RUSSELL FRANK INVESTMENT CO, 485APOS, 2000-09-01

RUSSELL FRANK INVESTMENT CO
485APOS, 2000-09-01

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<PAGE>

Filed Pursuant to Rule 485(a)
Registration No. 2-71299
811-3153

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A
---------

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-----
Pre-Effective Amendment No.
---- -----
Post-Effective Amendment No. 47 X
---- -----

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-----
Amendment No. 47 X
---- -----

FRANK RUSSELL INVESTMENT COMPANY
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

909 A Street, Tacoma, Washington 98402
------------------------------------ --------
(Address of Principal Executive Office) (ZIP Code)

Registrant's Telephone Number, including area code: 253/627-7001

<TABLE>
<S> <C>
Gregory J. Lyons, Associate General Counsel Deborah R. Gatzek, Esq.
Frank Russell Investment Company Stradley, Ronon, Stevens & Young
909 A Street 1840 Gateway Drive, 2nd Floor
Tacoma, Washington 98402 San Mateo, CA 94404
253-596-2406 650-377-1601
</TABLE>

________________________________________________________________________________
(Name and Address of Agent for Service)

Approximate date of commencement of proposed public offering: As soon as
practical after the effective date of the Registration Statement.

It is proposed that this filing will become effective (check appropriate
box)

( ) immediately upon filing pursuant to paragraph (b)
( ) on December 1, 1999 pursuant to paragraph (b)
(X) 60 days after filing pursuant to paragraph (a)(1)
( ) on (date) pursuant to paragraph (a)(1)
( ) 75 days after filing pursuant to paragraph (a)(2)
( ) on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
( ) this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY

Russell Funds

PROSPECTUS

CLASS E SHARES:

TAX-MANAGED LARGE CAP FUND
(formerly Equity T Fund)
TAX-MANAGED SMALL CAP FUND

__________________, 2000
909 A STREET, TACOMA, WA 98402 . 800-787-7354 . 253-627-7001

As with all mutual funds, the Securities and Exchange Commission has neither
determined that the information in this Prospectus is accurate or complete, nor
approved or disapproved of these securities. It is a criminal offense to state
otherwise.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S> <C>
Risk/Return Summary
Investment Objective, Principal Investment Strategies and Principal Risks.................................. 1
Performance................................................................................................ 2
Fees and Expenses.......................................................................................... 3
Summary Comparison of the Funds................................................................................. 4
Investment Objective and Principal Investment Strategies........................................................ 5
Risks........................................................................................................... 9
Management of the Funds......................................................................................... 11
The Money Managers.............................................................................................. 12
Dividends and Distributions..................................................................................... 12
Taxes........................................................................................................... 13
How Net Asset Value Is Determined............................................................................... 14
Distribution and Shareholder Servicing Arrangements............................................................. 14
How to Purchase Shares.......................................................................................... 15
Exchange Privilege.............................................................................................. 16
How to Redeem Shares............................................................................................ 18
Payment of Redemption Proceeds.................................................................................. 18
Written Instructions............................................................................................ 18
Account Policies................................................................................................ 19
Financial Highlights............................................................................................ 21
Money Manager Information....................................................................................... 24
</TABLE>

<PAGE>

RISK/RETURN SUMMARY

Investment Objective, Principal Investment Strategies and Principal Risks

TAX-MANAGED LARGE CAP FUND
--------------------------
(formerly Equity T Fund)

Investment To provide capital growth on an after-tax basis by investing
Objective principally in equity securities.

Principal The Tax-Managed Large Cap Fund invests primarily in equity
Investment securities of large capitalization US companies, although the
Strategies Fund may invest a limited amount in non-US firms from time to
time. The Fund generally pursues a market-oriented style of
security selection which incorporates both a growth style and
a value style. The Fund seeks to realize capital growth while
minimizing shareholder tax consequences arising from the
Fund's portfolio management activities. The Fund attempts to
do this through the realization of returns as capital gains
and not as investment income under US tax laws. The Fund also
attempts to minimize its realization of capital gains and
offset any such realization of capital gains with capital
losses. The Fund intends to be fully invested at all times.

Principal An investment in the Tax-Managed Large Cap Fund, like any
Risks investment, has risks. The value of the Fund fluctuates
and you could lose money. The principal risks of investing in
the Fund are those associated with tax-sensitive management,
investing in equity securities, securities lending and
exposing liquidity reserves to equity markets. Please refer to
the "Risks" section later in this Prospectus for further
details.

TAX-MANAGED SMALL CAP FUND
--------------------------

Investment To provide capital growth on an after-tax basis by investing
Objective principally in equity securities of small capitalization
companies.

Principal The Tax-Managed Small Cap Fund invests primarily in equity
Investment securities of US companies, although the Fund may invest a
Strategies limited amount in non-US firms from time to time. The Fund
generally pursues a market-oriented style of security
selection which incorporates both a growth style and a value
style. The Fund seeks to realize capital growth while
minimizing shareholder tax consequences arising from the
Fund's portfolio management activities. The Fund attempts to
do this through the realization of returns as capital gains
and not as investment income under US tax laws. The Fund also
attempts to minimize its realization of capital gains and
offset any such realization of capital gains with capital
losses. The Fund intends to be fully invested at all times.

Principal An investment in the Tax-Managed Small Cap Fund, like any
Risks investment, has risks. The value of the Fund fluctuates
and you could lose money. The principal risks of investing in
the Fund are those associated with tax-sensitive management,
investing in equity securities, investing in securities of
small capitalization companies, securities lending and
exposing liquidity reserves to equity markets. Please refer to
the "Risks" section later in this Prospectus for further
details.

1
<PAGE>

Performance

The following bar charts illustrate the risks of investing in the Funds by
showing how the performance of each Fund's Class S Shares varies from year to
year over a 10-year period (or, if a Fund has not been in operation for 10
years, since the beginning of such Fund's operations). The highest and lowest
quarterly returns during the period shown in the bar charts for the Funds' Class
S Shares are set forth below the bar charts.

No Class E Shares were issued during the periods shown. Class E Shares and
Class S Shares will have substantially similar annual returns because the Shares
of each class are invested in the same portfolio of securities. Annual returns
for each class will differ only to the extent that the Class E Shares and Class
S Shares do not have the same expenses. The expenses for Class E Shares are
generally expected to be higher than the expenses for Class S Shares.

The tables accompanying the bar charts further illustrate the risks of
investing in the Funds by showing how each Fund's average annual returns for 1,
5 and 10 years (or, if a Fund has not been in operation for 10 years, since the
beginning of operations of such Fund) compare with the returns of certain
indexes that measure broad market performance.

Past performance is no indication of future results.

Tax-Managed Large Cap Fund
Annual Total Returns*
(for the years ended December 31)
Class S

[PERFORMANCE GRAPH APPEARS HERE]

MEASUREMENT PERIOD
(FISCAL YEAR ENDED)

1997 31.73%
1998 32.08%
1999 16.57%

* Year to date return as of June 30, 2000: (1.30)%

Best Quarter: 23.71% (4Q/98)
Worst Quarter: (10.12)% (3Q/98)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Average annual total returns Since
for the periods ended December 31, 1999 1 Year Inception*
--------------------------------------- ------ ----------
<S> <C> <C>
Tax-Managed Large Cap Fund Class S........................... 16.57% 26.87%
S&P 500 Composite Stock Price Index.......................... 21.14 27.70
--------------------------------------------------------------------------------------
</TABLE>
_____________________________
* The Tax-Managed Large Cap Fund commenced operations on October 7, 1996.

2
<PAGE>

Tax-Managed Small Cap Fund

Because the Tax-Managed Small Cap Fund had not been in operation for a full
calendar year when this Prospectus was printed, its performance history and
average annual returns are not included. Performance history and average annual
returns will be available for the Tax-Managed Small Cap Fund after the Fund has
been in operation for one calendar year.

Fees And Expenses

The following tables describe the fees and expenses that you may pay if you
buy and hold Shares of the Funds.

Shareholder Fees
(fees paid directly from your investment)

<TABLE>
<CAPTION>
Maximum Sales
Maximum Sales Charge (Load)
Charge (Load) Imposed on Maximum
Imposed on Reinvested Deferred Sales Redemption Exchange
Purchases Dividends Charge (Load) Fees Fees
--------- --------- ------------- ---- ----
<S> <C> <C> <C> <C> <C>
All Funds, Class E............... None None None None None
</TABLE>

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
(% of net assets)

<TABLE>
<CAPTION>
Other Expenses
(including Total Gross Total Net
Administrative Fees Annual Fund Annual Fund
and Shareholder Operating Fee Waivers and Operating
Advisory Fee* Servicing Fees)** Expense# Reimbursements Expenses
------------- ------------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
Class E Shares
Tax-Managed Large Cap.......... 0.70% 0.40% 1.10% 0.00% 1.10%
Tax-Managed Small Cap+......... 0.98% 0.58% 1.56% (0.06)% 1.50%
</TABLE>
______________________

* Each Fund may also pay, in addition to the fee set forth above, a fee which
compensates the Funds' advisor, Frank Russell Investment Management Company
(FRIMCo) for managing collateral which the Funds have received in
securities lending and certain other portfolio transactions which are not
treated as net assets of that Fund ("additional assets") in determining the
Fund's net asset value per share. The additional fee payable to FRIMCo will
equal an amount of up to 0.07% of each Fund's additional assets on an
annualized basis.

** Annual operating expenses for the Tax-Managed Small Cap Fund are based on
average net assets expected to be invested during the Fund's first 12
months of operation. During the course of that period, expenses may be more
or less than the amount shown. "Other Expenses" for Class E Shares include
a shareholder servicing fee of 0.25% of average daily net assets of the
Funds' Class E Shares.

3
<PAGE>

# If you purchase any class of Shares of a Fund through a financial
intermediary, such as a bank or an investment adviser, you may also pay
additional fees to the intermediary for services provided by the
intermediary. You should contact your financial intermediary for
information concerning what additional fees, if any, will be charged.

+ FRIMCo has contractually agreed to waive, at least until October 31, 2001
up to the full amount of its 1.03% combined advisory and administrative
fees for the Tax-Managed Small Cap Fund, and to reimburse the Fund to the
extent that Fund-level expenses exceed 1.25% of the average daily net
assets of that Fund on an annual basis.

Example

This example is intended to help you compare the cost of investing in each
Fund with the cost of investing in other mutual funds.

The example assumes that you invest $10,000 in a Fund for the time periods
indicated, and then redeem all of your Shares at the end of the period. The
example also assumes your investment has a 5% return each year and that
operating expenses remain the same.

Although your actual costs may be higher or lower, under these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class E:
Tax-Managed Large Cap Fund...................... $112 $350 $607 $1,341
Tax-Managed Small Cap Fund...................... 153 487 845 1,852
</TABLE>

SUMMARY COMPARISON OF THE FUNDS

<TABLE>
<CAPTION>
Fund Anticipated Maximum Focus
---- Equity Debt -----
Investments Investments
----------- -----------
<S> <C> <C> <C>
Tax-Managed Large Cap Fund................. 65-100% 35% Capital growth
Tax-Managed Small Cap Fund................. 65-100% 35% Capital growth
</TABLE>

4
<PAGE>

INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES

TAX-MANAGED LARGE CAP FUND (formerly Equity T Fund)
---------------------------------------------------

Investment To provide capital growth on an after-tax basis by investing
Objective principally in equity securities.

Principal The Tax-Managed Large Cap Fund invests primarily in equity
Investment securities of large capitalization US companies, as
Strategies represented by the S&P 500(R) market index, although the Fund
may invest a limited amount in non-US firms from time to time.

The Fund generally pursues a market-oriented style of security
selection, which incorporates both a growth style and a value
style, based on quantitative investment models which are
mathematical formulas based on statistical analyses. This
style emphasizes investments in large capitalization companies
that, on a long-term basis, appear to be undervalued relative
to their growth prospects, and may include both growth and
value securities. Although it is not an index fund, under
normal market conditions, the Tax-Managed Large Cap Fund will
invest at least 65 percent of the value of its total assets in
securities that are included in the S&P 500(R) market index.

The Fund seeks to realize capital growth while minimizing
shareholder tax consequences arising from the Fund's portfolio
management activities. In its attention to tax consequences of
its investment decisions, the Fund differs from most equity
mutual funds, which are managed to maximize pre-tax total
return without regard to whether their portfolio management
activities result in taxable distributions to shareholders.

The Fund is designed for long-term investors who seek to
minimize the impact of taxes on their investment returns. The
Fund is not designed for short-term investors or for tax-
deferred investment vehicles such as IRAs and 401(k) plans.

The Fund intends to minimize its taxable distributions to
shareholders in two ways:

. First, the Fund strives to realize its returns as long-
term capital gains, and not as investment income, under US
tax laws. To do so, the Fund typically buys stocks with
the intention of holding them long enough to qualify for
capital gain tax treatment.

. Second, the Fund attempts to minimize its realization of
capital gains and to offset any such realization with
capital losses. To do so, when the Fund sells shares of an
appreciated portfolio security, it seeks to minimize the
resulting capital gains by first selling the shares for
which the Fund paid the highest price. Further, the Fund
attempts to offset those capital gains with matching
capital losses by simultaneously selling shares of
depreciated portfolio securities.

If large shareholder redemptions occur unexpectedly, the Fund
could be required to sell portfolio securities resulting in
its realization of net capital gains. This could temporarily
reduce the Fund's tax efficiency. Also, as the Fund matures,
it may hold individual securities that have appreciated so
significantly that it would be difficult for the Fund to sell
them without realizing net capital gains.

5
<PAGE>

The Fund selects and holds portfolio securities based on its
assessment of their potential for long-term total returns. The
Fund uses a dividend discount model to gauge securities'
anticipated returns relative to their industry peers. This
model forecasts the expected future dividends of individual
securities and calculates the expected return at the current
share price. The Fund identifies securities that exhibit
superior total return prospects. From among those securities,
using a quantitative after-tax model, the Fund chooses stocks
from a variety of economic sectors and industries, generally
in the proportions that those sectors and industries are
represented in the S&P 500 Index.

When the Fund's shares are redeemed, the Fund could be
required to sell portfolio securities resulting in its
realization of net capital gains, impacting all shareholders.
The Fund believes that multiple purchases and redemptions of
Fund shares by individual shareholders could adversely affect
the Fund's strategy of tax-efficiency and could reduce its
ability to contain costs. The Fund further believes that
short-term investments in the Fund are inconsistent with its
long-term strategy. For this reason, the Fund will apply its
general right to refuse any purchases by rejecting purchase
orders from investors whose patterns of purchases and
redemptions in the Fund is inconsistent with the Fund's
strategy.

The Fund intends to be fully invested at all times. Although
the Fund, like any mutual fund, maintains liquidity reserves
(i.e., cash awaiting investment or held to meet redemption
requests), the Fund exposes these reserves to the performance
of appropriate equity markets by investing in stock index
futures contracts. This causes the Fund to perform generally
as though its cash reserves were actually invested in those
markets. The Fund may also invest its liquidity reserves in
one or more FRIC money market funds.

Additionally, the Fund may lend up to one-third of its
portfolio securities to earn income. These loans may be
terminated at any time. The Fund will receive either cash or
US government debt obligations as collateral.

From time to time, the Fund may take temporary defensive
positions that may be inconsistent with its principal
investment policies in an attempt to respond to adverse
market, economic, political or other conditions. If this
occurs, the Fund may not be able to achieve its investment
objective during such times.

TAX-MANAGED SMALL CAP FUND
--------------------------

Investment To provide capital growth on an after-tax basis by investing
Objective principally in equity securities of small capitalization
companies.

Principal The Tax-Managed Small Cap Fund invests primarily in equity
Investment securities of US companies, although the Fund may invest a
Strategies limited amount in non-US firms from time to time.

The Fund generally pursues a market-oriented style of security
selection, which incorporates both a growth style and a value
style, based on quantitative investment models which are
mathematical formulas based on statistical analyses. This
style emphasizes investments in small capitalization companies
that, on a long-term basis, appear to be undervalued relative
to their growth prospects, and may include both growth and
value securities. Under normal market conditions, the Tax-
Managed Small Cap Fund will invest at least 65 percent of its
total assets in securities that are not included in the S&P
500 market index.

6
<PAGE>

The Fund intends to minimize its taxable distributions to
shareholders in two ways:

. First, the Fund strives to realize its returns as long-term
capital gains, and not as investment income, under US tax
laws. To do so, the Fund typically buys stocks with the
intention of holding them long enough to qualify for
capital gain tax treatment.

The Fund selects and holds portfolio securities based on its
assessment of their potential for long-term total returns.

7
<PAGE>

8
<PAGE>

RISKS

An investment in the Funds, like any investment, has risks. The value of
each Fund fluctuates, and you could lose money. The following table describes
principal types of risks that the Funds are subject to and lists next to each
description those Funds most likely to be affected by the risk. Other Funds that
are not listed may hold portfolio investments that are subject to one or more of
the risks, but will not do so in a way that is expected to principally affect
the performance of the Fund as a whole. Please refer to the Funds' Statement of
Additional Information for a discussion of risks associated with types of
securities held by the Funds and the investment practices employed by the
individual Funds.

<TABLE>
<CAPTION>
Risk Associated With: Description Relevant Fund
--------------------- ----------- -------------
<S> <C> <C>
Tax-Sensitive Management A Fund's tax-managed equity investment Tax-Managed Large Cap
strategy may not provide as high a Tax-Managed Small Cap
return before consideration of federal
income tax consequences as other funds.
A tax-sensitive investment strategy
involves active management and a Fund
may realize capital gains.

Equity securities The value of equity securities will Tax-Managed Large Cap
rise and fall in response to the Tax-Managed Small Cap
activities of the company that issued
the stock, general market conditions
and/or economic conditions.

. Value Stocks Investments in value stocks are subject Tax-Managed Large Cap
to risks that (i) their intrinsic Tax-Managed Small Cap
values may never be realized by the
market or (ii) such stock may turn out
not to have been undervalued.

. Growth Stocks Growth company stocks may provide Tax-Managed Large Cap
minimal dividends which could otherwise Tax-Managed Small Cap
cushion stock prices in a market
decline. The value of growth company
stocks may rise and fall significantly
based, in part, on investors'
perceptions of the company, rather than
on fundamental analysis of the stocks.

. Market-Oriented Market-oriented investments are Tax-Managed Large Cap
Investments generally subject to the risks Tax-Managed Small Cap
associated with growth and value stocks.
</TABLE>

9
<PAGE>

<TABLE>
<S> <C> <C>
. Securities of Small Investments in smaller companies may Tax-Managed Small Cap
Capitalization Companies involve greater risks because these
companies generally have a limited
track record. Smaller companies often
have narrower markets and more limited
managerial and financial resources than
larger, more established companies. As
a result, their performance can be more
volatile, which may increase the
volatility of a Fund's portfolio.

Exposing Liquidity By exposing its liquidity reserves to Tax-Managed Large Cap
Reserves to Equity the equity market, principally by use Tax-Managed Small Cap
Markets of equity futures, a Fund's performance
tends to correlate more closely to the
performance of the market as a whole.
Although this increases a Fund's
performance if equity markets rise, it
reduces a Fund's performance if equity
markets decline.

Securities Lending If a borrower of a Fund's securities Tax-Managed Large Cap
fails financially, the Fund's recovery Tax-Managed Small Cap
of the loaned securities may be delayed
or the Fund may lose its rights to the
collateral which could result in a loss
to a Fund.
</TABLE>

An investment in any of the Funds is not a bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

10
<PAGE>

MANAGEMENT OF THE FUNDS

The Funds' investment adviser is FRIMCo, 909 A Street, Tacoma, Washington
98402. FRIMCo pioneered the "multi-style, multi-manager" investment method in
mutual funds and, at June 30, 2000, managed over $18 billion in more than 30
mutual fund portfolios. FRIMCo was established in 1982 to serve as the
investment management arm of Russell.

Russell, which acts as consultant to the Funds, was founded in 1936 and has
been providing comprehensive asset management consulting services for over 30
years to institutional investors, principally large corporate employee benefit
plans. Russell provides the Funds and FRIMCo with the asset management
consulting services that it provides to its other consulting clients. The Funds
do not compensate Russell for these services. Russell and its affiliates have
offices around the world, in Tacoma, New York, Toronto, London, Paris, Sydney,
Auckland, Singapore and Tokyo.

Russell is a subsidiary of The Northwestern Mutual Life Insurance Company.
Founded in 1857, Northwestern Mutual is a mutual life insurance corporation
headquartered in Milwaukee, Wisconsin. It leads the US in both individual life
insurance sold annually and individual life insurance in force.

FRIMCo recommends money managers to the Funds, allocates Fund assets among
them, oversees them, and evaluates their results. FRIMCo also oversees the
management of the Funds' liquidity reserves. The Funds' money managers select
the individual portfolio securities for the assets assigned to them.

FRIMCo's officers and employees who oversee the money managers are:

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

. Jean Carter, who has been Director of Global Equities since January
2000. From 1994 to 1999, Ms. Carter was a Portfolio Manager of FRIMCo.

. James M. Imhof, Director of FRIMCo's Portfolio Trading, manages the
Funds' liquidity portfolios on a day to day basis and has been
responsible for ongoing analysis and monitoring of the money managers
since 1989.

