid per
share of security ($ omitted)............ N/A N/A N/A N/A
</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.

-48-
<PAGE>

FINANCIAL HIGHLIGHTS OF THE VOLATILITY CONSTRAINED BOND 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.

VOLATILITY CONSTRAINED BOND FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......... $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33 $ 19.51
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 1.09 1.21 1.15 .82 1.34 1.45
Net realized and unrealized gain
(loss) on investments.................. (.22) .58 (1.16) .45 (.88) .80
-------- -------- -------- -------- -------- --------
Total From Investment Operations....... .87 1.79 (.01) 1.27 .46 2.25
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income.................... (1.01) (1.22) (1.13) (.71) (1.28) (1.43)
Tax Return of capital.................... -- -- -- (.29) -- --
-------- -------- -------- -------- -------- --------
Total Distributions.................... (1.01) (1.22) (1.13) (1.00) (1.28) (1.43)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR............... $ 19.07 $ 19.21 $ 18.64 $ 19.78 $ 19.51 $ 20.33
======== ======== ======== ======== ======== ========
TOTAL RETURN (%)........................... 4.66 9.89 (.02) 6.67 2.29 12.00
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average net........ .76 .71 .67 .66 .68 .62
assets
Net investment income to average
net assets............................. 5.69 6.33 5.97 5.79 6.74 7.34
Portfolio turnover....................... 311.51 256.72 182.65 220.77 312.05 159.20
Net assets, end of year ($000 omitted)... 163,197 181,881 195,007 225,672 292,909 293,603
</TABLE>

<TABLE>
<CAPTION>
1990 1989 1988 1987
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......... $ 19.37 $ 19.14 $ 19.21 $ 20.06
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... 1.52 1.66 1.55 1.48
Net realized and unrealized gain
(loss) on investments................... .13 .30 (.10) (.67)
-------- -------- -------- --------
Total From Investment................... 1.65 1.96 1.45 .81
Operations............................. -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income..................... (1.51) (1.73) (1.52) (1.59)
Tax Return of capital..................... -- -- -- --
-------- -------- -------- --------
Total Distributions..................... (1.51) (1.73) (1.52) (1.66)
-------- -------- -------- --------
NET ASSET VALUE, END OF YEAR................ $ 19.51 $ 19.37 $ 19.14 $ 19.21
======== ======== ======== ========
TOTAL RETURN (%)............................ 8.92 10.64 7.77 4.27
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses to average
net assets............................... .62 .61 .59 .58
Net investment income to average
net assets.............................. 7.88 8.41 7.97 7.75
Portfolio turnover........................ 181.66 331.12 238.69 190.36
Net assets, end of year ($000 omitted).... 240,887 214,745 234,095 251,702
</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.

-49-
<PAGE>

FINANCIAL HIGHLIGHTS OF THE MULTISTRATEGY BOND 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.

MULTISTRATEGY BOND FUND

<TABLE>
<CAPTION>
1996 1995 1994 1993++
--------- --------- --------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR........ $ 10.25 $ 9.29 $ 10.31 $ 10.00
-------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... .61 .65 .58 .46
Net realized and unrealized gain
(loss) on investments.................. (.12) .97 (1.03) .40
-------- -------- -------- -------
Total From Investment Operations...... .49 1.62 (.45) .86
-------- -------- -------- -------
Less Distributions:
Net investment income................... (.61) (.66) (.57) (.46)
In excess of net investment income...... (.01) -- -- --
Net realized gain on investments........ (.01) -- -- (.08)
In excess of net realized gain on
investments............................ -- -- -- (.01)
-------- -------- -------- -------
Total Distributions................... (.63) (.66) (.57) (.55)
-------- -------- -------- -------
NET ASSET VALUE, END OF YEAR.............. $ 10.11 $ 10.25 $ 9.29 $ 10.31
======== ======== ======== =======
TOTAL RETURN (%)(A)....................... 4.97 17.92 (4.35) 8.74
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
net assets (b)......................... .81 .85 .85 .85
Operating expenses, gross, to average
net assets (b)......................... .89 .89 .90 1.20
Net investment income to average net
assets (b)............................. 6.19 6.61 6.26 5.60
Portfolio turnover (b).................. 145.38 142.26 136.39 188.95
Net assets, end of year ($000 omitted).. 305,428 218,765 173,035 98,374
Per share amount of fees waived
($ omitted)............................ .0055 -- -- .0002
Per share amount of fees reimbursed
($ omitted)............................ .0005 .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.

-50-