. Eric W. Ogard, who has been a Portfolio Manager of FRIMCo since March
2000. Mr. Ogard was a Research Analyst for FRIMCo from 1995 to 1997 and
a Senior Research Analyst for FRIMCo from 1997 to 2000. Mr. Ogard has,
jointly with Mr. Trittin, primary responsibility for the management of
the Tax-Managed Large Cap and Tax-Managed Small Cap 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 Russell. Mr. Trittin has, jointly with
Mr. Ogard, primary responsibility for management of the Tax-Managed
Large Cap and Tax-Managed Small Cap Funds.

The aggregate annual rate of advisory and administrative fees, payable to
FRIMCo monthly on a pro rata basis, are the following percentages of each Fund's
average daily net assets: Tax-Managed Large Cap Fund, 0.75% and Tax-Managed
Small Cap Fund, 1.03%. Of these aggregate amounts 0.05% is attributable to
administrative services. FRIMCo has contractually agreed to waive, at least
until October 31, 2001, a portion of its 1.03% combined advisory and
administrative fees for the Tax-Managed Small Cap Fund, up to the full amount of
those fees for Fund-level expenses that exceed 1.25% of the average daily net
assets of that Fund on an annual basis. Additionally, FRIMCo has agreed to
reimburse the Tax-Managed Small Cap Fund, at least until October 31, 2001, for
all remaining Fund-level expenses that exceed 1.25% of the average daily net
assets of the Tax-Managed Small Cap Fund on an annual basis. Each Fund may also
pay, in addition to the aggregate fees set forth above, a fee which compensates
FRIMCo for managing collateral which the Funds have received in securities
lending and certain other portfolio transactions which are not treated as net

11
<PAGE>

assets of that Fund ("additional assets") in determining the Fund's net asset
value per share. The additional fee payable to FRIMCo will equal an amount of up
to 0.07% of each Fund's additional assets on an annualized basis.

The Funds conduct their business through a number of service providers, who
act on behalf of the Funds. FRIMCo, the Funds' administrator and investment
adviser, performs the Funds' day to day corporate management and also evaluates
and oversees the Funds' money managers. Each of the Funds' money managers makes
all investment decisions for the portion of the Fund assigned to it by FRIMCo.
The Funds' custodian, State Street Bank, maintains custody of all of the Funds'
assets. FRIMCo, in its capacity as the Funds' transfer agent, is responsible for
maintaining the Funds' shareholder records and carrying out shareholder
transactions. When a Fund acts in one of these areas, it does so through the
service provider responsible for that area.

THE MONEY MANAGERS

Each Fund allocates its assets among the money managers listed under "Money
Manager Information" at the end of this Prospectus. FRIMCo, as the Funds'
advisor, may change the allocation of a Fund's assets among money managers at
any time. The Funds received an exemptive order from the Securities and Exchange
Commission (SEC) that permits a Fund to engage or terminate a money manager at
any time, subject to the approval by the Fund's Board of Trustees (Board),
without a shareholder vote. A Fund notifies its shareholders within 60 days of
when a money manager begins providing services. The Funds select money managers
based primarily upon the research and recommendations of FRIMCo and Russell.
FRIMCo and Russell evaluate 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 any Fund's selection or termination of a money manager.

Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund. At the same time, however, each money
manager must operate within the Fund's investment objectives, restrictions and
policies. Additionally, each manager must operate within more specific
constraints developed from time to time by FRIMCo. FRIMCo develops such
constraints for each manager based on FRIMCo's assessment of the manager's
expertise and investment style. By assigning more specific constraints to each
money manager, FRIMCo intends to capitalize on the strengths of each money
manager and to combine their investment activities in a complementary fashion.
Although the money managers' activities are subject to general oversight by the
Board and the Funds' officers, neither the Board, the officers, FRIMCo nor
Russell evaluate the investment merits of the money managers' individual
security selections.

J.P. Morgan Investment Management, Inc. ("Morgan") manages the Tax-Managed
Large Cap Fund. Robin Chance is the individual responsible for the management of
the Fund. Ms. Chance, Vice President and member of the Structured Equity Group,
has responsibility for tax aware structured equity strategies. Ms. Chance joined
Morgan in 1987. Ms. Chance is a CFA and a graduate of the University of
Pennsylvania's Management and Technology Program, also earning an MBA from New
York University's Stern School of Business.

Geewax, Terker & Company manages the Tax-Managed Small Cap Fund. John
Julius Geewax is the portfolio manager responsible for the management of the
Fund. Mr. Geewax is a graduate of the University of Pennsylvania and has earned
a J.D. from the University of Pennsylvania as well as an MBA and a PhD from the
Wharton School of the University of Pennsylvania. Mr. Geewax co-founded the
firm in 1982. He is currently a general partner and portfolio manager
responsible for research and development and trading oversight for all of the
firm's investment services.

DIVIDENDS AND DISTRIBUTIONS

Income Dividends

Each Fund distributes substantially all of its net investment income and
net capital gains to shareholders each year. The amount and frequency of
distributions are not guaranteed, all distributions are at the Board's
discretion. Currently, the Board intends to declare dividends from net
investment income (if any), according to the following schedule:

12
<PAGE>

Declared Payable Funds
-------- ------- -----

Annually.............. Mid-December Tax Managed Large Cap and
Tax-Managed Small Cap Funds

Capital Gains Distributions

The Board intends to declare capital gain distributions (both short-term
and long-term) once a year in mid-December to reflect any net short-term and net
long-term capital gains realized by a Fund as of October 31 of the current
fiscal year. A Fund may be required to make an additional distribution if
necessary, in any year for operational or other reasons. Distributions that are
declared in October, November or December to shareholders of record in such
months, and paid in January of the following year, will be treated for tax
purposes as if received on December 31 of the year in which they were declared.

Buying a Dividend

If you purchase shares just before a distribution, you will pay the full
price for the Shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." Unless your account is
a tax-deferred account, dividends paid to you would be included in your gross
income for tax purposes even though you may not have participated in the
increase of the net asset value of a Fund, regardless of whether you reinvested
the dividends. To avoid "buying a dividend," check a Fund's distribution dates
before you invest.

Automatic Reinvestment

Your dividends and other distributions are automatically reinvested at the
closing net asset value on the record date, in additional shares of the
appropriate Fund, unless you elect to have the dividends or distributions paid
in cash or invested in another Fund. You may change your election by delivering
written notice no later than ten days prior to the payment date to the Funds at
Frank Russell Investment Company c/o Boston Financial Data Services, 2 Heritage
Drive, N. Quincy, MA 02171.

TAXES

In general, distributions from a Fund are taxable to you as either ordinary
income or capital gains. This is true whether you reinvest your distributions in
additional shares of the Fund or receive them in cash. Any long-term capital
gains distributed by a Fund are taxable to you as long-term capital gains no
matter how long you have owned your shares. Every January, you will receive a
statement that shows the tax status of distributions you received for the
previous year. Distributions declared in December but paid in January are
taxable as if they were paid in December.

When you sell or exchange your shares of a Fund, you may have a capital
gain or loss. Any loss incurred on the 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 gains dividends received with respect to such Shares. The tax
rate on any gain from the sale or exchange of your shares depends on how long
you have held your shares.

The Funds make no representation as to the amount of variability of each
Funds' capital gain distributions which may vary as a function of several
variables including, but not limited to, prevailing dividend yield levels,
general market conditions, shareholders redemption patterns and Fund cash
equitization activity.

Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-US investors may be
subject to US withholding and estate tax. You should consult your tax
professional about federal, state, local or foreign tax consequences of holding
shares of a Fund.

13
<PAGE>

When a Fund invests in securities of certain foreign countries, the Fund
may have taxes withheld on the income received from these securities. If more
than 50% of the total fair market value of the Fund's assets is made up of
foreign securities, then the Fund may elect to pass through such taxes to
shareholders as a foreign tax credit.

If you are a corporate investor, a portion of the dividends from net
investment income paid by the Tax-Managed Large Cap Fund or Tax-Managed Small
Cap Fund 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 each Fund from domestic (US)
sources. Certain holding period and debt financing restrictions may apply to
corporate investors seeking to claim the deduction. You should consult your tax
professional with respect to the applicability of these rules.

Although the Tax-Managed Large Cap and the Tax-Managed Small Cap Funds are
managed to minimize the amount of capital gains realized during a particular
year, the realization of capital gains is not entirely within either Fund's or
its money manager's control. Shareholder purchase and redemption activity, as
well as the Fund's performance, will impact the amount of capital gains
realized. Capital gains distributions by the Tax-Managed Large Cap Fund and Tax-
Managed Small Cap Fund may vary considerably from year to year.

By law, a Fund must withhold 31% of your distributions and proceeds if you
do not provide your correct taxpayer identification number, or certify that such
number is correct, or if the IRS instructs the Fund to do so.

The tax discussion set forth above is included for general information
only. You should consult your own tax adviser concerning the federal, state,
local or foreign tax consequences of an investment in 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 Funds'
Statement of Additional Information.

HOW NET ASSET VALUE IS DETERMINED

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 redemption orders
are tendered. For all Funds, a business day is one on which the New York Stock
Exchange (NYSE) is open for trading. The NYSE is not open on national holidays
or Good Friday. All Funds determine net asset value at 4:00 p.m. Eastern Time or
the close of the NYSE, whichever is earlier.

Valuation of Portfolio Securities

Securities held by the Funds are typically priced using market quotations
or pricing services when the prices are believed to be reliable, that is, when
the prices reflect the fair market value of the securities. The Funds value
securities for which market quotations are not readily available at "fair
value," as determined in good faith and in accordance with procedures
established by the Board.

Money market instruments maturing within 60 days of the valuation date that
are held by the Tax-Managed Large Cap and Tax-Managed Small Cap Funds are valued
at "amortized cost" unless the Board determines that amortized cost does not
represent fair value. Under this method, a portfolio instrument is initially
valued at cost, and thereafter a constant accretion/amortization to maturity of
any discount or premium is assumed. While amortized cost provides certainty in
valuation, it may result in periods when the value of an instrument is higher or
lower than the price a Fund would receive if it sold the instrument.

DISTRIBUTION AND SHAREHOLDER
SERVICING ARRANGEMENTS

The Funds offer multiple classes of Shares: Class C Shares, Class E Shares
and Class S Shares.

14
<PAGE>

Class C Shares participate in the Funds' Rule 12b-1 distribution plan
and in the Funds' shareholder servicing plan. Under the distribution plan,
the Funds' Class C Shares pay distribution fees of 0.75% annually for the
sale and distribution of Class C Shares. Under the shareholder servicing
plan, the Funds' Class C Shares pay shareholder servicing fees of 0.25% on
an annualized basis for services provided to Class C shareholders. Because
both of these fees are paid out of the Funds' Class C Share assets on an
ongoing basis, over time these fees will increase the cost of your
investment in Class C Shares of the Funds, and the distribution fee may
cost an investor more than paying other types of sales charges.

Class E Shares participate in the Funds' shareholder servicing plan.
Under the shareholder servicing plan, the Funds' Class E Shares pay
shareholder servicing fees of 0.25% on an annualized basis for services
provided to Class E shareholders. The shareholder servicing fees are paid
out of the Funds' Class E share assets on an ongoing basis, and over time
will increase the cost of your investment in the Funds.

Class S Shares participate in neither the Funds' distribution plan nor
the Funds' shareholder servicing plan.

HOW TO PURCHASE SHARES

Funds are generally available only through a select network of qualified
Financial Intermediaries. If you are not currently working with one of these
Financial Intermediaries, please call Russell Investor Services at (800) RUSSEL4
(800-787-7354) for assistance in contacting an investment professional near you.

For the Class E Shares, there is a $2,500 required minimum initial
investment for each account in each Fund. Each Fund reserves the right to change
the categories of investors eligible to purchase its shares or the required
minimum investment amount. You may be eligible to purchase Fund shares if you do
not meet the required initial minimum investment. You should consult your
Financial Intermediary for details, which are summarized in the Funds' statement
of additional information.

Financial Intermediaries may charge their customers a fee for providing
investment-related services. Financial Intermediaries may receive shareholder
servicing compensation from the Funds' Distributor with respect to Class E
Shares of the Funds.

Paying for Shares

You may purchase Shares of the Funds through a Financial Intermediary on
any business day the Funds are open. Purchase orders are processed at the next
net asset value per share calculated after the Funds' receive your order in
proper form (defined in the "Written Instructions" section), and accept the
order.

All purchases must be made in US dollars. Checks and other negotiable bank
drafts must be drawn on US banks and made payable to "Frank Russell Investment
Company." The Funds reserve the right to reject any purchase order for any
reason including, but not limited to, receiving a check which does not clear the
bank or a payment which does not arrive in proper form by settlement date. You
will be responsible for any resulting loss to the Funds. An overdraft charge may
also be applied. Cash, third party checks and checks drawn on credit card
accounts generally will not be accepted. However, exceptions may be made by
prior special arrangement with certain Financial Intermediaries.

Offering Dates and Times

Orders must be received by the Funds prior to 4:00 p.m. Eastern Time or the
close of the NYSE, whichever is earlier. Purchases can be made on any day when
Fund shares are offered. Because Financial Intermediaries' processing time may
vary, please ask your Financial Intermediary representative when your account
will be credited.

Order and Payment Procedures

15
<PAGE>

Generally, you must place purchase orders for Shares through a Financial
Intermediary. You may pay for your purchase by mail or electronic funds
transfer. Initial purchases require a completed and signed Application for each
new account regardless of the investment method. Specific payment arrangements
should be made with your Financial Intermediary.

By Mail

For new accounts, please mail the completed Application to your Financial
Intermediary. Payment for orders may be made by check or other negotiable bank
draft and sent to the Funds' Transfer Agent. Certified checks are not necessary,
but checks are accepted subject to collection at full face value in US funds.
Third party checks will not be accepted. Checks should be made payable to "Frank
Russell Investment Company."

By Federal Funds Wire

You can pay for orders by wiring federal funds to the Funds' Custodian,
State Street Bank and Trust Company. All wires must include your account
registration and account number for identification. Inability to properly
identify a wire transfer may prevent or delay timely settlement of your
purchase.

By Automated Clearing House ("ACH")

You can make initial or subsequent investments through ACH to the Funds'
Custodian, State Street Bank and Trust Company.

Automated Investment Program

You can make regular investments (minimum $50) in the Funds in an
established account on a monthly, quarterly, semiannual or annual basis by
automatic electronic funds transfer from a bank account. You must make a
separate transfer for each Fund in which you purchase Shares. You may change the
amount or stop the automatic purchase at any time. Contact your Financial
Intermediary for further information on this program and an enrollment form.

Three-Day Settlement Program

The Funds will accept orders at the next computed net asset value through
Financial Intermediaries to purchase Shares of the Funds for settlement on the
third business day following the receipt of the order. These orders are paid for
by a federal funds wire if the Financial Intermediary has enrolled in the
program and agreed in writing to indemnify the Funds against any losses
resulting from non-receipt of payment.

EXCHANGE PRIVILEGE

By Mail or Telephone

Through your Financial Intermediary, you may exchange Shares of any Fund
you own for shares of any other Fund on the basis of the 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 FRIC through
another Prospectus under certain conditions and only in states where the
exchange may be legally made. For additional information, including Prospectuses
for other Funds, contact your Financial Intermediary.

Exchanges may be made by mail or by telephone if the registration of the
two accounts is identical. Contact your Financial Intermediary for assistance in
exchanging Shares and, because Financial Intermediaries' processing time may
vary, to find out when your account will be credited or debited. To request an
exchange in writing, please follow the procedures in the "Written Instructions"
section before mailing to your Financial Intermediary.

16
<PAGE>

An exchange involves the redemption of Shares, which is treated as a sale
for income tax purposes. Thus, capital gain or loss may be realized. Please
consult your tax adviser for more information. 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) at the next net asset value per share
calculated after the Funds received the exchange request in good order.

In-Kind Exchange of Securities

FRIMCo, in its capacity as the Funds' investment advisor, may, at its
discretion, permit you to acquire Shares in exchange for securities you
currently own. Any securities exchanged must meet the investment objective,
policies and limitations of the applicable Fund, have a readily ascertainable
market value, be liquid, not be subject to restrictions on resale and have a
market value, plus any cash, equal to at least $100,000.

Shares purchased in exchange for securities generally may not be redeemed
or exchanged for 15 days following the purchase by exchange or until the
transfer has settled, whichever comes first. If you are a taxable investor, you
will generally realize a gain or loss for federal income tax purposes on the
exchange. If you are contemplating an in-kind exchange you should consult your
tax adviser.

The price at which the exchange will take place 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 way the Fund values its
assets. Any interest earned on the securities following their delivery to the
Funds and prior to the exchange will be considered in valuing the securities.
All interest, dividends, subscription or other rights attached to the securities
becomes the property of the Fund, along with the securities. Please contact your
Financial Intermediary for further information.

17
<PAGE>

HOW TO REDEEM SHARES

Shares of the Funds may be redeemed through your Financial Intermediary on
any business day the Funds are open at the next net asset value per share
calculated after the Funds' Transfer Agent receives an order in proper form
(defined in the "Written Instructions" section). Payment will ordinarily be made
within seven days after receipt of your request in proper form. Shares recently
purchased by check may not be available for redemption for 15 days following the
purchase or until the check clears, whichever occurs first, to assure payment
has been collected.

Redemption Dates and Times

Redemption requests must be placed through a Financial Intermediary and
received by the Funds prior to 4:00 p.m. Eastern Time or the close of the NYSE,
whichever is earlier. Because Financial Intermediaries' processing times may
vary, please ask your Financial Intermediary representative when your account
will be debited. Requests can be made by mail or telephone on any day when Fund
shares are offered, or through the Systematic Withdrawal Program described
below.

By Mail or Telephone

You may redeem your shares by calling or writing to your Financial
Intermediary. Written requests to sell shares are in proper form when the
instructions are signed by all registered owners, with a signature guarantee if
necessary.

Omnibus Accounts

Many brokers, employee benefit plans and bank trusts combine their client's
Fund holdings in a single omnibus account with the Funds held in the brokers',
plans', or bank trusts' own name or "street name." Therefore, if you hold Fund
shares through a brokerage account, employee benefit plan or bank trust fund,
the Funds may have records only of the omnibus account. In this case, your
broker, employee benefit plan or bank is responsible for keeping track of your
account information. This means that you may not be able to request transactions
in your Shares directly through the Funds, but can do so only through your
broker, plan administrator or bank. Ask your Financial Intermediary for
information on whether your Fund shares are held in an omnibus account.

PAYMENT OF REDEMPTION PROCEEDS

By Check

When you redeem your Shares, a check for the redemption proceeds will be
sent to the shareholder(s) of record at the address of record within seven days
after the Funds receive a redemption request in proper form.

By Wire

If you have established the electronic redemption option, your redemption
proceeds can be wired to your predesignated bank account on the next bank
business day after the Funds receive your redemption request. The Funds may
charge a fee to cover the cost of sending a wire transfer for redemptions less
than $1,000, and your bank may charge an additional fee to receive the wire.
Wire transfers can be sent to US commercial banks that are members of the
Federal Reserve System.

WRITTEN INSTRUCTIONS

Proper Form: Written instructions must be in proper form. They must include:

A description of the request

18
<PAGE>

The name of the Fund(s)

The class of shares, if applicable

The account number(s)

The amount of money or number of shares being purchased, exchanged,
transferred or redeemed

The name(s) on the account(s)

The signature(s) of all registered account owners

For exchanges, the name of the Fund you are exchanging into

Your daytime telephone number

Signature Requirements Based on Account Type

<TABLE>
<CAPTION>
Account Type Requirements for Written Requests
<S> <C>
Individual, Joint Tenants, Written instructions must be signed by each shareholder, exactly as the
Tenants in Common names appear in the account registration.

UGMA or UTMA (custodial accounts Written instructions must be signed by the custodian in his/her
for minors) capacity as it appears in the account registration.

Corporation, Association Written instructions must be signed by authorized person(s), stating
his/her capacity as indicated by the corporate resolution to act on the
account and a copy of the corporate resolution, certified within the
past 90 days, authorizing the signer to act.

Estate, Trust, Pension, Profit Written instructions must be signed by all trustees. If the name of the
Sharing Plan trustee(s) does not appear in the account registration, please provide
a copy of the trust document certified within the last 60 days.

Joint tenancy shareholders whose Written instructions must by signed by the surviving tenant(s). A
co-tenants are deceased certified copy of the death certificate must accompany the request.
</TABLE>

Signature Guarantee

The Funds reserve the right to require a signature guarantee under certain
circumstances. A signature guarantee verifies the authenticity of your
signature. You should be able to obtain a signature guarantee from a bank,
broker, credit union, savings association, clearing agency, or securities
exchange or association, but not a notary public. Call your financial
institution to see if it has the ability to guarantee a signature.

ACCOUNT POLICIES

Third Party Transactions

19
<PAGE>

If you purchase Shares as part of a program of services offered by a
Financial Intermediary, you may be required to pay additional fees. You should
contact your Financial Intermediary for information concerning what additional
fees, if any, may be charged.

Redemption In-Kind

A Fund may pay for any portion of the redemption amount in excess of
$250,000 by a distribution in-kind of securities from the Fund's portfolio,
instead of in cash. If you receive an in-kind distribution of portfolio
securities, and choose to sell them, you will incur brokerage charges and
continue to be subject to tax consequences and market risk pending any sale.

Stale Checks

For the protection of shareholders and the Funds, if a check issued for the
payment of a redemption or distribution is not cashed for more than 180 days
from issuance, it will not be honored. The Funds have adopted procedures
described in the statement of additional information regarding the treatment of
stale checks, or you may contact your Financial Intermediary for additional
information.

20
<PAGE>

FINANCIAL HIGHLIGHTS

The following financial highlights tables are intended to help you
understand the Funds' financial performance for the past 5 years (or, if a Fund
or Class has not been in operation for 5 years, since the beginning of
operations for that Fund or Class). Certain information reflects financial
results for a single Fund share throughout each year or period ended December 31
and for the four months ended April 30, 2000. The total returns in the table
represent how much your investment in a Fund would have increased (or decreased)
during each period, assuming reinvestment of all dividends and distributions.
This information, except for the four months ended April 30, 2000 data, has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Funds'
financial statements, are included in the Funds' annual reports, which are
available upon request. The Funds' semi-annual reports for the period ended
April 30, 2000 are also available upon request. The information in the following
tables represents the Financial Highlights for the Funds' Class S Shares for the
periods shown. No Class E Shares were issued during the periods shown.

<PAGE>

Tax-Managed Large Cap Fund-Class S Shares

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
2000* 1999 1998 1997 1996**
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $ 21.17 $ 18.26 $ 13.90 $ 10.61 $ 10.00
------------ ------------ ------------ ------------ ------------

Income From Operations
Net investment income (a)..................... .04 .14 .10 .08 .03
Net realized and unrealized gain (loss)....... (.44) 2.88 4.35 3.28 .61
------------ ------------ ------------ ------------ ------------

Total income from operations................ (.40) 3.02 4.45 3.36 .64
------------ ------------ ------------ ------------ ------------

Distributions
From net investment income.................... (.01) (.11) (.08) (.07) (.03)
From net realized gain........................ -- -- (.01) -- --
------------ ------------ ------------ ------------ ------------

Total distributions......................... (.01) (.11) (.09) (.07) (.03)
------------ ------------ ------------ ------------ ------------

Net Asset Value, End of Period................. $ 20.76 $ 21.17 $ 18.26 $ 13.90 $ 10.61
============ ============ ============ ============ ============

Total Return (%)(b)............................ (1.91) 16.57 32.08 31.73 6.10

Ratios/Supplemental Data:
Net Assets, end of period (in thousands)...... 625,720 566,001 305,452 109,735 19,931

Ratios to average net assets (%)(c):
Operating expenses, net..................... .86 .85 .99 1.00 1.00
Operating expenses, gross................... .86 .85 .99 1.08 2.83
Net investment income....................... .54 .71 .61 .92 1.62

Portfolio turnover rate (%)................... 9.14 48.35 50.59 39.23 8.86
</TABLE>

* For the four months ended April 30, 2000 (Unaudited).
** For the period October 7, 1996 (commencement of operations) to December 31,
1996.
(a) For the periods subsequent to December 31, 1997, average month-end shares
outstanding were used for this calculation.
(b) Periods less than one year are not annualized.
(c) The ratios for periods less than one year are annualized.

22
<PAGE>

Tax-Managed Small Cap Fund-Class S Shares

<TABLE>
<CAPTION>
2000* 1999**
---------- ----------
<S> <C> <C>
Net Asset Value, Beginning of Period.................. $ 10.73 $ 10.00
---------- ----------

Income From Operations
Net investment income (a)............................ .01 .01
Net realized and unrealized gain (loss).............. .53 .72
---------- ----------

Total income from operations....................... .54 .73
---------- ----------

Distributions
From net investment income........................... (.01) --
---------- ----------

Net Asset Value, End of Period........................ $ 11.26 $ 10.73
========== ==========

Total Return (%)(b)................................... 5.02 7.30

Ratios/Supplemental Data:
Net Assets, end of period (in thousands)............. 72,297 29,053

Ratios to average net assets (%)(c):
Operating expenses, net............................ 1.25 1.25
Operating expenses, gross.......................... 1.66 7.95
Net investment income.............................. .22 1.92

Portfolio turnover rate (%).......................... 4.01 3.33
</TABLE>

* For the four months ended April 30, 2000 (Unaudited).
** For the period December 1, 1999 (commencement of operations) to December 31,
1999.
(a) Average month-end shares outstanding were used for this calculation.
(b) Periods less than one year are not annualized.
(c) The ratios for periods less than one year are annualized.

<PAGE>

MONEY MANAGER INFORMATION

The money managers have no affiliations with the Funds or the Funds'
service providers other than their management of Fund assets. 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 Funds in FRIC, or to other clients of FRIMCo or of
Frank Russell Company, including Frank Russell Company's wholly owned
subsidiary, Frank Russell Trust Company.

Tax-Managed Large Cap Fund

J.P. Morgan Investment Management Inc., 522 Fifth Ave., 6th Floor, New
York, NY 10036.

Tax-Managed Small Cap Fund

Geewax, Terker & Company, 99 Starr Street, Phoenixville, PA 19460.

When considering an investment in the Funds, do not rely on any information
unless it is contained in this Prospectus or in the Funds' Statement of
Additional Information. The Funds have not authorized anyone to add any
information or to make any additional statements about the Funds. The Funds may
not be available in some jurisdictions or to some persons. The fact that you
have received this Prospectus should not, in itself, be treated as an offer to
sell Fund Shares to you. Changes in the affairs of the Funds or in the Funds'
money managers may occur after the date on the cover page of this Prospectus.
This Prospectus will be amended or supplemented to reflect any material changes
to the information it contains.

24
<PAGE>

For more information about the Funds, the following documents are available
without charge:

ANNUAL/SEMIANNUAL REPORTS: Additional information about the Funds' investments
is available in the Funds' annual and semiannual reports to shareholders. In
each Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Funds.

The annual report for each Fund and the SAI are incorporated into this
Prospectus by reference. You may obtain free copies of the reports and the SAI,
and may request other information, by contacting your Financial Intermediary or
the Funds at:

Frank Russell Investment Company
909 A Street
Tacoma, WA 98402
Telephone: 1-800-787-7354
Fax: 253-591-3495
Website: russell.com

You can review and copy information about the Funds (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
You can obtain information on the operation of the Public Reference Room by
calling the Commission at 1-800-SEC-0330. You can obtain copies of this
information upon paying a duplicating fee by writing to the Public Reference
Section of the Commission, Washington, D.C. 20549-6009. Reports and other
information about the Funds are also available on the Commission's Internet
website at sec.gov.

FRANK RUSSELL INVESTMENT COMPANY
Class E Shares:
Tax-Managed Large Cap Fund
Tax-Managed Small Cap Fund

Distributor: Russell Fund Distributors, Inc.
SEC File No. 811-3153
36-08-095 (11/00)

<PAGE>

FRANK RUSSELL INVESTMENT COMPANY

MONEY MARKET FUNDS

PROSPECTUS

CLASS I AND S SHARES:*

MONEY MARKET FUND
TAX FREE MONEY MARKET FUND

CLASS S SHARES:

US GOVERNMENT MONEY MARKET FUND

________________________, 2000

909 A STREET, TACOMA, WA 98402 . 800-787-7354 . 253-627-7001

* Effective _____________, 2000, the existing Class S Shares of the Money
Market Fund and Tax Free Money Market Fund were redesignated as Class I Shares,
and new Class S Shares of the Money Market Fund and Tax Free Money Market Fund
were created. All references herein to Class S are to the new Class S
established on ___________, 2000.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
Risk/Return Summary
Investment Objective, Principal Investment Strategies and Principal Risks.................................... 1
Performance.................................................................................................. 3
Fees and Expenses............................................................................................ 6
Investment Objective and Principal Investment Strategies........................................................ 8
Risks........................................................................................................... 10
Management of the Funds......................................................................................... 12
The Money Managers.............................................................................................. 12
Dividends and Distributions..................................................................................... 13
Taxes........................................................................................................... 13
How Net Asset Value Is Determined............................................................................... 14
How to Purchase Shares.......................................................................................... 14
Exchange Privilege.............................................................................................. 16
How to Redeem Shares............................................................................................ 17
Payment of Redemption Proceeds.................................................................................. 18
Written Instructions............................................................................................ 19
Account Policies................................................................................................ 20
Financial Highlights............................................................................................ 21
Money Manager Information....................................................................................... 25
</TABLE>

<PAGE>

RISK/RETURN SUMMARY

Investment Objective, Principal Investment Strategies and Principal Risks

MONEY MARKET FUND
-----------------

Investment To maximize current income to the extent consistent with the
Objective 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.

Principal The Money Market Fund invests in a portfolio of high quality
Investment money market securities maturing within 397 days or less.
Strategies The Fund principally invests in securities issued or
guaranteed by the US government or its agencies or by US and
foreign banks, as well as asset-backed securities and short-
term debt of US and foreign corporations and trusts. The
dollar-weighted average maturity of the Fund's portfolio is
90 days or less. The Money Market Fund seeks to achieve its
objective by active security selection consistent with its
daily assessment of market and credit risks.

Principal Risks An investment in the Money Market Fund, like any investment,
has risks. The principal risks of investing in the Fund are
those associated with investing in fixed-income securities,
including instruments of US and foreign banks and branches
and foreign corporations, use of repurchase agreements and
credit and liquidity enhancements. Please refer to the
"Risks" section later in this Prospectus for further
details.

US GOVERNMENT MONEY MARKET FUND
-------------------------------

Investment To provide the maximum current income that is consistent
Objective 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.

Principal The US Government Money Market Fund invests in a portfolio
Investment of high quality money market securities issued or guaranteed
Strategies by the US government or any of its agencies and
instrumentalities maturing within 397 days or less. The
dollar-weighted average maturity of the Fund's portfolio is
90 days or less. The Fund seeks to achieve its objective by
active security selection consistent with its daily
assessment of market risks.

Principal Risks An investment in the US Government Money Market Fund, like
any investment, has risks. The principal risks of investing
in the Fund are those associated with investing in fixed-
income securities and repurchase agreements. Please refer to
the "Risks" section later in this Prospectus for further
details.

TAX FREE MONEY MARKET FUND
--------------------------

Investment To provide the maximum current income exempt from federal
Objective 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.

1
<PAGE>

Principal The Tax Free Money Market Fund invests in a portfolio of
Investment high quality short-term debt securities maturing in 397 days
Strategies or less. The dollar-weighted average maturity of the Fund's
portfolio is 90 days or less. The Fund invests almost
exclusively in investment-grade municipal debt obligations
providing tax-exempt interest income.

Principal Risks An investment in the Tax Free Money Market Fund, like any
investment, has risks. The principal risks of investing in
the Fund are those associated with investing in fixed-income
securities, municipal obligations and credit and liquidity
enhancements. Please refer to the "Risks" section later in
this Prospectus for further details on these risks.

An investment in any of the Funds offered by this Prospectus is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Funds seek to preserve the value of your investment at
$1.00 per Share, it is possible to lose money by investing in any of the
Funds.

2
<PAGE>

Performance

The following bar charts illustrate the risks of investing in the Funds by
showing how the performance of the Money Market and Tax Free Money Market Funds'
Class I Shares and the US Government Money Market Fund's Class S Shares varies
from year to year over a 10-year period. The highest and lowest quarterly
returns during the period shown in the bar charts for each of the Fund's Class S
or Class I Shares, as applicable, is set forth below the bar charts.

Effective __________, 2000, the existing Class S Shares of the Money Market
Fund and Tax Free Money Market Fund ("old Class S Shares") were redesignated as
Class I Shares, and new Class S Shares of the Money Market Fund and Tax Free
Money Market Fund were created. The returns shown for the Class I Shares prior
to that date are those of the Funds' old Class S Shares. No Shares of the Class
that is currently designated Class S of the Money Market Fund or Tax Free Money
Market Fund were issued during the periods shown. Class S Shares and Class I
Shares of the Money Market and Tax Free Money Market Funds will have
substantially similar annual returns because the Shares of each class are
invested in the same portfolio of securities. Annual returns for these classes
will differ only to the extent that the Class S Shares and Class I Shares do not
have the same expenses. The expenses for Class S Shares of the Money Market and
Tax Free Money Market Funds are generally expected to be higher than the
expenses for the Class I Shares of those Funds.

The tables accompanying the bar charts further illustrate the risks of
investing in the Funds by showing each Fund's average annual returns for 1, 5
and 10 years.

Past performance is no indication of future results.

Money Market Fund Class I
Annual Total Returns*
(for the years ended December 31)

[PERFORMANCE GRAPH APPEARS HERE]

Measurement Period
(Fiscal Year Ended)
-------------------

1990 8.55%
1991 6.38%
1992 4.11%
1993 3.48%
1994 4.57%
1995 6.19%
1996 5.63%
1997 5.79%
1998 5.69%
1999 5.27%

* Year to date return as of June 30, 2000: 3.01%

Best Quarter: 2.11% (3Q/90)
Worst Quarter: 0.80% (4Q/93)

<TABLE>
<CAPTION>
Average annual total returns
for the periods ended December 31, 1999 1 Year 5 years 10 years
--------------------------------------- ------ ------- --------
<S> <C> <C> <C>
Money Market Fund Class I*.................................... 5.27% 5.70% 5.54%

Current
30-Day Yields for the year ended December 31, 1999 -------
--------------------------------------------------
Money Market Fund Class I..................................... 5.67%

7-Day Yields for the year ended December 31, 1999 Current Effective
------------------------------------------------- ------- ---------
Money Market Fund Class I..................................... 5.69% 5.85%
</TABLE>

___________

* For periods prior to April 1, 1995 performance results for the Money Market
Fund do not reflect deduction of management fees.

To obtain current yield information, please call 1-800-787-7354.

3
<PAGE>

US Government Money Market Fund Class S
Annual Total Returns*
(for the years ended December 31)

[Performance Graph Appears Here]

Measurement Period
(Fiscal Year Ended)
-------------------

1990 8.04%
1991 5.90%
1992 3.53%
1993 2.88%
1994 3.87%
1995 5.98%
1996 5.40%
1997 5.59%
1998 5.34%
1999 4.93%

* Year to date return as of June 30, 2000: 2.89%

Best Quarter: 1.98% (3Q/90)
Worst Quarter: 0.67% (4Q/93)

<TABLE>
<CAPTION>
Average annual total returns
for the periods ended December 31, 1999 1 Year 5 years 10 years
--------------------------------------- ------ ------- --------
<S> <C> <C> <C>
US Government Money Market Fund Class S...................................... 4.93% 5.44% 5.13%

Current
30-Day Yields for the year ended December 31, 1999 -------
--------------------------------------------------
US Government Money Market Fund Class S...................................... 5.35%

Current Effective
7-Day Yields for the year ended December 31, 1999 ------- ---------
-------------------------------------------------
US Government Money Market Fund Class S...................................... 5.30% 5.44%
</TABLE>

To obtain current yield information, please call 1-800-787-7354.

4
<PAGE>

Tax Free Money Market Fund Class I
Annual Total Returns*
(for the years ended December 31)

[Performance Graph Appears Here]

Measurement Period
(Fiscal Year Ended)
-------------------

1990 5.99%
1991 4.84%
1992 3.09%
1993 2.55%
1994 2.83%
1995 3.76%
1996 3.35%
1997 3.61%
1998 3.36%
1999 3.31%

* Year to date return as of June 30, 2000: 1.97%

Best Quarter: 1.50% (4Q/90)
Worst Quarter: 0.58% (1Q/94)

<TABLE>
<CAPTION>
Average annual total returns
for the periods ended December 31, 1999 1 Year 5 years 10 years
--------------------------------------- ------ ------- --------
<S> <C> <C> <C>
Tax Free Money Market Fund Class I........................................... 3.31% 3.47% 3.66%

30-Day Yields for the year ended December 31, 1999 Current
-------------------------------------------------- -------
Tax Free Money Market Fund Class I........................................... 3.70%

7-Day Yields for the year ended December 31, 1999 Current Effective
------------------------------------------------- ------- ---------
Tax Free Money Market Fund Class I........................................... 4.42% 4.52%

7-Day Tax Equivalent Yield for the year ended December 31, 1999 Current Effective
--------------------------------------------------------------- ------- ---------
Tax Free Money Market Fund................................................... 7.32% 7.48%
</TABLE>

To obtain current yield information, please call 1-800-787-7354.

5
<PAGE>

Fees and Expenses

The following tables describe the fees and expenses that you may pay if you buy
and hold shares of the Funds.

Shareholder Fees
(fees paid directly from your investment)

<TABLE>
<CAPTION>
Maximum Sales
Maximum Sales Charge (Load)
Charge (Load) Imposed on
Imposed on Reinvested Maximum Deferred
Purchases Dividends Sales Charge (Load) Redemption Fees Exchange Fees
--------- --------- ------------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Each Fund (Classes I and S) None None None None None
</TABLE>

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
(% of net assets)

<TABLE>
<CAPTION>
Other
Expenses
(including Total Gross Total Net
Administrative Annual Fund Annual Fund
Fees and Transfer Operating Fee Operating
Advisory Fee Agency Fees) Expenses* Waivers# Expenses
------------ ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Class I:
Money Market Fund................................ 0.20% 0.12% 0.32% (0.15)% 0.17%
Tax Free Money Market Fund....................... 0.20% 0.11% 0.31% (0.10)% 0.21%

Class S:
Money Market Fund................................ 0.20% 0.27% 0.47% (0.15)% 0.32%
US Government Money Market Fund.................. 0.20% 0.34% 0.54% (0.24)% 0.30%
Tax Free Money Market Fund....................... 0.20% 0.21% 0.41% (0.10)% 0.31%
</TABLE>

___________________________

* If you purchase any class of Shares of a Fund through a Financial
Intermediary, such as a bank or an investment adviser, you may also pay
additional fees to the intermediary for services provided by the
intermediary. You should contact your intermediary for information
concerning what additional fees, if any, will be charged.

# FRIMCo has contractually agreed to waive, at least until October 31, 2001,
a portion of its 0.25% combined advisory and administrative fees for the US
Government Money Market Fund, up to the full amount of that fee for all
expenses that exceed 0.30% of the average daily net assets on an annual
basis. Additionally, FRIMCo has contractually agreed to waive, at least
until October 31, 2001, 0.15% of its 0.25% and 0.10% of its 0.25% combined
advisory and administrative fees for the Money Market Fund and Tax Free
Money Market Fund, respectively.

6
<PAGE>

Example

This example is intended to help you compare the cost of investing in each Fund
with the cost of investing in other mutual funds.

The example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your Shares at the end of those periods. The
example also assumes your investment has a 5% return each year and that
operating expenses remain the same.

Although your actual costs may be higher or lower, under these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------- ---------- ---------- ------------

Class I:
<S> <C> <C> <C> <C>
Money Market Fund........................................................ $17 $ 87 $164 $390
Tax Free Money Market Fund............................................... 22 90 164 384

Class S:
Money Market Fund........................................................ 33 136 248 578
US Government Money Market Fund.......................................... 31 149 278 654
Tax Free Money Market Fund............................................... 32 122 220 508
</TABLE>

7
<PAGE>

INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES

MONEY MARKET FUND
-----------------

<TABLE>
<S> <C>
Investment To maximize current income to the extent consistent with the preservation of capital and
Objective liquidity, and the maintenance of a stable $1.00 per share net asset value, by investing
in short-term, high-grade money market instruments.

Principal The Money Market Fund invests in a portfolio of high quality money market securities
Investment maturing within 397 days or less. The Fund principally invests in securities issued or
Strategies guaranteed by the US government or its agencies or by US and foreign banks, as well as
asset-backed securities and short-term debt of US and foreign corporations and trusts.
The Fund invests in securities which may be supported by credit enhancements primarily
from US and foreign banks. Up to 10% of the Fund's net assets may be "illiquid"
securities (i.e., securities that do not have a readily available market or that are
subject to resale restrictions). The Fund's investments may include adjustable rate
securities whose rates are tied to appropriate money market indices which reset
frequently. The dollar- weighted average maturity of the Fund's portfolio is 90 days or
less.

The Money Market Fund seeks to achieve its objective by active security selection
consistent with its daily assessment of market and credit risks. This approach begins
with a broad review of the economic and political environment. Interest rate forecasts
of the investment community and Federal Reserve policy are analyzed to develop an
expectation for interest rate trends. Within this framework, the Fund identifies
individual securities for investment.

From time to time, the Fund may take temporary defensive positions that may be
inconsistent with its principal investment policies in an attempt to respond to adverse
market, economic, political or other conditions.
</TABLE>

US GOVERNMENT MONEY MARKET FUND
--------------------------------

<TABLE>
<S> <C>
Investment To provide the maximum current income that is consistent with the preservation of
Objective capital and liquidity and the maintenance of a stable $1.00 per share net asset value by
investing exclusively in US government obligations.

Principal The US Government Money Market Fund invests in a portfolio of high quality money market
Investment securities issued or guaranteed by the US government or any of its agencies and
Strategies instrumentalities maturing within 397 days or less. These include, among others, the US
Treasury, Federal National Mortgage Association, Federal Home Loan Mortgage Association
and the Federal Home Loan Bank. The Fund enters into repurchase agreements
collateralized by US government and agency obligations. The Fund's investments may
include adjustable rate securities whose rates are tied to appropriate money market
indices and reset frequently. The dollar-weighted average maturity of the Fund's
portfolio is 90 days or less.

The Fund seeks to achieve its objective by active security selection consistent with its
daily assessment of market risks. This approach begins with a broad review of the
economic and political environment. Interest rate forecasts of the investment community
and Federal Reserve policy are analyzed to develop an expectation for interest rate
trends. Within this framework, the Fund identifies individual securities for investment.
</TABLE>

8
<PAGE>

TAX FREE MONEY MARKET FUND
--------------------------

<TABLE>
<S> <C>
Investment To provide the maximum current income exempt from federal income tax that is consistent
Objective 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.

Principal The Tax Free Money Market Fund invests in a portfolio of high quality short-term debt
Investment securities maturing in 397 days or less. The dollar-weighted average maturity of the
Strategies Fund's portfolio is 90 days or less.

The Fund invests almost exclusively in investment-grade municipal debt obligations
providing tax-exempt interest income. Specifically, these obligations are debt
obligations, rated A- or higher by Moody's Investor Service, Inc. or its equivalent by a
nationally recognized statistical rating organization (NRSRO), 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 to obtain funds to support special government needs or special projects.

Some of the securities in which the Fund invests are supported by credit and liquidity
enhancements from third parties. These enhancements are generally letters of credit from
foreign or domestic banks.

From time to time, the Fund may take temporary defensive positions that may be
inconsistent with its principal investment policies in an attempt to respond to adverse
market, economic, political or other conditions.
</TABLE>

9
<PAGE>

RISKS

An investment in the Funds, like any investment, has risks. The following
table describes principal types of risks that the Funds are subject to and lists
next to each description those Funds most likely to be affected by the risk.
Other Funds that are not listed may hold portfolio investments that are subject
to one or more of the risks, but will not do so in a way that is expected to
principally affect the performance of the Fund as a whole. Please refer to the
Funds' Statement of Additional Information for a discussion of risks associated
with types of securities held by the Funds and the investment practices employed
by the individual Funds.

Risk Associated With: Description Relevant Fund
--------------------- ----------- -------------

<S> <C> <C>
Fixed-income Prices of fixed-income securities rise and fall in Money Market
Securities response to interest rate changes. Generally, when US Government
interest rates rise, prices of fixed-income Money Market
securities fall. The longer the duration of the Tax Free
security, the more sensitive the security is to this Money Market
risk. A 1% increase in interest rates would reduce
the value of a $100 note by approximately one dollar
if it had a one-year duration, but would reduce its
value by approximately fifteen dollars if it had a
15-year duration. There is also a risk that one or
more of the securities will be downgraded in credit
rating or go into default. Lower-rated bonds
generally have higher credit risks.

Instruments of Non-US corporations and banks issuing dollar Money Market
US and Foreign denominated instruments in the US are not necessarily
Banks and subject to the same regulatory requirements that
Branches and apply to US corporations and banks, such as
Foreign accounting, auditing and recordkeeping standards, the
Corporations public availability of information and, for banks,
reserve requirements, loan limitations and
examinations. This increases the possibility that a
non-US corporation or bank may become insolvent or
otherwise unable to fulfill its obligations on these
instruments.

Municipal Municipal obligations are affected by economic, Tax Free
Obligations business or political developments. These securities Money Market
may be subject to 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.

Credit and Adverse changes in a guarantor's credit quality if Money Market
Liquidity contemporaneous with adverse changes in the Tax Free
Enhancements guaranteed security could cause losses to a Fund and Money Market
may affect its net asset value.

Repurchase Under a repurchase agreement, a bank or broker sells US Government
Agreements securities to a Fund and agrees to repurchase them at Money Market
</TABLE>

10
<PAGE>

the Fund's cost plus interest. If
the value of the securities
declines, and the bank or broker
defaults on its repurchase
obligation, the Fund could incur
a loss.

An investment in money market funds is not a bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Money Market, US Government Money Market and Tax
Free Money Market Funds seek to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in each of these Funds.

11
<PAGE>

MANAGEMENT OF THE FUNDS

The Funds' investment adviser is Frank Russell Investment Management
Company (FRIMCo), 909 A Street, Tacoma, Washington 98402. FRIMCo pioneered the
"multi-style, multi-manager" investment method in mutual funds and, at June 30,
2000, managed over $18 billion in more than 30 mutual fund portfolios. FRIMCo
was established in 1982 to serve as the investment management arm of Frank
Russell Company (Russell).

FRIMCo acts as money manager for the Money Market and US Government Money
Market Funds and recommends money managers to the Tax Free Money Market Fund,
oversees them, and evaluates their results. Each Fund's money manager selects
the individual portfolio securities for the assets assigned to it.

The aggregate annual rate of advisory and administrative fees, payable to
FRIMCo monthly on a pro rata basis, are the following percentages of each Fund's
average daily net assets: Money Market Fund, 0.25%, US Government Money Market
Fund, 0.25% and Tax Free Money Market Fund, 0.25%. Of these aggregate amounts
0.05% is attributable to administrative services. FRIMCo has contractually
agreed to waive, at least until October 31, 2001, a portion of its 0.25%
combined advisory and administrative fees for the US Government Money Market
Fund, up to the full amount of that fee for all expenses that exceed 0.30% of
the average daily net assets on an annual basis. Additionally, FRIMCo has
contractually agreed to waive, at least until October 31, 2001, 0.15% of its
0.25% and 0.10% of its 0.25% combined advisory and administrative fees for the
Money Market Fund and Tax Free Money Market Fund, respectively. Each Fund may
also pay, in addition to the aggregate fees set forth above, a fee which
compensates FRIMCo for managing collateral which the Funds have received in
certain portfolio transactions which are not treated as net assets of that Fund
("additional assets") in determining the Fund's net asset value per share. The
additional fee payable to FRIMCo will equal an amount of up to 0.07% of each
Fund's additional assets on an annualized basis.

THE MONEY MANAGERS

The Tax Free Money Market Fund allocates its assets to the money manager
listed under "Money Manager Information" at the end of this Prospectus. FRIMCo,
as the Funds' advisor, may change the allocation of a Fund's assets to one or
more other money managers at any time. The Funds received an exemptive order
from the Securities and Exchange Commission (SEC) that permits a Fund to engage
or terminate a money manager at any time, subject to the approval by the Fund's
Board of Trustees (Board), without a shareholder vote. A Fund notifies its
shareholders within 60 days of when a money manager begins providing services.
The Funds select money managers based primarily upon the research and
recommendations of FRIMCo and Russell. FRIMCo and Russell evaluate
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 any
Fund's selection or termination of a money manager.

A money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund. At the same time, however, the money
manager must operate within the Fund's investment objectives, restrictions and
policies. Additionally, the manager must operate within more specific
constraints developed from time to time by FRIMCo. FRIMCo develops such
constraints for a manager based on FRIMCo's assessment of the manager's
expertise and investment style. By assigning more specific constraints to a
money manager, FRIMCo intends to capitalize on the strengths of the money
manager and if multiple managers are employed, to combine their investment
activities in a complementary fashion.

12
<PAGE>

Although the money managers' activities are subject to general oversight by the
Board and the Funds' officers, neither the Board, the officers, FRIMCo nor
Russell evaluate the investment merits of a money manager's individual security
selections.

DIVIDENDS AND DISTRIBUTIONS

Income Dividends

<TABLE>
<CAPTION>
Declared Payable Funds
-------- ------- -----
<S> <C> <C>
Daily....................... Jan. to Nov., 2nd to last Money Market Fund
business day of the month; Dec., US Government Money Market Fund
last business day of the month Tax Free Money Market Fund
</TABLE>

The Funds determine net investment income immediately prior to the
determination of their net asset values. This occurs at the earlier of 4:00 p.m.
or the close of the New York Stock Exchange on each business day. Net investment
income is credited daily to the accounts of shareholders of record prior to the
net asset value calculation. The income is paid monthly.

Capital Gains Distributions

The Board intends to declare long-term capital gain distributions once a
year in mid-December to reflect any net long-term capital gains realized by a
Fund as of October 31 of the current fiscal year. A Fund may be required to make
an additional distribution, if necessary, in any year for operation or other
reasons.

Automatic Reinvestment

Your dividends and other distributions are automatically reinvested at the
closing net asset value on the record date, in additional shares of the
appropriate Fund, unless you elect to have the dividends or distributions paid
in cash or invested in another Fund. You may change your election by delivering
written notice no later than ten days prior to the payment date to the Funds at
Frank Russell Investment Company, c/o Boston Financial Data Services, 2 Heritage
Drive, N. Quincy, MA 02171.

TAXES

In general, distributions from a Fund are taxable to you as either ordinary
income or capital gains. This is true whether you reinvest your distributions in
additional shares of the Fund or receive them in cash. Every January, you will
receive a statement that shows the tax status of distributions you received for
the previous year. Distributions declared in December but paid in January are
taxable as if they were paid in December.

Because the Funds expect to maintain a stable $1.00 Share price, you should
not have any gain or loss if you sell your Shares.

13
<PAGE>

The Tax Free Money Market Fund intends to continue to qualify to pay
"exempt-interest dividends" to its shareholders by maintaining, as of the close
of each quarter of its taxable years, at least 50% of the value of its total
assets in municipal obligations. If the Fund satisfies this requirement,
distributions from net investment income to shareholders will be exempt from
federal income taxation, including the alternative minimum tax, to the extent
net investment income is represented by interest on municipal obligations.
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, the dividends are treated as ordinary income,
whether paid in cash or reinvested in additional shares. The Fund may invest a
portion of its assets in private activity bonds, the income from which is a
preference item in determining your alternative minimum tax.

The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers concerning the
federal, state, local or foreign tax consequences of an investment in 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 SAI.

HOW NET ASSET VALUE IS DETERMINED

Net Asset Value Per Share

The net asset value per share is calculated for Shares of each Fund on each
business day on which Shares are offered or redemption orders are tendered. A
business day for the Funds includes any day on which the New York Stock Exchange
(NYSE) is open for trading and the Boston Federal Reserve Bank is open. Neither
the NYSE nor the Boston Federal Reserve Bank is open on national holidays. All
Funds determine net asset value at 4:00 p.m. Eastern Time or as of the close of
the NYSE, whichever is earlier.

Valuation of Portfolio Securities

The Funds' portfolio investments are valued using the amortized cost
method. Under this method, a portfolio instrument is initially valued at cost
and thereafter a constant accretion/amortization to maturity of any discount or
premium is assumed. While amortized cost provides certainty in valuation, it may
result in periods when the value of an instrument is higher or lower than the
price a Fund would receive if it sold the instrument.

HOW TO PURCHASE SHARES

For Class I Shares, there is a $100,000 required minimum initial investment
for each account in each Fund. There is currently no required minimum investment
for Class S Shares of the Funds described in this Prospectus. The Funds are
designed to be used as part of an allocated investment portfolio in combination
with Funds described in the other Frank Russell Investment Company
Prospectuses.

Financial Intermediaries may charge their customers a fee for providing
investment-related services. Financial Intermediaries generally receive no
compensation from the Funds or the Funds' service providers with respect to
Class I or Class S Shares of the Funds.

14
<PAGE>

Paying for Shares

All purchases must be made in US. dollars. Checks and other negotiable bank
drafts must be drawn on US. banks and made payable to "Frank Russell Investment
Company." The Funds reserve the right to reject any purchase order for any
reason including, but not limited to, receiving a check which does not clear the
bank or a payment which does not arrive in proper form by settlement date. You
will be responsible for any resulting loss to the Funds. An overdraft charge may
also be applied. Cash, third party checks and checks drawn on credit card
accounts generally will not be accepted. However, exceptions may be made by
prior special arrangement with certain Financial Intermediaries.

Offering Dates and Times

Orders must be received by the Funds prior to the following designated
times:

<TABLE>
<S> <C>
4:00 p.m. Eastern Time or close of the NYSE, whichever is earlier* Money Market Fund
11:45 a.m. Eastern Time Tax Free Money Market Fund
12:15 p.m. Eastern Time US Government Money Market Fund
</TABLE>

______________________________

* On days when the Public Securities Association declares an early closure of
the bond market, orders to purchase Shares of the Money Market Fund must be
received prior to the time of such early closure.

Purchases can be made on any day when Fund Shares are offered. Because
Financial Intermediaries' processing time may vary, please ask your Financial
Intermediary representative when your account will be credited.

Order and Payment Procedures

Generally, you must place purchase orders for Shares of the Funds through a
Financial Intermediary. You may pay for your purchase by mail or electronic
funds transfer. Initial purchases require a completed and signed Application for
each new account regardless of the investment method. Specific payment
arrangements should be made with your Financial Intermediary.

By Mail

By Federal Funds Wire

15
<PAGE>

By Automated Clearing House ("ACH")

You can make initial or subsequent investments through ACH to the Funds'
Custodian, State Street Bank and Trust Company. Purchases through ACH are
subject to a 10 day hold before Shares can be redeemed.

Automated Investment Program

Three-Day Settlement Program

The Funds will accept orders at the next computed net asset value from
Financial Intermediaries to purchase Shares of the Funds for settlement on the
third business day following the receipt of the order. These orders are paid for
by a federal funds wire if the Financial Intermediary has enrolled in the
program and agreed in writing to indemnify the Funds against any losses
resulting from non-receipt of payment.

Check Writing Privileges

If you buy Class S Shares of the Money Market Fund or Tax Free Money Market
Fund, you may request redemption drafts (checks) free of charge on your account
application or, for an existing account, by calling Russell Investor Services at
800-RUSSEL4 (800-787-7354). Check writing privileges allow you to write checks
against your account. There are no check writing privileges for the US
Government Money Market Fund.

The minimum amount for which a check can be written is $500. Any checks
under that amount presented for payment may be rejected. Checks written for
amounts larger than the collected balance in your account will be rejected. The
payee of the check may charge you for rejected checks.

EXCHANGE PRIVILEGE

By Mail or Telephone

16
<PAGE>

An exchange involves the redemption of Shares, which is treated as a sale
for income tax purposes. Thus, capital gain or loss may be realized. Please
consult your tax adviser for more information. The 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) at the next net asset value per share
calculated after the Funds received the exchange request in good order.

In-Kind Exchange of Securities

HOW TO REDEEM SHARES

Shares of the Funds may be redeemed through your Financial Intermediary on
any business day the Funds are open at the next net asset value per share
calculated after the Funds' Transfer Agent receives an order in proper form
(defined in the "Written Instructions" section). Payment will ordinarily be made
within seven days after receipt of your request in proper form. Shares recently
purchased by check may not be available for redemption for 10 days following the
purchase or until the check clears, whichever occurs first, to assure payment
has been collected.

Redemption Dates and Times

Redemption requests must be placed through a Financial Intermediary and
received by the Funds prior to the following designated times. Because Financial
Intermediaries' processing times may vary, please ask your Financial
Intermediary representative when your account will be debited. Requests can be
made by mail or telephone on any day when Fund shares are offered, or through
the Systematic Withdrawal Program described below.

_____________________________

* On days when the Public Securities Association declares an early closure of
the bond market, orders to redeem Shares of the Money Market Fund must be
received prior to the time of such early closure.

By Mail or Telephone

17
<PAGE>

Systematic Withdrawal Program

The Funds offer a systematic withdrawal program which allows you to redeem
your Shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. If you would like to establish a
systematic withdrawal program, please complete the proper section of the account
application and indicate how you would like to receive your payments. You will
generally receive your payment by the end of the month in which a payment is
scheduled. When you redeem your shares under a systematic withdrawal program, it
is a taxable transaction.

You may choose to have the payments mailed to you or directed to your bank
account by ACH transfer. You may discontinue the systematic withdrawal program,
or change the amount and timing of withdrawal payments by contacting your
Financial Intermediary.

Selling Shares by Check

For accounts with check writing privileges, you may make checks payable to
any person for any amount of $500 or more. Since you will not know the exact
amount in your account on the day a check clears, a check should not be used to
close your account.

The checks are drawn through State Street Bank and Trust Company (the
"Bank"). The Bank may end this service at any time upon notice to you. You
generally will not be able to convert a check drawn on your Fund account into a
certified or cashier's check by presenting it at any bank. Since the Funds are
not banks, the Funds cannot assure that a stop payment order you write will be
effective. The Funds will use their best efforts, however, to see that these
orders are carried out.

When a check is presented for payment, the Funds will redeem an equivalent
number of Shares in your account to cover the amount of the check. The Shares
will be redeemed at the net asset value next determined after the Funds receive
the check, as long as the check does not exceed the collected balance in your
account. If a check is presented for payment that exceeds the collected balance
in your account, the Bank may return the check unpaid.

Omnibus Accounts

PAYMENT OF REDEMPTION PROCEEDS

By Check

By Wire

18
<PAGE>

Reserve System.

WRITTEN INSTRUCTIONS

Proper Form: Written instructions must be in proper form. They must include:

A description of the request

The name of the Fund(s)

The class of shares, if applicable

The account number(s)

The amount of money or number of shares being purchased, exchanged,
transferred or redeemed

The name(s) on the account(s)

The signature(s) of all registered account owners

For exchanges, the name of the Fund you are exchanging into

Your daytime telephone number

Signature Requirements Based on Account Type

<TABLE>
<CAPTION>
Account Type Requirements for Written Requests
<S> <C>

Individual, Joint Tenants, Written instructions must be signed by each shareholder, exactly as the
Tenants in Common names appear in the account registration.
UGMA or UTMA (custodial Written instructions must be signed by the custodian in his/her
accounts for minors) capacity as it appears in the account registration.
Corporation, Association Written instructions must be signed by authorized person(s), stating
his/her capacity as indicated by the corporate resolution to act on the
account and a copy of the corporate resolution, certified within the
past 90 days, authorizing the signer to act.
Estate, Trust, Pension, Written instructions must be signed by all trustees. If the name of the
Profit Sharing trustee(s) does not appear in the account registration, please provide
Plan a copy of the trust document certified within the last 60 days.
Joint tenancy shareholders Written instructions must by signed by the surviving tenant(s). A
whose co-tenants are certified copy of the death certificate must accompany the request.
deceased
</TABLE>

Signature Guarantee

19
<PAGE>

ACCOUNT POLICIES

Third Party Transactions

Redemption In-Kind

Stale Checks

20
<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand a Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share throughout each year or period ended
December 31 and for the four months ended April 30, 2000. The total returns in
the table represent how much your investment in the Fund would have increased
(or decreased) during each period, assuming reinvestment of all dividends and
distributions. This information, except for the four months ended April 30, 2000
data, has been audited by PricewaterhouseCoopers LLP, whose report, along with
the Funds' financial statements, are included in the Funds' annual report, which
is available upon request. Effective _____________, 2000, the existing Class S
Shares of the Money Market Fund and Tax Free Money Market Fund were redesignated
as Class I Shares, and new Class S Shares of the Money Market Fund and Tax Free
Money Market Fund were created. All references to Class S are to the new Class
S established on ___________, 2000.

21
<PAGE>

Money Market Fund-Class I Shares

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
2000* 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ----------- ----------- ----------- ----------- ----------

Income From Operations
Net investment income.......................... .0191 .0515 .0553 .0563 .0549 .0601
----------- ----------- ----------- ----------- ----------- ----------

Distributions
From net investment income..................... (.0191) (.0515) (.0553) (.0563) (.0549) (.0601)
----------- ----------- ----------- ----------- ----------- ----------

Net Asset Value, End of Period.................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
=========== =========== =========== =========== =========== ==========

Total Return (%)(a)(c).......................... 1.93 5.27 5.69 5.79 5.63 6.19

Ratios/Supplemental Data:
Net Assets, end of period (in thousands)....... 1,627,797 2,026,717 1,605,026 926,283 496,932 533,643

Ratios to average net assets (%)(b)(c):
Operating expenses, net...................... .16 .17 .16 .08 .05 .06
Operating expenses, gross.................... .31 .32 .31 .30 .30 .26
Net investment income........................ 5.76 5.15 5.54 5.65 5.49 6.01
</TABLE>

* For the four months ended April 30, 2000 (Unaudited).
(a) Periods less than one year are not annualized.
(b) The ratios for periods less than one year are annualized.
(c) 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.

22
<PAGE>

US Government Money Market Fund-Class S Shares

<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
2000* 1999 1998 1997 1996 1995
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ----------- ----------- ------------ ------------ ------------

Income From Operations
Net investment income....................... .0185 .0483 .0520 .0545 .0526 .0580
----------- ----------- ----------- ------------ ------------ ------------

Distributions
From net investment income.................. (.0185) (.0483) (.0520) (.0545) (.0526) (.0580)
----------- ----------- ----------- ------------ ------------ ------------

Net Asset Value, End of Period............... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
=========== =========== =========== ============ ============ ============

Total Return (%)(a)(c)....................... 1.86 4.93 5.34 5.59 5.40 5.98

Ratios/Supplemental Data:
Net Assets, end of period (in thousands).... 110,476 190,150 166,224 187,412 239,725 149,941

Ratios to average net assets (%)(b)(c):
Operating expenses, net................... .30 .30 .32 .20 .25 .32
Operating expenses, gross................. .48 .54 .55 .41 .50 .51
Net investment income..................... 5.53 4.83 5.20 5.44 5.27 5.82
</TABLE>

23
<PAGE>

Tax Free Money Market Fund-Class I Shares

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
2000* 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
---------- ---------- ---------- ---------- ---------- ----------

Income From Operations
Net investment income........................ .0122 .0326 .0331 .0355 .0329 .0370
---------- ---------- ---------- ---------- ---------- ----------

Distributions
From net investment income................... (.0122) (.0326) (.0331) (.0355) (.0329) (.0370)
---------- ---------- ---------- ---------- ---------- ----------

Net Asset Value, End of Period................ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========== ========== ========== ========== ========== ==========

Total Return (%)(a)(c)........................ 1.23 3.31 3.36 3.61 3.35 3.76

Ratios/Supplemental Data:
Net Assets, end of period (in thousands)..... 205,957 246,695 194,663 130,725 102,207 78,000

Ratios to average net assets (%)(b)(c):
Operating expenses, net.................... .30 .21 .34 .28 .42 .48
Operating expenses, gross.................. .40 .31 .44 .38 .42 .48
Net investment income...................... 3.69 3.28 3.29 3.55 3.28 3.69
</TABLE>

* For the four months ended April 30, 2000 (Unaudited).
(a) Periods less than one year are not annualized.
(b) The ratios for the periods less than one year are annualized.
(c) 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 service fees.

24
<PAGE>

MONEY MANAGER INFORMATION

The money managers identified below, other than the money manager for the
Money Market and US Government Money Market Funds, have no affiliations with the
Funds or the Funds' service providers other than their management of Fund
assets. 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 Funds in FRIC, or to
other clients of FRIMCo or of Frank Russell Company, including Frank Russell
Company's wholly owned subsidiary, Frank Russell Trust Company.

Money Market Fund

Frank Russell Investment Management Company, 909 A Street, Tacoma, WA
98402.

US Government Money Market Fund

Frank Russell Investment Management Company, See: Money Market Fund.

Tax Free Money Market Fund

Weiss, Peck & Greer, LLC, One New York Plaza, 30th Floor, New York, NY
10004.

25
<PAGE>

For more information about the Funds, the following documents are available
without charge:

STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Funds.

Frank Russell Investment Company
909 A Street
Tacoma, WA 98402
Telephone: 1-800-787-7354
Fax: 253-591-3495
Website: russell.com

FRANK RUSSELL INVESTMENT COMPANY FRANK RUSSELL INVESTMENT COMPANY

Class I and S Shares:
Money Market Fund
Tax Free Money Market Fund

Class S Shares:
US Government Money Market Fund

Distributor: Russell Fund Distributors, Inc.
SEC File No. 811-3153
36-08-059 (___/00)

<PAGE>

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

STATEMENT OF ADDITIONAL INFORMATION
__________________, 2000

Frank Russell Investment Company ("FRIC") is a single legal entity
organized as a Massachusetts business trust. FRIC operates investment portfolios
referred to as "Funds." FRIC offers Shares of beneficial interest in the Funds
in multiple separate Prospectuses.

This Statement of Additional Information ("Statement") is not a
prospectus; this Statement should be read in conjunction with the Funds'
Prospectuses. Prospectuses may be obtained without charge by telephoning or
writing FRIC 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 FRIC's Annual Reports to
Shareholders for the year ended December 31, 1999 and FRIC's Semi-Annual Report
to Shareholders for the four months ended April 30, 2000. Copies of the Funds'
Annual Reports and Semi-Annual Reports accompany this Statement.

This Statement relates to the following Funds, each of which commenced
operations on the date indicated:

<TABLE>
<CAPTION>
Fund Inception
Fund Date Prospectus Date
---- ---- ---------------
<S> <C> <C>
Money Market Fund October 15, 1981 __________, 2000
U.S. Government Money Market Fund September 5, 1985 __________, 2000
Tax Free Money Market May 8, 1987 __________, 2000
Tax-Managed Large Cap Fund October 7, 1996 __________, 2000
Tax-Managed Small Cap Fund December 1, 1999 __________, 2000
</TABLE>

This Statement relates only to those Funds listed above. However, certain
information herein may also apply to other FRIC Funds not offered by this
Statement.
<PAGE>

Each of the Funds, other than the US Government Money Market Fund, presently
offers interests in different classes of Shares as described in the table below.
For purposes of this Statement, each Fund that issues multiple classes of Shares
is referred to as a "Multiple Class Fund." Unless otherwise indicated, this
Statement relates to all classes of Shares of the Funds.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Fund Class C Class E Class I Class S
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund* X X
---------------------------------------------------------------------------------------------
U.S. Government Money Market X
---------------------------------------------------------------------------------------------
Tax Free Money Market* X X
---------------------------------------------------------------------------------------------
Tax-Managed Large Cap (formerly Equity T) X X X
---------------------------------------------------------------------------------------------
Tax-Managed Small Cap X X X
---------------------------------------------------------------------------------------------
</TABLE>
__________________

* Effective ______________, 2000, the existing Class S Shares of the Money
Market and Tax Free Money Market Funds were redesignated as Class I Shares, and
new Class S Shares of these Funds were created. All reference herein to Class S
of the Money Market and Tax Free Money Market Funds are to the new Class S
Shares established on ___________, 2000.
<PAGE>

TABLE OF CONTENTS

CERTAIN TERMS USED IN THIS STATEMENT ARE DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGE 57

<TABLE>
<CAPTION>
Page
<S> <C> <C>
STRUCTURE AND GOVERNANCE..................................................................................... 1
Organization and Business History..................................................................... 1
Shareholder Meetings.................................................................................. 1
Controlling Shareholders.............................................................................. 1
Trustees and Officers................................................................................. 2

OPERATION OF FRIC............................................................................................ 7
Service Providers..................................................................................... 7
Consultant............................................................................................ 7
Advisor and Administrator............................................................................. 8
Money Managers........................................................................................ 9
Distributor........................................................................................... 9
Custodian and Portfolio Accountant.................................................................... 9
Transfer and Dividend Disbursing Agent................................................................ 10
Order Placement Designees............................................................................. 10
Independent Accountants............................................................................... 10
Codes of Ethics....................................................................................... 10
Plan Pursuant to Rule 18f-3........................................................................... 12
Distribution Plan..................................................................................... 13
Shareholder Services Plan............................................................................. 14
Fund Expenses......................................................................................... 15
Purchase and Redemption of Fund Shares................................................................ 15
Valuation of Fund Shares.............................................................................. 15
Valuation of Portfolio Securities..................................................................... 16
Portfolio Transaction Policies........................................................................ 16
Portfolio Turnover Rate............................................................................... 17
Brokerage Allocations................................................................................. 17
Brokerage Commissions................................................................................. 18
Yield and Total Return Quotations..................................................................... 20

INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS.................................................... 21
Investment Restrictions............................................................................... 22
Investment Policies................................................................................... 24
Certain Investments................................................................................... 28

TAXES........................................................................................................ 45

MONEY MANAGER INFORMATION.................................................................................... 49

RATINGS OF DEBT INSTRUMENTS.................................................................................. 50

FINANCIAL STATEMENTS......................................................................................... 56

GLOSSARY..................................................................................................... 57
</TABLE>

<PAGE>

STRUCTURE AND GOVERNANCE

ORGANIZATION AND BUSINESS HISTORY. FRIC commenced business operations as a
Maryland corporation on October 15, 1981. On January 2, 1985, FRIC reorganized
by changing its domicile and legal status to a Massachusetts business trust.

FRIC is currently organized and operating under an amended Master Trust
Agreement dated July 26, 1984, and the provisions of Massachusetts's law
governing the operation of a Massachusetts business trust. The Board of Trustees
("Board" or the "Trustees") may amend the Master Trust Agreement from time to
time; provided, however, that any amendment which would materially and adversely
affect shareholders of FRIC as a whole, or shareholders of a particular Fund,
must be approved by the holders of a majority of the Shares of FRIC or the Fund,
respectively. FRIC is a registered open-end management investment company of the
diversified type.

FRIC 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." Each Fund is a
separate trust under Massachusetts law. 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.

FRIC's Funds are authorized to issue Shares of beneficial interest in one or
more classes. 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.
Shares of each class of a Fund represent proportionate interests in the assets
of that Fund 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 the dividends and distributions earned on the assets belonging to the Fund
that the Board declares. Each class of Shares is designed to meet different
investor needs. The Class C Shares are subject to a Rule 2b-1 fee of up to 0.75%
and a shareholder services fee of up to 0.25%. Class E Shares are subject to a
shareholder services fee of up to 0.25%. The Class I and 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 refers to all classes of 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 FRIC 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.

Frank Russell Company has the right to grant (and withdraw) the nonexclusive use
of the name "Frank Russell" or any variation.

SHAREHOLDER MEETINGS. FRIC will not hold annual meetings of shareholders, but
special meetings may be held. Special meetings may be convened (i) by the Board,
(ii) upon written request to the Board by shareholders holding at least 10% of
FRIC's 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.
Each share of a class of a Fund has one vote in Trustee elections and other
matters submitted for shareholder vote. On any matter which affects only a
particular Fund or class, only Shares of that Fund or class are entitled to
vote. There are no cumulative voting rights.

CONTROLLING SHAREHOLDERS. The Trustees have the authority and responsibility to
manage the business of FRIC, and hold office for life unless they resign or are
removed by, in substance, a vote of two-thirds of FRIC Shares outstanding. Under
these circumstances, no one person, entity or shareholder "controls" FRIC.

1
<PAGE>

At _________________, 2000, the following persons could be deemed to "control"
the following Funds because such persons owned more than 25% of the voting
securities of the indicated Funds:

At ______________, 2000, the following persons owned 5% or more of any Class of
any Fund's Shares:

The Trustees and officers of FRIC, as a group, own less than 1% of any Class of
each Fund.

TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Funds, including reviewing and approving the
Funds' contracts with FRIMCo, Russell and the money managers. A Trustee may be
removed at any time by, in substance, a vote of two-thirds of FRIC Shares. A
vacancy in the Board shall be filled by a vote of a majority of the remaining
Trustees so long as, in substance, two-thirds of the Trustees have been elected
by shareholders. The 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.

FRIC paid in aggregate $147,339 for the year ended December 31, 1999 to the
Trustees 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. FRIC's officers and employees are paid by FRIMCo or its
affiliates.

The following table contains the Trustees and officers and their positions with
FRIC, their dates of birth, their present and principal occupations during the
past five years and the mailing addresses of Trustees who are not affiliated
with FRIC.

An asterisk (*) indicates that the Trustee or officer is an "interested person"
of FRIC 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.

2
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Lynn L. Anderson, Trustee, Also currently: Trustee, President and Chief Executive
Born April 22, 1939 President and Officer, Russell Insurance Funds; Director, Chief
Chief Executive Executive Officer and Chairman of the Board, Russell
909 A Street Officer since Fund Distributors, Inc.; Trustee, Chairman of the Board,
Tacoma, Washington 1987. President, The SSgA Funds (investment company); Director
98402-1616 and Chairman of the Board, Frank Russell Investment
Management Company; Chairman of the Board, Frank Russell
Trust Company; Director and Chairman of the Board, Frank
Russell Investment Company PLC; Director, Frank Russell
Investments (Ireland) Limited, Frank Russell Investments
(Cayman) Ltd., and Frank Russell Investments (UK) Ltd.;
March 1997 to December 1998, Director, Frank Russell
Company; June 1993 to November 1995, Director, Frank
Russell Company. Until September 1994, Director and
President, The Laurel Funds, Inc. (investment company).
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Paul E. Anderson, Trustee since 1984. Also currently: Trustee, Russell Insurance Funds. 1996 to
Born October 15, 1931 present, President, Anderson Management Group LLC
(architectural design and manufacturing). 1984 to 1996,
23 Forest Glen Lane President, Vancouver Door Company, Inc.
Tacoma, Washington 98409
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Paul Anton, Ph.D., Trustee since 1985. Also currently: Trustee, Russell Insurance Funds. President,
Paul Anton and Associates (Marketing Consultant on emerging
Born December 1, 1919 international markets for small corporations). 1991-1994,
Adjunct Professor, International Marketing, University of
PO Box 212 Washington, Tacoma, Washington.
Gig Harbor,
Washington 98335
--------------------------------------------------------------------------------------------------------------
</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Principal Occupation(s)
Name, Age, Position(s) Held During the
Address with Fund Past 5 Years
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William E. Baxter, Trustee since 1984. Trustee, Russell Insurance Funds.
Born June 8, 1925 Retired.

800 North C Street
Tacoma, Washington 98403
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Kristianne Blake Trustee since 2000. Also currently: Trustee, Russell Insurance Funds; President,
Born January 22, 1954 Kristianne Gates Blake, P.S.; Trustee, WM Group of Funds;
Trustee, William H. & Mary M. Gates Charitable Remainder
P.O. Box 28338 Annuity Trust.
Spokane, Washington
99228
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Lee C. Gingrich, Trustee since 1984. Also currently: Trustee, Russell Insurance Funds and
Born October 6, 1930 President, Gingrich Enterprises, Inc. (Business and Property
Management).
1730 North Jackson
Tacoma, Washington 98406
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Eleanor W. Palmer, Trustee since 1984. Also currently: Trustee, Russell Insurance Funds and
Born May 5, 1926 Director of Frank Russell Trust Company. Retired.

2025 Narrows View Circle
#232-D, P.O. Box 1057
Gig Harbor, Washington
98335
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Raymond P. Tennison, Jr. Trustee since 2000. Also currently: Trustee, Russell Insurance Funds and
Born December 21, 1955 President, Simpson Investment Company and several additional
subsidiary companies, including Simpson Timber Company,
1301 Fifth Avenue Simpson Paper Company and Simpson Tacoma Kraft Company.
Suite 2800 Prior to July 1997, President and Board member, Simpson
Seattle, Washington 98101 Paper Company. Trustee, Simpson Employee Retirement Fund.
--------------------------------------------------------------------------------------------------------------------
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Principal Occupation(s)
Name, Age, Position(s) Held During the
Address with Fund Past 5 Years
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Mark E. Swanson, Treasurer and Chief Also currently: Treasurer and Chief Accounting
Born November 26, 1963 Accounting Officer Officer, Russell Insurance Funds; Director, Fund
since 1998. Administration Frank Russell Trust Company;
909 A Street Treasurer, Assistant Secretary and Principal
Tacoma, Washington Accounting Officer, SSgA Funds (investment company);
98402-1616 Director of Fund Administration, Frank Russell
Investment Management Company; Manager, Funds Accounting
and Taxes, Russell Fund Distributors, Inc. April 1996 to
August 1998, Assistant Treasurer, Frank Russell
Investment Company; August 1996 to August 1998,
Assistant Treasurer, Russell Insurance Funds; November
1995 to July 1998, Assistant Secretary, SSgA Funds;
February 1997 to July 1998, Manager, Funds Accounting
and Taxes, Frank Russell Investment Management Company.
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
*Randall P. Lert, Director of Also currently: Director of Investments, Russell Insurance
Born October 3, 1953 Investments since Funds; Chief Investment Officer, Frank Russell Trust
1991. Company; Director and Chief Investment Officer, Frank

909 A Street Russell Investment Management Company; Director and Chief
Tacoma, Washington Investment Officer, Russell Fund Distributors, Inc.;
98402-1616 Director-Futures Trading, Frank Russell Investments
(Ireland) Limited and Frank Russell Investments (Cayman)
Ltd.; Senior Vice President and Director of Portfolio
Trading, Frank Russell Canada Limited/Limitee. April 1990 to
November 1995, Director of Investments of Frank Russell
Investment Management Company.
--------------------------------------------------------------------------------------------------------------
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Principal Occupation(s)
Name, Age, Position(s) Held During the
Address with Fund Past 5 Years
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Karl J. Ege, Secretary and General Also currently: Secretary and General Counsel of
Born October 8, 1941 Counsel since 1994. Russell Insurance Funds; Director, Secretary and
General Counsel, Russell Real Estate Advisors, Inc.
909 A Street and Frank Russell Capital, Inc.; Secretary, General
Tacoma, Washington Counsel and Managing Director--Law and Government
98402-1616 Affairs of Frank Russell Company; Secretary and
General Counsel of Frank Russell Investment Management
Company, Frank Russell Trust Company and Russell Fund
Distributors, Inc.; Director and Secretary of Russell
Insurance Agency, Inc., Frank Russell Investments
(Delaware), Inc., A Street Investment Associates,
Inc., Russell International Services Co., Inc. and
Russell 20-20 Association; Director and Assistant
Secretary of Frank Russell Company Limited (London)
and Russell Systems Ltd.; Director of Frank Russell
Investment Company LLC, Frank Russell Securities,
Inc., Frank Russell Company PTY, Limited, Frank
Russell Institutional Funds plc, Frank Russell
Qualifying Investor Fund, Russell Investment
Management Ltd., Frank Russell Investment Company PLC,
Frank Russell Investments (Ireland) Limited, Frank
Russell Investment (Japan), Ltd., Frank Russell
Company, S.A., Frank Russell Japan Co., Ltd., Frank
Russell Company (NZ) Limited, Russell Investment
Nominee Co PTY Ltd and Frank Russell Investments (UK)
Ltd. April 1992 to December, 1998, Director, Frank
Russell Company.
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
*Peter F. Apanovitch, Manager of Short-Term Also currently: Manager of Short-Term Investment
Born May 3, 1945 Investment Funds. Funds, Russell Insurance Funds, Frank Russell
Investment Management Company and Frank Russell Trust
Company.
909 A Street
Tacoma, Washington
98402-1616
--------------------------------------------------------------------------------------------------------------
</TABLE>

TRUSTEE COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FRIC
TRUSTEE FROM FRIC PART OF FRIC EXPENSES RETIREMENT PAID TO TRUSTEES
------- ------------ --------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
Paul E. Anderson $30,000 $0 $0 $38,000*
Paul Anton, PhD. $30,000 $0 $0 $38,000*
William E. Baxter $30,000 $0 $0 $38,000*
Kristianne Blake $0 $0 $0 $0
Lee C. Gingrich $30,000 $0 $0 $38,000*
Eleanor W. Palmer $30,000 $0 $0 $38,000*
Raymond P. Tennison, Jr. $0 $0 $0 $0
</TABLE>

6
<PAGE>

* Received $8,000 for service as trustees on the Board of Trustees for the
Russell Insurance Funds.

OPERATION OF FRIC

SERVICE PROVIDERS. Most of FRIC's necessary day-to-day operations are performed
by separate business organizations under contract to FRIC. The principal service
providers are:

<TABLE>
<S> <C>
Consultant Frank Russell Company

Advisor, Administrator, Transfer and Frank Russell Investment Management Company
Dividend Disbursing Agent

Money Managers Multiple professional discretionary investment management
organizations

Custodian and Portfolio Accountant State Street Bank and Trust Company
</TABLE>

CONSULTANT. Frank Russell Company, the corporate parent of Frank Russell
Investment Management Company ("FRIMCo"), was responsible for organizing FRIC
and provides ongoing consulting services, described in the Prospectuses, to FRIC
and FRIMCo. FRIMCo does not pay Frank Russell Company an annual fee for
consulting services.

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), Frank Russell Company
(N.Z.) Limited (Auckland), and 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. 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 US 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.

As affiliates, Frank Russell Company and FRIMCo may establish certain
intercompany cost allocations that reflect the consulting services supplied to
FRIMCo. George F. Russell, Jr., Trustee Emeritus and Chairman Emeritus of FRIC,
is the Chairman of the Board of Frank Russell Company. FRIMCo is a wholly owned
subsidiary of Frank Russell Company.

Frank Russell Company is a subsidiary of The Northwestern Mutual Life Insurance
Company ("Northwestern Mutual"). Founded in 1857, Northwestern Mutual is a
mutual insurance corporation organized under the laws of Wisconsin. Northwestern
Mutual's products consist of a full range of permanent and term life insurance,
disability income insurance, long-term care insurance, mutual funds and
annuities for personal, estate, retirement, business, and benefits planning.
Northwestern Mutual provides its insurance products and services through an
exclusive network of approximately 7,200 agents associated with over 100 general
agencies nationwide. Northwestern Mutual leads the U.S. in both individual life
insurance sold annually and total individual life insurance in force.

7
<PAGE>

ADVISOR AND ADMINISTRATOR. FRIMCo 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), 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 Portfolio.
(See, "Investment Policies--Liquidity Portfolio.") FRIMCo also acts as FRIC's
transfer agent, dividend disbursing agent and as the money manager for the Money
Market and US Government Money Market Funds. FRIMCo, as agent for FRIC, pays the
money managers' fees for the Funds, as a fiduciary for the Funds, out of the
advisory fee paid by the Funds to FRIMCo. The remainder of the advisory fee is
retained by FRIMCo as compensation for the services described above and to pay
expenses.

Each of the Funds pays an advisory fee and an administrative 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. Services which
are administrative in nature are provided by FRIMCo pursuant to an
Administrative Agreement for an annual fee of 0.05% of each Fund's average daily
net asset value. (See the applicable Prospectus for the Funds' annual advisory
percentage rates.)

FRIMCo has contractually agreed to waive all or a portion of its combined
advisory and administrative fees for certain Funds. This arrangement is not part
of the Advisory Agreement with FRIC or the Administrative Agreement and may be
changed or discontinued. FRIMCo currently calculates its advisory fee based on a
Fund's average daily net assets less any advisory fee incurred on the Fund's
assets to the extent the Fund incurs advisory fees for investing a portion of
its assets in FRIC's Money Market Fund.

The following Funds paid FRIMCo the listed advisory and administrative fees
(gross of reimbursements and/or waivers) for the years ended December 31, 1999,
1998 and 1997:

<TABLE>
<CAPTION>
YEARS ENDED
12/31/99 12/31/98 12/31/97
-------- -------- --------
<S> <C> <C> <C>
Money Market $5,108,573 $2,719,009 $1,805,170
U.S. Government Money Market 392,940 372,920 542,075
Tax Free Money Market 491,260 429,613 266,939
Tax-Managed Large Cap (formerly Equity T) 3,180,328 1,463,604 375,054
Tax-Managed Small Cap* 18,536 -- --
</TABLE>

* Tax-Managed Small Cap Fund commenced operations December 1, 1999.

Effective October 15, 1997, FRIMCo voluntarily agreed to waive 0.15% of its
0.25% combined advisory and administrative fee for the Money Market Fund. FRIMCo
waived fees in the amounts of $1,611,140, $1,631,406 and $3,065,144 for the
years ended December 31, 1997, 1998 and 1999, respectively. As a result of the
waivers, the Fund paid advisory and administrative equal to $194,031, $1,087,604
and $2,043,429 for the years ended December 31, 1997, 1998 and 1999,
respectively.

Prior to June 15, 1998, FRIMCo voluntarily agreed to waive 0.13% of its 0.20%
advisory and administrative fees for the US Government Money Market Fund.
Effective June 15, 1998, FRIMCo has contractually agreed to waive a portion of
its combined advisory fee, up to the full amount of those fees, equal to the
amount by which the Fund's total operating expenses exceed 0.30% of the Fund's
average daily net assets on an annual basis. FRIMCo waived fees in the amounts
of $463,787, $316,055 and $379,754 for the years ended December 31, 1997, 1998
and 1999, respectively. As a result of the waivers, the Fund paid advisory and
administrative equal to $78,288, $56,865 and $13,186 for the years ended
December 31, 1997, 1998 and 1999, respectively.

Effective January 1, 1997, FRIMCo voluntarily agreed to waive 0.10% of its 0.25%
combined advisory and administrative fees for the Tax Free Money Market Fund.
FRIMCo waived fees in the amounts of $106,776, $171,845 and $196,504 for the
years ended December 31, 1997, 1998 and 1999, respectively. As a result of the
waivers, the Fund paid advisory and

8
<PAGE>

administrative equal to $160,163, $257,768 and $294,756 for the years ended
December 31, 1997, 1998 and 1999, respectively.

FRIMCo has contractually agreed to waive a portion of its 1.03% combined
advisory and administrative fees for the Tax-Managed Small Cap Fund, up to the
full amount of those fees, equal to the amount by which total Fund-level
expenses exceed 1.25% of the Fund's average daily net assets on an annual basis.
In addition, FRIMCo has contractually agreed to reimburse the Fund for any
remaining total Fund-level expenses after any FRIMCo waiver which exceed 1.25%
of average daily net assets on an annual basis. FRIMCo waived fees in the amount
of $18,536 for the year ended December 31, 1999. In addition, FRIMCo reimbursed
the Fund $101,897 for expenses over the cap in 1999. As a result of the waivers
and reimbursements, the Fund paid no advisory and administrative for the year
ended December 31, 1999. The Fund commenced operations on December 1, 1999.

FRIMCo is a wholly-owned subsidiary of Frank Russell Company, a subsidiary of
The Northwestern Mutual Life Insurance Company. FRIMCo's mailing address is 909
A Street, Tacoma, WA 98402.

MONEY MANAGERS. Except with respect to the Money Market and US Government Money
Market Funds, the Funds' money managers have no affiliations or relationships
with FRIC 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 advisors or discretionary
managers for Frank Russell Trust Company, other investment vehicles sponsored or
advised by Frank Russell Company or its affiliates, 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 advisory fees, FRIMCo, as agent for FRIC, 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 years ended
December 31, 1997, 1998 and 1999, management fees paid to the money managers
were:

<TABLE>
<CAPTION>
Annual rate
Fund $ Amount Paid (as a % of average daily net assets)
---- --------------------------------------- ------------------------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Tax-Managed Large Cap $170,958 $606,948 $1,130,665 0.31% 0.31% 0.27%
Tax-Managed Small Cap* -- -- 6,673 -- -- 0.34%
Tax Free Money Market 103,973 134,817 146,901 0.08% 0.08% 0.08%
</TABLE>

* The Tax-Managed Small Cap Fund commenced operations on December 1, 1999.

Each money manager has agreed that it will look only to FRIMCo for the payment
of the money manager's fee, after FRIC has paid FRIMCo. 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. (the "Distributor") serves as the
distributor of FRIC Shares. The Distributor receives no compensation from FRIC
for its services other than Rule 12b-1 compensation and shareholder services
compensation for certain classes of Shares pursuant to FRIC's Rule 12b-1
Distribution Plan and Shareholder Services Plan, respectively. The Distributor
is a wholly owned subsidiary of FRIMCo and its mailing address is 909 A Street,
Tacoma, WA 98402.

CUSTODIAN AND PORTFOLIO ACCOUNTANT. State Street Bank and Trust Company ("State
Street") serves as the custodian for FRIC. State Street also provides basic
portfolio recordkeeping required for each of the Funds for regulatory and
financial reporting purposes. For these services, State Street is paid the
following annual fees, which will be billed and payable on a monthly basis:

CUSTODY:

9
<PAGE>

Domestic Custody - (i) $3,000 per portfolio per fund; (ii) First $10 billion in
average daily net assets - 0.75%, Over $10 billion - 0.65%. Global Custody - (i)
First $500 million in month end net assets - 0.11% - 0.35%, Over $500 million -
0.03% - 0.35% depending on the geographic classification of the investments in
the international funds (ii) a transaction charge ranging from $25 - $100
depending on the geographic classification of the investments in the
international funds. All Custody - (i) Portfolio transaction charges range from
$6.00 - $25.00 depending on the type of transaction; (ii) Futures and Options
charges range from $8.00 - $25.00; (iii) monthly pricing fees of $375.00 per
portfolio (except for the Tax Free Money Market Fund) and $6.00 - $11.00 per
security; (iv) on-line access charges of $2,500 per fund; and (v) Reimbursement
of out-of-pocket expenses including postage, transfer fees, stamp duties, taxes,
wire fees, telexes and freight. In addition, interest earned on uninvested cash
balances will be used to offset the Funds' custodian expense.

FUND ACCOUNTING:

Domestic Fund Accounting - (i) $10,000 per portfolio; and (ii) 0.015% of average
daily net assets. International Fund Accounting - (i) $24,000 per portfolio per
year; and (ii) 0.03% of month end net assets. Yield calculation services -$4,200
per fixed income fund. Tax accounting services - $8,500 per Equity Fund, $11,000
per Fixed Income Fund, and $15,000 per Global Fund. 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
FRIC. For this service, FRIMCo is paid a fee for transfer agency and dividend
disbursing services provided to FRIC. From this fee, which is based upon the
number of shareholder accounts and total assets of the Funds, FRIMCo compensates
unaffiliated agents who assist in providing these services. FRIMCO is also
reimbursed by FRIC for certain out-of-pocket expenses, including postage, taxes,
wires, stationery and telephone. FRIMCo's mailing address is 909 A Street,
Tacoma, WA 98402.

ORDER PLACEMENT DESIGNEES. FRIC has authorized certain Financial Intermediaries
to accept on its behalf purchase and redemption orders for FRIC Shares. Certain
Financial Intermediaries are authorized, subject to approval of FRIC's
Distributor, to designate other intermediaries to accept purchase and redemption
orders on FRIC's behalf. With respect to those intermediaries, FRIC will be
deemed to have received a purchase or redemption order when such a Financial
Intermediary or, if applicable, an authorized designee, accepts the order. The
customer orders will be priced at the applicable Fund's net asset value next
computed after they are accepted by such a Financial Intermediary or an
authorized designee, provided that Financial Intermediary or an authorized
designee timely transmits the customer order to FRIC.

INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP serves as the independent
accountants of FRIC. PricewaterhouseCoopers LLP is responsible for performing
annual audits of the financial statements and financial highlights of the Funds
in accordance with generally accepted auditing standards and a review of federal
tax returns. The mailing address of PricewaterhouseCoopers LLP is 1800 First
Interstate Center, 999 Third Avenue, Seattle, WA 98104-4098.

CODES OF ETHICS. FRIC, FRIMCo and RFD have each adopted a Code of Ethics as
required under SEC Rule 17j-1. These Codes permit personnel subject to the Codes
to invest in securities, which may include securities in which the Funds can
invest. Personal investments are subject to the regulatory and disclosure
provisions of the respective Codes. In addition, each Money Manager of a FRIC
Fund has adopted a Code of Ethics under Rule 17j-1. The table below indicates
whether each Money Manager's Code of Ethics permits personnel covered by the
Code to invest in securities and, where appropriate, to invest in securities in
which a Fund advised by that Money Manager may invest.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Is personal investing Are investments in securities owned by the advised Fund
Money Manager allowed? allowed?
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEW Capital Management, L.P. Yes No
--------------------------------------------------------------------------------------------------------------------
Alliance Capital Management Yes Yes, but not in securities with pending or possible client
L.P. buy or sell orders
--------------------------------------------------------------------------------------------------------------------
Barclays Global Fund Yes Yes, but not in securities with pending or possible client
Advisors N.A. buy or sell orders and certain blackouts apply to
securities of Barclays PLC and securities underwritten by
Barclays affiliates
--------------------------------------------------------------------------------------------------------------------
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BlackRock Financial Yes Yes, but not in securities with pending or possible client
Management buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
The Boston Company Asset Yes Yes, but not in securities with pending or possible client
Management buy or sell orders, also, certain persons may not purchase
securities issued by financial services organizations
-----------------------------------------------------------------------------------------------------------------------------
CapitalWorks Investment Yes Yes, but not in securities with pending or possible client
Partners buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
Cohen & Steers Yes Yes, but not in securities with pending or possible client
-----------------------------------------------------------------------------------------------------------------------------
Delaware International Yes Yes, but not in securities with pending or possible client
Advisors Limited buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
Delphi Management, Inc. Yes Yes, but not in securities with pending or possible client
buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
Driehaus Capital Yes Yes, but not in securities with pending or possible client
Management, Inc. buy or sell orders unless the order is bunched with the
client's, the client is able to fully complete its own
order, and the order receives the average price for that
day
-----------------------------------------------------------------------------------------------------------------------------
Equinox Capital Management, Yes Yes, but not in securities with pending or possible client
Inc. buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
Fidelity Management Trust Yes Cannot purchase securities on a restricted list
Company
-----------------------------------------------------------------------------------------------------------------------------
Fiduciary International, Yes Yes, but not in securities with pending or possible client
Inc. buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
Foreign & Colonial Emerging Yes Cannot purchase securities on a restricted list
Markets Limited
------------------------------------------------------------------------------------------------------------------------
Franklin Portfolio Yes Yes, but not in securities with pending or possible client
Associates LLC buy or sell orders, also, certain persons may not invest
in securities of financial services organizations
-----------------------------------------------------------------------------------------------------------------------------
Geewax, Terker & Company Yes Yes, but not in securities with pending or possible client
buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
Genesis Asset Managers, Ltd. Yes Yes, but not in securities with pending or possible client
buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
GlobeFlex Capital, L.P. Yes Yes, but not in securities with pending or possible client
buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
Jacobs Levy Equity Yes Yes, but not in securities with pending or possible client
Management, Inc. buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Investment Yes Cannot purchase securities on a restricted list or
Management, Inc. securities of financial services organizations
-----------------------------------------------------------------------------------------------------------------------------
Lazard Asset Management Yes Cannot purchase securities on a restricted list
-----------------------------------------------------------------------------------------------------------------------------
Lincoln Capital Management Yes Yes, but not in securities with pending or possible client
Company buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
Marsico Capital Management, Severely restricts No
LLC personal trading except
for a limited number of
specific transactions
such as purchase of
mutual fund shares,
commercial paper, etc.
-----------------------------------------------------------------------------------------------------------------------------
Marvin & Palmer Associates, Yes Yes
Inc.
-----------------------------------------------------------------------------------------------------------------------------
Mastholm Asset Management, Yes Yes, but not in securities with pending or possible client
LLC buy or sell orders
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS Institutional Advisors, Yes Yes, but not in securities with pending or possible client
Inc. buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Miller, Anderson & Yes Yes, but not in securities with pending or possible client
Sherrerd, LLP buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Montgomery Asset Management Yes Yes, but not in securities with pending or possible client
LLC buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Nicholas Applegate Capital Yes Yes, but not in securities with pending or possible client
Management buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Oechsle International Yes Yes, but not in securities with pending or possible client
Advisors, LLC buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Pacific Investment Yes Yes, but not in securities with pending or possible client
Management Company buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Peachtree Asset Management Yes Yes, but not in securities with pending or possible client
buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Sanford C. Bernstein & Co., Yes Yes, subject to blackouts and other restrictions
Inc.
-----------------------------------------------------------------------------------------------------------------------
Schroders Capital Yes Cannot purchase securities on a restricted list
Management International
Limited
-----------------------------------------------------------------------------------------------------------------------
Security Capital Global Yes Yes, but not in securities with pending or possible client
Capital Management Group buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Sirach Capital Management, Yes Yes, but not in securities with pending or possible client
Inc. buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Standish, Ayer & Wood, Inc. Yes Cannot purchase securities on a restricted list
-----------------------------------------------------------------------------------------------------------------------
STW Fixed Income Management Yes Yes, but not in securities with pending or possible client
Ltd. buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Strong Capital Management Yes Yes, but not in securities with pending or possible client
buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Suffolk Capital Management Yes Yes, but not in securities with pending or possible client
Ltd. buy or sell orders or in securities of which 10% or more
are held in portfolios managed by Suffolk
-----------------------------------------------------------------------------------------------------------------------
Turner Investment Partners Yes Yes, but not in securities with pending or possible client
buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Weiss, Peck & Greer, L.L.C. Yes Yes, but not in securities with pending or possible client
buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
Westpeak Investment Yes Yes, but not in securities with pending or possible client
Advisors, L.P. buy or sell orders
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

PLAN PURSUANT TO RULE 18f-3. Securities and Exchange Commission (the "SEC") Rule
18f-3 under the 1940 Act, permits a registered open-end investment company to
issue multiple classes of Shares in accordance with a written plan approved by
the investment company's board of trustees that is filed with the SEC. At a
meeting held on April 22, 1996, the Board adopted a plan pursuant to Rule 18f-3
(the "Rule 18f-3 Plan") on behalf of each Fund that issues multiple classes of
Shares (each a "Multiple Class Fund"). At a meeting held on June 3, 1998, the
Board amended the Rule 18f-3 Plan to create classes for the Institutional Funds.
On November 9, 1998, the Board again amended the Rule 18f-3 Plan to revise the
previously authorized classes. On August 9, 1999, the Board amended the Rule
18f-3 Plan to create classes for the Tax-Managed Small Cap Fund, Tax-Managed
Large Cap Fund and Tax-Managed Global Equity Fund. On November 22, 1999, the
Board amended the Rule 18f-3 Plan to create Class A Shares for all Funds except
the Institutional Funds and the money market funds. On August 7, 2000, the Board
amended the Rule 18f-3 Plan to (a) redesignate Class S Shares as Class I Shares,
and create new Class S Shares for the Money Market and Tax Free Money Market
Funds, (b) create new Class E Shares for the Tax-Managed Large Cap, Tax-Managed
Small Cap and Tax-Managed Global Equity Funds, (c) create Class B Shares and (d)
create classes for the Select Growth , Select Value and Tax-Managed Overseas
Equity Funds. For purposes of this Statement of Additional Information, each
Fund that issues multiple classes of Shares is referred to as a "Multiple
Class

12
<PAGE>

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: (1) each class of Shares
offered in connection with a Rule 12b-1 plan may bear certain fees under its
respective Rule 12b-1 plan and may 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
may have different exchange privileges from another class; (6) each class of
Shares of a Multiple Class Fund may 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, which
regulates the circumstances under which the Funds may, directly or indirectly,
bear distribution expenses. Rule 12b-1 provides that the Funds may pay for such
expenses only pursuant to a plan adopted in accordance with Rule 12b-1.
Accordingly, 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' Prospectuses. In adopting the Distribution
Plan, a majority of the Trustees, including a majority of the Trustees who are
not "interested persons" (as defined in the 1940 Act) of FRIC 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 Distribution
Plan, the Distributor, as the Multiple Class Funds' principal underwriter,
represented to the Trustees that the Distributor believes that the Distribution
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 (such as 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 12b-1 fees may be used to compensate (a) Selling Agents (as defined below)
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. The Distribution Plan is a compensation-type plan. As such, FRIC makes
no distribution payments to the Distributor with respect to Class C Shares
except as described above. Therefore, FRIC does not pay for unreimbursed
expenses of the Distributor, including amounts expended by the Distributor in
excess of amounts received by it from FRIC, 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 FRIC under the
Distribution Plan.

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 and Class D Shares for any activities or expenses primarily
intended to result in the sale of Class C Shares and Class D Shares of a
Multiple Class Fund. Such payments by FRIC will be calculated daily and paid
periodically and shall not be made less frequently than quarterly. 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 affected Class of the lesser of (a) more than fifty
percent (50%) of the outstanding Shares of the affected Class of a Multiple
Class Fund or (b) sixty-seven percent (67%) or more of the Shares of the
affected Class of a Multiple Class Fund present at a shareholders' meeting, if
the holders of more than 50% of the outstanding Shares of the affected Class of
such Fund are present or represented by proxy (a "1940 Act Vote"). 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
affected Class of 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

13
<PAGE>

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 the affected Class of a Multiple Class Fund or (b) a 1940 Act Vote.

Under the Distribution Plan, the Multiple Class Funds may also enter into
agreements ("Selling Agent Agreements") with Financial Intermediaries and with
the Distributor to provide sales support services with respect to Multiple Class
Fund Shares held by or for the customers of the Financial Intermediaries.
Financial Intermediaries that have entered into Selling Agent Agreements are
referred to in this Statement as "Selling Agents."

Under the Distribution Plan, the following Multiple Class Funds' Class C Shares
accrued expenses in the following amounts, payable as compensation to the
Distributor, for the year ended December 31, 1999 (these amounts were for
compensation to dealers):

Class C
-------
Tax-Managed Large Cap $ 133
Tax-Managed Small Cap 65

SHAREHOLDER SERVICES PLAN. A majority of the Trustees, including a majority of
Independent Trustees, has adopted and amended a Shareholder Services Plan for
certain classes of Shares of the Funds ("Servicing Plan"). The Servicing Plan
was adopted on April 22, 1996 and amended on June 3, 1998, November 9, 1998,
August 9, 1999, November 22, 1999 and August 7, 2000.

Under the Service Plan, FRIC may compensate the Distributor or any investment
advisers, banks, broker-dealers, financial planners or other financial
institutions that are dealers of record or holders of record or that have a
servicing relationship with the beneficial owners or record holders of Shares of
the Class A, Class C or Class E, 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
FRIC's Class A, Class C or Class E. Such payments by FRIC 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 any Class A, Class C or
Class E Shares may exceed, on an annual basis, 0.25% 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 FRIC'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 Service Plan, the following Multiple Class Funds' Class C and Class E
Shares accrued expenses in the following amounts payable to the Distributor, for
the year ended December 31, 1999:

Class C Class E*
------- --------
Tax-Managed Large Cap 44 --
Tax-Managed Small Cap 22 --

* No Class E Shares of these Funds were issued during the period shown.

14
<PAGE>

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 advisory fee
and the annual administrative fee, each 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 (except for the Tax
Exempt Bond, Money Market, U.S. Government Money Market, 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 FRIC to indemnify the 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, FRIMCo has contractually agreed to waive
and/or reimburse until October 31, 2001 all or a portion of its aggregate
combined advisory and administrative fees with respect to certain Funds.

PURCHASE AND REDEMPTION OF FUND SHARES

Minimum Investment Requirements. You may be eligible to purchase Fund Shares if
-------------------------------
you do not meet the applicable required minimum investment. The Funds, at their
discretion, may waive the initial minimum investment requirement for some
employee benefit plans and other plans with at least $5 million in total plan
assets or if requirements are met for a combined purchase privilege, cumulative
quantity discount, or statement of intention. The Funds may also, at their
discretion, waive the minimum initial investment for clients of certain
Financial Intermediaries who have entered into special arrangements with the
Funds. If you invest less than the required minimum investment in a Fund, and
the minimum investment required has not been waived for you, the Funds reserve
the right to refuse your order or to correct, within a reasonable period, your
purchase transaction and notify you promptly of that correction.

Trustees, officers, employees and certain third party contractors of FRIC and
its affiliates and their spouses and children are not subject to any initial
minimum investment requirement.

Stale Checks. If you do not cash a dividend, distribution, or redemption check
------------
within 180 days from the date it was issued, the Funds will act to protect
themselves and you. No interest will accrue on amounts represented by uncashed
checks.

For uncashed dividend and distribution checks and uncashed redemption checks of
$25 or less, the Funds will deem the uncashed check to be an order to reinvest
the proceeds of the uncashed check into your account with that Fund at its then-
current net asset value, and, if the uncashed check represents a dividend or
distribution, the Funds will deem it to be an order to reinvest all future Fund
dividends and distributions unless otherwise notified by you. If you do not have
an open account with that Fund, an uncashed check of more than $25 will be
deemed an order to purchase shares of the Frank Russell Investment Company Money
Market Fund, and the proceeds of any uncashed checks for $25 or less will be
held in the Fund's general account for your benefit in accordance with
applicable law.

For redemption checks of more than $25, the Fund will reissue the check. If the
reissued check is not cashed within 180 days from the date it was reissued, the
Funds will deem that to be an order to reinvest the proceeds of the uncashed
check into your account with that Fund at its then-current net asset value. If
you no longer have a current account open for that Fund, the uncashed check will
be deemed an order to purchase shares of the Frank Russell Investment Company
Money Market Fund.

Solicitation Fees FRIMCo may enter into written agreements with certain
-----------------
Financial Intermediaries in which it agrees to pay a solicitation fee, or
finders fee, out of its own resources, to such intermediaries in connection with
their referral of certain prospective investors to the Funds. Each prospective
shareholder on whose behalf a fee may be paid will receive from the intermediary
a disclosure statement setting forth the details of the arrangement and the
amount of fee to be received by the intermediary.

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
("NYSE") is open for trading, and for the Money Market, US Government Money
Market, and Tax Free Money Market

15
<PAGE>

Funds, any day on which both the NYSE is open for trading and the Boston Federal
Reserve Bank is open for business. Currently, the NYSE is open for trading every
weekday except New Year's Day, Martin Luther King, Jr. 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 NYSE is open, except Columbus Day and Veterans' Day.

Net asset value per share is computed for each class of Shares of a Fund by
dividing the current value of the Fund's assets attributable to each class of
Shares, less liabilities attributable to that class of Shares, by the number of
each individual class of Shares of the Fund outstanding, and rounding to the
nearest cent.

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 their net asset values, events
affecting the value of the portfolio securities occurring between the time
prices are determined and the time the Funds calculate their net asset values
may not be reflected in the calculations of net asset value unless FRIMCo
determines that a particular event would materially affect the net asset value.

VALUATION OF PORTFOLIO SECURITIES. With the exceptions noted below, the Funds
value their portfolio securities at "fair market value." This generally means
that equity securities and fixed-income securities listed and principally traded
on any national securities exchange are valued on the basis of the last sale
price or, if there were no sales, at the closing bid price, on the primary
exchange on which the security is traded. US 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 often are not available. As a result, these securities may be valued
using prices provided by a pricing service when the prices are believed to be
reliable--that is, when the prices reflect the fair market value of the
securities.

International equity securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of the mean of bid prices. If there is
no last sale or mean bid price, the securities may be valued on the basis of
prices provided by a pricing service when the prices are believed to be
reliable.

Money market instruments maturing within 60 days of the valuation date held by
the Funds are valued using the amortized cost method. Under this method, a
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 2(a)-7
of the 1940 Act. The money market instruments are valued at "amortized cost"
unless the Board determines that amortized cost does not represent fair value.
Money market instruments maturing within 60 days of the valuation date held by
the non-money market Funds are also valued at "amortized cost" unless the Board
determines that amortized cost does not represent fair value. While amortized
cost provides certainty in valuation, it may result in periods when the value of
an instrument is higher or lower than the price a Fund would receive if it sold
the instrument.

Municipal obligations are appraised or priced by an independent pricing source,
approved by the Board, which utilizes relevant information, such as bond
transactions, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities.

The Funds value securities for which market quotations are not readily available
at "fair value," as determined in good faith and in accordance with procedures
established by the Board.

PORTFOLIO TRANSACTION POLICIES. Generally, securities are purchased for the
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. The Equity II, Fixed Income

16
<PAGE>

III, Special Growth, Short Term Bond, Multistrategy Bond and Tax Exempt Bond
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, the Tax-Managed Large Cap Fund and the Tax-Managed Small Cap Fund,
which seek to minimize the impact of taxes on their shareholders, attempt 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 Tax-Managed Large Cap Fund and the Tax-Managed Small Cap Fund.

The portfolio turnover rates for certain multi-manager 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 the Tax-Managed
Large Cap and Tax-Managed Small Cap Funds' investment objective and policies,
those Funds' ability to change money managers may be constrained.

The Funds, except the Tax Exempt Bond, Tax-Managed Large Cap and Tax-Managed
Small Cap Funds, do not give significant weight to attempting to realize long-
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 past 13 months. For purposes of determining the rate, all
short-term securities, including options, futures, forward contracts, and
repurchase agreements, are excluded. Significant variations in the portfolio
turnover rates for any Fund generally are primarily attributable to money
manager changes, market volatility, and/or duration of portfolio investments.

The portfolio turnover rates for the last two years for each Fund (other than
the Money Market, US Government Money Market and Tax Free Money Market Funds)
were:

YEARS ENDED
-----------
12/31/99 12/31/98
-------- --------
Tax-Managed Large Cap (formerly Equity T) 48% 51%
Tax-Managed Small Cap* 3 --

* The Tax-Managed Small Cap Fund commenced operations on December 1, 1999.

A high portfolio turnover rate 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. FRIC's advisory agreements with FRIMCo and the money managers provide,
in substance and subject to specific directions from officers of FRIC 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).

17
<PAGE>

In addition, the advisory agreements authorize FRIMCo and the money managers,
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 commissions 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 FRIC's procedures adopted in accordance
with Rule 17e-1 of the 1940 Act.

FRIMCo does not expect FRIC to ordinarily effect a significant portion of FRIC's
total brokerage business for the Funds with broker-dealers affiliated with its
money managers. However, a money manager may effect portfolio transactions for
the segment of a Fund's portfolio assigned to the money manager with a broker-
dealer affiliated with the manager, as well as with brokers affiliated with
other money managers.

FRIMCo and each Money Manager arrange for the purchase and sale of FRIC'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 and each Money Manager may select brokers
and dealers which provide it with research services and may cause FRIC 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 and each Money Manager to supplement its own
research and analysis.

The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc. ("FRS"), an affiliate of FRIMCo, only when the applicable money
manager determines that the Funds will receive competitive execution, price and
commissions. Where brokerage transactions are effected by money managers on
behalf of the Funds through FRS at the request of the FRIMCo, research services
obtained from third party service providers at market rates are provided to
FRIMCo by FRS. Such research services include performance measurement
statistics, fund analytics systems and market monitoring systems. This
arrangement may be used by any Fund other than those Funds which invest
principally in fixed income securities. All Funds may also effect portfolio
transactions on an agency basis through, and pay brokerage commissions to,
brokerage affiliates of the money managers.

BROKERAGE COMMISSIONS. The Board 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 database 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 Tax-Managed
Large Cap and Tax-Managed Small Cap Funds were:

YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
Tax-Managed Large Cap (formerly Equity T) $403,032 $176,555 $40,539
Tax-Managed Small Cap* 26,712 -- --
-------- -------- -------
Total $429,744 $176,555 $40,539
======== ======== =======

* Tax-Managed Small Cap Fund commenced operations on December 1, 1999.

18
<PAGE>

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.

The Fixed Income I, Fixed Income III, Diversified Bond, Short Term Bond,
Multistrategy Bond, Tax Exempt Bond, Money Market, US 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, 1999, approximately $2.6 million 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,
1999, from portfolio transactions effected for all FRIC Funds, were as
follows:

PERCENT OF TOTAL
AFFILIATED BROKER/DEALER COMMISSIONS COMMISSIONS
------------------------ ----------- -----------
Autranet $ 16,389 0.07%
Bank of America 2,042 0.01
Commerz Bank 37,762 0.15
Donaldson, Lufkin & Jenrette 73,002 0.30
Dresdner Klienworth 922 0.00
Frank Russell Securities 1,943,521 7.88
Jarnine Fleming 249 0.00
J.P. Morgan 180,516 0.73
Morgan Stanley 57,324 0.23
Robert Baird 19,204 0.08
Robinson Humphry 3,495 0.01
Salomon Smith Barney 167,915 0.68
Sanford C. Bernstein 75,740 0.31
State Street Bank 23,071 0.09
------ ----
Total $2,601,152 10.55%
---------- -----

The percentage of total affiliated transactions (relating to trading activity)
to total transactions during the year ended December 31, 1999 for the Funds was
11%.

19
<PAGE>

During the year ended December 31, 1999, all FRIC Funds in the aggregate
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 FRIC's 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, 1999, was as follows:

<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Salomon
FUND Merrill Morgan Goldman Credit Paine Smith
Lynch Stanley Sachs Citibank Suisse Webber Barney
------------------------------------------------------------------------------------------------------------------------------------
Equity I $17,616,064 $3,786,338
------------------------------------------------------------------------------------------------------------------------------------
Equity III 3,540,200 $221,231
------------------------------------------------------------------------------------------------------------------------------------
Equity Q $3,721,595 14,945,639 433,263 485,156
------------------------------------------------------------------------------------------------------------------------------------
Fixed Income I 9,022,952 999,210 4,507,710 $1,563,566 $1,590,547 285,165
------------------------------------------------------------------------------------------------------------------------------------
Fixed Income III 3,612,410 8,668,200 5,636,482 1,599,751 363,273 715,933
------------------------------------------------------------------------------------------------------------------------------------
Diversified Equity 16,729,444 3,484,938
------------------------------------------------------------------------------------------------------------------------------------
Special Growth
------------------------------------------------------------------------------------------------------------------------------------
Equity Income 3,583,025 329,906
------------------------------------------------------------------------------------------------------------------------------------
Quantitative Equity 4,332,231 16,481,630 558,900
------------------------------------------------------------------------------------------------------------------------------------
Diversified Bond 2,971,698 971,729 1,261,638
------------------------------------------------------------------------------------------------------------------------------------
Short Term Bond 2,977,232 11,399,375 $369,627
------------------------------------------------------------------------------------------------------------------------------------
Multistrategy Bond 5,554,262 9,401,493 5,490,050 1,851,452 441,819 883,034
====================================================================================================================================
</TABLE>

At December 31, 1999, no FRIC Fund had any holdings in FRIC's top 10 following
broker-dealers:

Frank Russell Securities
Instinet Corp.
Investment Technology Group

YIELD AND TOTAL RETURN QUOTATIONS. The Funds compute their average annual total
return by using a standardized method of calculation required by the SEC and
report average annual total return for each class of Shares which they offer.

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 all classes of Shares are
reported in the respective Prospectuses.

Yields are computed by using standardized methods of calculation required by the
SEC. Similar to average annual total return calculations, a Fund calculates
yields for each class of Shares that it offers. Yields for Funds other than
Funds investing primarily in money market instruments (the "Money Market Funds")
are calculated by dividing the net investment income per share earned during a
30-day (or one month) period by the maximum offering price per share on the last
day of the period, according to the following formula:

20
<PAGE>

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 respective 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' respective Prospectuses.

Each Fund may, from time to time, advertise non-standard performances, including
average annual total return for periods other than 1, 5 or 10 years or since
inception.

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 indexes.

Tax-equivalent yields for the Tax Exempt Bond 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
(36.9%). The tax-equivalent yields for the Tax Exempt Bond and Tax Free Money
Market Funds are reported in the Funds' respective Prospectuses.

INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS

The following section relates to the investment restrictions, policies and
certain investments for all series of FRIC and is not limited to the series of
FRIC to which this Statement relates.

Each Fund's investment objective is "fundamental" which means each investment
objective may not be changed without the approval of a majority of each Fund's
shareholders. Certain investment policies may also be fundamental. Other
policies may be changed by a Fund without shareholder approval. The Funds'
investment objectives are set forth in the respective Prospectuses.

21
<PAGE>

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, and 13. (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.
(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 except stock
index and financial futures contracts.

7. Borrow money, except that the Fund may borrow as a temporary measure
for extraordinary or emergency purposes, and not in excess of five percent
of its net assets; provided, that the Fund may borrow to facilitate
redemptions (not for leveraging or investment), provided that borrowings do
not exceed an amount equal to 33 1/3% of the current value of the Fund's
assets taken at market value, less liabilities other than borrowings. If at
any time the Fund's borrowings exceed this limitation due to a decline in
net assets, such borrowings will be reduced to the extent necessary to
comply with this limitation within three days. Reverse repurchase
agreements will not be considered borrowings for purposes of the foregoing
restrictions, provided that the Fund will not purchase investments when
borrowed funds (including reverse repurchase agreements) exceed 5% of its
total 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 subject to legal or contractual restrictions on
disposition, except as permitted by the Tax Exempt Bond and Tax Free Money
Market Funds' investment objectives.

10. 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.

22
<PAGE>

11. 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'.

12. 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
Tax Exempt Bond 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.

13. 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.

14. Purchase from or sell portfolio securities to the officers, Trustees
or other "interested persons" (as defined in the 1940 Act) of FRIC,
including the Fund's money managers and their affiliates, except as
permitted by the 1940 Act, SEC rules or exemptive orders.

15. 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.

An additional fundamental policy is that (a) Fixed Income I, Diversified
Bond and Short Term Bond Funds may acquire convertible bonds which will be
disposed of by the Funds in as timely a manner as is practical after
conversion, and (b) Tax Exempt Bond Fund will not invest in interests in
oil, gas or other mineral exploration or development programs.

For purposes of these investment restrictions, the Tax Exempt Bond 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.

23
<PAGE>

INVESTMENT POLICIES.

Fund Investment Securities
--------------------------

The following tables illustrate the investments that the Funds primarily
invest in or are permitted to invest in:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Diversified Equity Quantitative International Diversified Multistrategy Real
Type of Portfolio Equity Income Equity Securities Bond Bond Estate
Security Fund Fund Fund Fund Fund Fund Scurities
----------------- ----------- ------ ------------ ------------- ------------ ------------ Fund
------
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stocks.............. |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Common stock equivalents
---------------------------------------------------------------------------------------------------------------------------
(warrants)............... |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
(options)................ |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
(convertible debt
securities)............ |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
(depository
receipts)............. |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Preferred stocks........... |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Equity derivative
securities............... |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Debt securities (below
investment grade or
junk bonds............... |X|
---------------------------------------------------------------------------------------------------------------------------
US government
securities............... |X| |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Municipal obligations...... |X|
---------------------------------------------------------------------------------------------------------------------------
Investment company
Securities............... |X| |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Foreign securities......... |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
US Tax
Tax Tax Tax Short Government Free
Emerging Managed Managed Special Exempt Term Money Money Money
Type of Portfolio Markets Large Cap Small Cap Growth Bond Bond Market Market Market
Securities Fund Fund Fund Fund Fund Fund Fund Fund Fund
---------- ---- ---- ---- ---- ---- ---- ---- ---- ----
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stocks.............. |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Common stock equivalents
----------------------------------------------------------------------------------------------------------------------------
(warrants)............... |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
(options)................ |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
(convertible debt
securities)............ |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
(depository
receipts).............. |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Preferred stocks.......... |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Equity derivative
securities................. |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Debt securities (below
investment grade or
junk bonds).............. |X| |X|
----------------------------------------------------------------------------------------------------------------------------
US government
securities............... |X| |X| |X| |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Municipal obligations...... |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Investment company
Securities............... |X| |X| |X| |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Foreign securities..... |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Fixed Fixed
Type of Portfolio Equity I Equity II Equity III Equity Q International Income I Income III
Security Fund Fund Fund Fund Fund Fund Fund
---------------- -------- -------- -------- ------- ------------- -------- ----------
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stocks.............. |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Common stock equivalents
----------------------------------------------------------------------------------------------------------------------------
(warrants)............... |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
(options)................ |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
(convertible debt
securities)............ |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
(depository
receipts).............. |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Preferred stocks........... |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Equity derivative |X| |X| |X| |X| |X|
securities.................
----------------------------------------------------------------------------------------------------------------------------
Debt securities (below
investment grade or
junk bonds).............. |X|
----------------------------------------------------------------------------------------------------------------------------
US government
securities............... |X| |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Municipal obligations...... |X|
----------------------------------------------------------------------------------------------------------------------------
Investment company
securities............... |X| |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Foreign securities......... |X| |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

Other Investment Practices
--------------------------

The Funds use investment techniques commonly used by other mutual
funds. The table below summarizes the principal investment practices of the
Funds, each of which may involve certain special risks. The Glossary located at
the back of the Statement of Additional Information describes each of the
investment techniques identified below.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Diversified Equity Quantitative International Diversified Multistrategy
Type of Portfolio Equity Income Equity Securities Bond Bond
Security Fund Fund Fund Fund Fund Fund
-------- ---- ---- ---- ---- ---- ----
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash reserves................. |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Repurchase agreements(1)...... |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
When-issued and forward
commitment securities....... |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Reverse repurchase
agreements.................. |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Lending portfolio securities
not to exceed 33 1/3% of
total Fund assets........... |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited
to 15% of a Fund's net
assets)..................... |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Forward currency
contracts(2)................ |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Write (sell) call and put
options on securities,
securities indexes and
foreign currencies(3)....... |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Purchase options on
securities, securities
indexes, and currencies(3).. |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Interest rate futures
contracts, stock index
futures contracts,
foreign currency
contracts and options
on futures(4)............... |X| |X| |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
Liquidity portfolios.......... |X| |X| |X| |X|
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-----------------------
(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
Fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and
may incur disposition costs in liquidating the security.
(2) Each of the International Securities, Diversified Bond and Multistrategy
Bond Funds may not invest more than one-third of its assets in these
contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. 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.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.

25
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
US
Real Tax- Tax- Tax Short Government Tax
Estate Emerging Managed Managed Special Exempt Term Money Money Free
Type of Portfolio Securities Markets Large Cap Small Cap Gowth Bond Bond Market Market Money
Securities Fund Fund Fund Fund Fund Fund Fund Fund Fund Market
----------------- ---------- -------- --------- --------- ------- ------- ------ ------- ---------- --------
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash reserves.............. |X| |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements(1)... |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
When-issued and forward
commitment securities.... |X| |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase
agreements............... |X| |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Lending portfolio
securities
not to exceed 33 1/3%
of total Fund assets..... |X| |X| |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities
(limited to 15% of a
Fund's net assets)....... |X| |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities
(limited to 10% of a
Fund's net assets)....... |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Forward currency
contracts(2)............. |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Write (sell) call and put
options on securities,
securities indexes and
foreign currencies(3).... |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Purchase options on
securities, securities
indexes, and
currencies(3)............ |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Interest rate futures
contracts, stock index
futures contracts,
foreign currency
contracts and options on
futures(4)............... |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Credit and liquidity
enhancements............. |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
Liquidity portfolio........ |X| |X| |X| |X| |X| |X|
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
Fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and
may incur disposition costs in liquidating the security.
(2) Each of the Emerging Markets and Short Term Bond Funds may not invest more
than one-third of its assets in these contracts. (3) A Fund will only
engage in options where the options are traded on a national securities
exchange or in an over-the-counter market. 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.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.

26
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Fixed Fixed
Type of Portfolio Equity I Equity II Equity III Equity Q International Income I Income III
Security Fund Fund Fund Fund Fund Fund Fund
----------------- -------- --------- ---------- -------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------
Cash reserves............ |X| |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Repurchase agreements(1). |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
When-issued and forward
commitment securities.. |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Reverse repurchase
agreements............. |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Lending portfolio
securities not to
exceed 33 1/3% of
total Fund assets...... |X| |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Illiquid securities
(limited to 15% of a
Fund's net assets)..... |X| |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Forward currency
contracts(2)........... |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Write (sell) call and put
options on securities,
securities indexes and
foreign currencies(3).. |X| |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Purchase options on
securities, securities
indexes, and
currencies(3).......... |X| |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Interest rate futures
contracts, stock index
futures contracts,
foreign currency
contracts and options
on futures(4).......... |X| |X| |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
Liquidity portfolio...... |X| |X| |X| |X| |X|
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
Fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and
may incur disposition costs in liquidating the security.
(2) Each of the International, Fixed Income I and Fixed Income III Funds may
not invest more than one-third of its assets in these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. 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. Only the Fixed Income III Fund currently intends to write or
purchase options on foreign currency.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.

Cash Reserves. Each Fund (except the Money Market, U.S. Government Money
-------------
Market and Tax Free Money Market Funds), and its money managers, may elect to
invest the Fund's cash reserves in one or more of FRIC's money market funds.
Those money market funds seek to maximize current income to the extent
consistent with the preservation of capital and liquidity, and the maintenance
of a stable $1.00 per share net asset value by investing solely in short-term
money market instruments. The Funds will use this procedure only so long as
doing so does not adversely affect the portfolio management and operations of
the money market funds and FRIC's other Funds. Those money market funds, and the
Funds investing in them, treat such investments as the purchase and redemption
of the money market funds' Shares. Any Fund investing in a 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 FRIC's Master Trust
Agreement, including voting rights. However, Shares of a money market fund
issued to other Funds will be voted by the Trustees in the same proportion as
the Shares of the money market fund that are held by shareholders that are not
Funds. Funds investing in a money market fund effectively do not pay an advisory
or administrative fee to a money market fund and thus do not pay duplicative
advisory or administrative fees, as FRIMCo waives a portion of its advisory or
administrative fees due from those Funds in an amount that offsets the advisory
or administrative fees it receives from the applicable money market fund in
respect of those investments.

27
<PAGE>

Liquidity Portfolio. 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, Tax-Managed Large
Cap, Tax-Managed Small Cap, 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. FRIMCo will exercise investment discretion
or select a money manager to exercise investment discretion for approximately 5-
15% of the Funds' assets assigned to a "Liquidity Portfolio."

A Liquidity Portfolio addresses this potential detriment by having FRIMCo
or a money manager selected for this purpose create a temporary 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 that of equity securities.

Money Market Instruments. The Money Market, US 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 Money Market Funds will
maintain a dollar-weighted average maturity of 90 days or less. Each of the
Funds will invest in securities maturing within 397 days or less at the time of
the trade date or such other date upon which a Fund's interest in a security is
subject to market action. Each money market 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 respective Prospectuses.

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

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.

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.

CERTAIN INVESTMENTS.

Repurchase Agreements. A 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 a Fund have a total value in excess of the value of the
repurchase agreement and are held by the Custodian 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. A 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 a 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.

28
<PAGE>

High Risk Bonds. The Funds, other than the Emerging Markets, Fixed Income
---------------
III, Short Term Bond, and Multistrategy Bond Funds, do not invest their 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 are the lowest
ratings which are considered "investment grade," 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, Fixed
Income III, Short Term Bond, 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 Emerging Markets, Fixed Income III, Short Term Bond, and Multistrategy
Bond Funds will invest in "investment grade" securities and may invest up to 5%
of its total assets (in the case of the Emerging Markets Fund), 10% of its total
assets (in the case of the Short Term Bond Fund), and 25% of its total assets
(in the case of the Fixed Income III and Multistrategy Bond Funds) 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 Funds 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, because they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuation in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial stress
which could adversely affect their ability to make payments of principal and
interest and increase the possibility of default. In addition, the market for
lower rated debt securities has expanded rapidly in recent years, and its growth
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 Fixed Income III, Multistrategy Bond, Short Term Bond, and
Emerging Markets 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.

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. For further description of the
various rating categories, see "Ratings of Debt Instruments."

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 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
generally thinner, more limited and less active 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

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<PAGE>

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 money 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 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, as
amended (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. These guidelines adopted by the Board for the
determination of liquidity of securities 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.

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 respective 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, a 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.

Forward Commitments. A 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
the Fund's ability to manage its investment portfolio and meet redemption
requests. A Fund may dispose of a forward 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.

Lending Portfolio Securities. Cash collateral received by a Fund when it
----------------------------
lends its portfolio securities is invested in high-quality short-term debt
instruments, short-term bank collective investment and money market mutual funds
(including funds advised by the Custodian, for which it may receive an asset-
based fee), and other investments meeting certain quality and maturity
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 then to pay for lending transaction costs, and then the remainder is
divided between the Fund and the lending agent.

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. A Fund will call loans to vote proxies if a
material issue affecting the investment is to be voted upon.

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<PAGE>

FRIC 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.

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, provided that
FRIC'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.
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.

An option on a security (or securities index) is a contract that gives the
purchaser of the option, in return for a premium, the right (but not the
obligation) 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 at a specified
exercise price at any time during the option period. 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
(established by the exchange upon which the stock index is traded) 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.) Options on securities indexes are
similar to options on specific securities 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.

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 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 the 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 the 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 the
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
the 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 the
Custodian.

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<PAGE>

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.

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.

Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.

A Fund will realize a capital gain from a closing transaction on an option
it has written if the cost of the closing option is less than the premium
received from writing the option, or, if it is more, the Fund will realize a
capital loss. If the premium received from a closing sale transaction is more
than the premium paid to purchase the option, the Fund will realize a capital
gain or, if it is less, the Fund will realize a capital loss. With respect to
closing transactions on purchased options, the capital gain or loss realized
will be short or long-term depending on the holding period of the option closed
out. The principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of the option,
the volatility of the underlying security or index, and the time remaining until
the expiration date.

The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is recorded as
a liability. The value of an option purchased or written is marked-to-market
daily and is valued at the closing price on the exchange on which it is traded
or, if not traded on an exchange or no closing price is available, at the mean
between the last bid and asked prices.

Risks Associated With Options On Securities And Indexes. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.

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.

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
underlying security above the exercise price, but, as long as its obligation as
a writer continues, has retained a 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.

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,

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<PAGE>

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.

Options On Foreign Currency. A Fund may buy and sell put and call options
---------------------------
on foreign currencies either on exchanges or in the over-the-counter market 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.

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

Each Fund may also 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
(in the case of a call) or short position (in the case of a 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. 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 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 on Securities and Indexes" above.

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<PAGE>

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 (the "CFTC"). 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.

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.

When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with the 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 the 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 equal to or higher than the price of the contract held by the Fund.

When selling a futures contract, a Fund will maintain with the 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 Custodian).

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<PAGE>

When selling a call option on a futures contract, a Fund will maintain with
the 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
the 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
"commodity pools," the Funds are limited in entering into futures contracts and
options on futures contracts to positions which constitute "bona fide hedging"
positions within the meaning and intent of applicable CFTC rules, and with
respect to positions for non-hedging purposes, 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 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 portfolio 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. 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. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.

Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.

There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position. 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.

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,

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<PAGE>

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, Tax-Managed Large
Cap, Tax-Managed Small Cap, 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 will
always be fully exposed to equity market performance.

Financial futures contracts may be used by the International, Emerging
Markets, Fixed Income I, Fixed Income III, International Securities, Diversified
Bond, Short Term Bond, Multistrategy Bond and Tax Exempt Bond 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 a 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.

When purchasing a futures contract, a Fund will maintain with the 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, a 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.

Foreign Currency Futures Contracts. The Funds are also permitted to enter
----------------------------------
into foreign currency futures contracts in accordance with their investment
objectives and as limited by the procedures outlined above.

A foreign currency futures contract is a bilateral agreement pursuant to
which one party agrees to make, and the other party agrees to accept delivery of
a specified type of debt security or currency at a specified price. Although
such futures contacts by their terms call for actual delivery or acceptance of
debt securities or currency, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery.

The Funds may sell a foreign currency futures contract to hedge against
possible variations in the exchange rate of the foreign currency in relation to
the US dollar. When a manager anticipates a significant change in a foreign
exchange rate while intending to invest in a foreign security, a Fund may
purchase a foreign currency futures contract to hedge against a rise in foreign
exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the Fund against any rise
in the foreign exchange rate which may add additional costs to acquiring the
foreign security position. The Funds may also purchase call or put options on
foreign currency futures contracts to obtain a fixed foreign exchange rate. The
Funds 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 Funds 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.

36
<PAGE>

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 Tax Exempt Bond 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
the 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 ("Forward Currency
-----------------------------------------------------------------
Contracts"). The Funds may engage in forward currency contracts 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. For example, to exchange a
certain amount of US dollars for a certain amount of Japanese Yen--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. 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. A Fund may, however,
enter into forward currency contracts containing either or both deposit
requirements and commissions. In order to assure that a 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. The Funds may engage in a forward
contract that involves transacting in a currency whose changes in value are
considered to be linked (a proxy) to a currency or currencies in which some or
all of the Funds' portfolio securities are or are expected to be denominated. A
Fund's dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of foreign currency with respect to specific receivables or
payables of the Funds generally accruing in connection with the purchase or sale
of their portfolio securities. Position hedging is the sale of foreign currency
with respect to portfolio security positions denominated or quoted in the
currency. A Fund may not position hedge with respect to a particular currency to
an extent greater than the aggregate market value (at the time of making such
sale) of the securities held in its portfolio denominated or quoted in or
currency convertible into that particular currency (or another currency or
aggregate of currencies which act as a proxy for that currency). The Funds may,
however, enter into a position hedging transaction with respect to a currency
other than that held in the Funds' portfolios, if such a transaction is deemed a
hedge. If a Fund enters into this type of hedging transaction, 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 a 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

37
<PAGE>

has agreed to purchase exceeds the price of the currency that it has agreed to
sell. There can be no assurance that new forward currency contracts or offsets
will be available to a Fund.

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.

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 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.

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 a Fund is engaged in that strategy.

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

Forward foreign currency transactions are subject to the additional 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.

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<PAGE>

Depository Receipts. A 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 may be 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 Continental 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 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 US 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.

Bank Instruments. The Diversified Bond, Multistrategy Bond, Short Term
----------------
Bond, Money Market, Fixed Income I and Fixed Income III Funds may invest in bank
instruments, which include European certificates of deposit ("ECDs"), European
time deposits ("ETDs") and Yankee Certificates of deposit ("Yankee CDs"). 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. 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 managers when evaluating credit risk in the
selection of investments for these Funds.

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.

39
<PAGE>

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

40
<PAGE>

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.

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 passthrough 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 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.

41
<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
Tax Exempt Bond Fund 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 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.

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<PAGE>

DEMAND NOTES. The Tax Exempt Bond 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 Tax Exempt Bond 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 III, Short Term 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. When a Fund engages in an interest rate swap, it exchanges its
obligations to pay or rights to receive interest payments for the obligations or
rights to receive interest payments of another party (i.e., 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 their portfolios or to protect against any increase in
the price of securities they anticipate purchasing at a later date. Inasmuch as
these hedging transactions are entered into for good faith hedging purposes, the
money managers and the Funds believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to the Funds'
borrowing restrictions. The net amount of the excess, if any, of the Funds'
obligations over their entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Funds' custodian. To
the extent that the Funds enter into interest rate swaps on other than a net
basis, the amount maintained in a segregated account will be the full amount of
the Funds' obligations, if any, with respect to such interest rate swaps,
accrued on a daily basis. The Funds will not enter into any interest rate swaps
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into such transaction. If
there is a default by the other party to such a transaction, the Funds will have
contractual remedies pursuant to the agreement related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.

The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If a money manager using this
technique is incorrect in its forecast of market values, interest rates and
other applicable factors, the investment performance of a 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

43
<PAGE>

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.

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.

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

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.

44
<PAGE>

Other Debt Securities. Multistrategy Bond and Fixed Income III Funds may
---------------------
invest in debt securities issued by supranational organizations such as:

The World Bank -- An international bank which was chartered to finance
development projects in developing member countries.

The European Community -- An organization which consists of certain
European states engaged in cooperative economic activities.

The European Coal and Steel Community -- An economic union of various
European nations' steel and coal industries.

The Asian Development Bank -- An international development bank
established to lend funds, promote investment and provide technical
assistance to member nations in the Asian and Pacific regions.

Multistrategy Bond and Fixed Income III Funds may also invest in debt
securities denominated in the ECU, which is a "basket" consisting of specific
amounts of currency of member states of the European Economic Community. The
Counsel of Ministers of the European Economic Community may adjust specific
amounts of currency comprising the ECU to reflect changes in the relative values
of the underlying currencies. The money managers investing in these securities
do not believe that such adjustments will adversely affect holders of ECU-
denominated obligations or the marketability of the securities.

Brady Bonds. The Fixed Income III, Multistrategy Bond, International
-----------
Securities 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

Distributions
-------------

Distributions of Net Investment Income. The Funds receive income generally
in the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a Fund, constitutes its net investment
income from which dividends may be paid to you. Any distributions by a Fund from
such income will be taxable to you as ordinary income, whether you take them in
cash or in additional Shares.

Distributions of Capital Gains. The Funds may derive capital gains and
losses in connection with sales or other dispositions of their portfolio
securities. Distributions derived from the excess of net short-term capital gain
over net long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by a Fund will be
taxable to you as long-term capital gain, regardless of how long you have held
your Shares in the Fund. Any net short-term or long-term capital gains realized
by a Fund (net of any capital loss carryovers) generally will be distributed
once each year, and may be distributed more frequently, if necessary, in order
to reduce or eliminate federal excise or income taxes on a Fund.

Information on the Tax Character of Distributions. Each Fund will inform
you of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held a Fund's Shares for a full year, you may have designated and distributed to
you as ordinary income or capital gain a percentage of income and/or capital
gains that is not equal to the actual amount of such income and/or capital gains
earned during the period of your investment in a Fund.

45
<PAGE>

Taxes
-----

Election to be Taxed as a Regulated Investment Company. Each Fund has
elected to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code (the "Code"), has qualified as such for its most
recent fiscal year, and intends to so qualify during the current fiscal year. As
a regulated investment company, a Fund generally pays no federal income tax on
the income and gains it distributes to you. The Board reserves the right not to
maintain the qualification of a Fund as a regulated investment company if it
determines such course of action to be beneficial to you. In such case, a Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary income or
capital gains to the extent of a Fund's available earnings and profits.

Excise Tax Distribution Requirements. The Code requires a Fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its net capital gain income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal excise
taxes. Each Fund intends to declare and pay sufficient dividends in December (or
in January that are treated by you as received in December) but does not
guarantee and can give no assurances that its distributions will be sufficient
to eliminate all such taxes.

Redemption of Fund Shares. Redemptions and exchanges of a Fund's Shares
are taxable transactions for federal and state income tax purposes that cause
you to recognize a gain or loss. If you hold your Shares as a capital asset, the
gain or loss that you realize will be capital gain or loss. Any loss incurred on
the redemption or exchange of Shares held for six months or less will be treated
as a long-term capital loss to the extent of any long-term capital gains
distributed to you by a Fund on those Shares.

Beginning after the year 2005 (2000 for certain shareholders), gain on the
sale or redemption of Shares held more than five years may be subject to a
reduced rate of tax.

All or a portion of any loss that you realize upon the redemption of your
Fund Shares will be disallowed to the extent that you purchase other Shares in
such Fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new Shares you purchase.

US Government Obligations. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the US government,
subject in some states to minimum investment requirements that must be met by a
Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by US government securities do
not generally qualify for tax-free treatment. The rules on exclusion of this
income are different for corporations.

Dividends-Received Deduction For Corporations. Distributions from
Diversified Equity, Equity Income, Quantitative Equity, Real Estate Securities,
Special Growth, Tax-Managed Large Cap, Tax-Managed Small Cap, Equity I, Equity
II, Equity III and Equity Q Funds may qualify in part for the 70% dividends-
received deduction for corporations. The portion of the dividends so qualified
depends on the aggregate taxable qualifying dividend income received by such
Funds from domestic (US) sources. The Fund will send to shareholders statements
each year advising the amount of the dividend income which qualifies for such
treatment. All dividends, including those which qualify for the dividends-
received deduction, must be included in your alternative minimum taxable income
calculation.

Effect of Foreign Investments on Distributions. Most foreign exchange
gains realized on the sale of debt instruments are treated as ordinary income by
Funds which invest in foreign securities. Similarly, foreign exchange losses
realized by such Funds on the sale of debt instruments are generally treated as
ordinary income losses. These gains when distributed will be taxable to you as
ordinary dividends, and any losses will reduce such Fund's ordinary income
otherwise available for distribution to you. This treatment could increase or
reduce such Fund's ordinary income distributions to you, and may cause some or
all of such Fund's previously distributed income to be classified as a return of
capital.

The Funds may be subject to foreign withholding taxes on income from
certain of their foreign securities. If more than 50% of a Fund's total assets
at the end of the fiscal year are invested in securities of foreign
corporations, such Fund may elect to pass-through to you your pro rata share of
foreign taxes paid by the Fund. If this election is made, the year-end

46
<PAGE>

statement you receive from the Fund will show more taxable income than was
actually distributed to you. However, you will be entitled to either deduct your
share of such taxes in computing your taxable income or claim a foreign tax
credit for such taxes against your US federal income tax. Each of these Funds
will provide you with the information necessary to complete your individual
income tax return if such election is made.

If a Fund invests in an entity that is classified as a "passive foreign
investment company" (a "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 to the Fund. Under the Code, a Fund
can elect to mark-to-market their PFIC holdings in lieu of paying taxes on gains
or distributions therefrom. In addition, Emerging Markets Fund may invest up to
10% of its total assets in the stock of foreign investment companies that may be
treated as 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
nondeductible federal income tax at the Fund level, whether or not the
corresponding income is distributed to you. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the fund.
In some cases, 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 Emerging Markets 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. Investment income
received from sources within foreign countries may be subject to foreign income
taxes withheld at the source. The US has entered into tax treaties with many
foreign countries which may 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 assets invested
within various countries is not known.

Exempt Interest Dividends. The Tax Exempt Bond Fund and Tax Free Money
Market Fund do not intend to purchase any municipal obligations required, in the
opinion of bond counsel, to be treated as a 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. The Code also provides that interest on indebtedness
incurred, or continued, to purchase or carry Tax Exempt Bond Fund and Tax Free
Money Market Fund Shares, is not deductible; and that persons who are
"substantial users" (or persons related thereto) of facilities financed by
private activity 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 Tax Exempt Bond Fund or Tax Free Money Market Fund.

Investment in Complex Securities. The Funds may invest in complex
securities. Such investments may be subject to numerous special and complicated
tax rules. These rules could affect whether gains and losses recognized by a
Fund are treated as ordinary income or capital gain and/or accelerate the
recognition of income to a Fund or defer a Fund's ability to recognize losses.
In turn, these rules may affect the amount, timing or character of the income
distributed to you by a Fund.

From November 1, 1999 to December 31, 1999, the Real Estate Securities
Fund, Short Term Bond Fund, Diversified Bond Fund and the Multistrategy Bond
Fund incurred net realized capital losses of $4,344,347, $283,698, $2,227,479
and $6,282,764, respectively. As permitted by tax regulations, the Real Estate
Securities Fund, Short Term Bond Fund, Diversified Bond Fund and the
Multistrategy Bond Fund intend to elect to defer these losses and treat them as
arising in the year ending October 31, 2000.

At December 31, 1999, 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>
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
Real Estate Emerging Markets Short Term Bond Diversified Bond Multistrategy Bond
Year Securities Fund Fund Fund Fund Fund
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
12/31/01 -- -- (4,813,748) -- --
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
12/31/02 -- -- (5,161,817) -- --
------------------ ------ ------------- -------------------- -------------------- ------------------- --------------------
12/31/03 -- (2,887,175) (2,834,049) -- --
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
12/31/04 -- (348,806) (1,947,924) -- --
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
12/31/05 -- -- (574,853) -- --
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
12/31/06 (2,695,613) (56,335,865) (51,911) -- --
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
</TABLE>

47
<PAGE>

<TABLE>
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
12/31/07 (22,446,311) (29,958,651) (3,470,874) (11,070,653) (17,634,520)
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
TOTALS (25,141,924) (86,530,497) (18,855,176) (11,070,653) (17,634,520)
------------------ -------------------- -------------------- -------------------- ------------------- --------------------
</TABLE>

Redemptions in Kind. Each Fund has committed itself to pay in cash (by
check) all requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the Fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities and
Exchange Commission. In the case of redemption requests in excess of these
amounts FRIC's Board reserves the right to make payments in whole or in part in
securities or other assets of a Fund, in case of an emergency, or if the payment
of such a redemption in cash would be detrimental to the existing shareholders
of the Fund. In these circumstances, the securities distributed would be valued
at the price used to compute the Fund's net assets and you may incur brokerage
fees in converting the securities to cash. The Funds do not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.

48
<PAGE>

MONEY MANAGER INFORMATION

MONEY MARKET FUND

Frank Russell Investment Management Company is wholly-owned by Frank
Russell Company, a subsidiary of The Northwestern Mutual Life Insurance Company.

US GOVERNMENT MONEY MARKET FUND

Frank Russell Investment Management Company. See: Money Market Fund.

TAX FREE MONEY MARKET FUND

Weiss, Peck & Greer, L.L.C. is a wholly-owned subsidiary of Robeco Groep N.V.

TAX-MANAGED LARGE CAP FUND

J.P. Morgan Investment Management Inc. is a wholly owned subsidiary of J.P.
Morgan & Co., Inc., a publicly held bank holding company.

TAX-MANAGED SMALL CAP FUND

Geewax, Terker & Company is a general partnership with its general partners,
John J. Geewax and Bruce E Terker, each owning 50% of the firm.

49
<PAGE>

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 I
indicates that the security ranks in the higher end of its generic
category; the modifier 2 indicates a mid-range ranking; and modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.

STANDARD & POOR'S RATINGS GROUP ("S&P"):

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

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

50
<PAGE>

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.

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.

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.

51
<PAGE>

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-I+") or if the nominal
maturity is short, a rating of "SP- I+/AAA" is assigned.

COMMERCIAL PAPER RATINGS.

MOODY'S:

Commercial paper rated Prime by Moody's is based upon its evaluation of
many factors, including: (1) 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-1,
Prime-2, or Prime-3.

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<PAGE>

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-1, 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 'I' category. The majority of short-term debt
issuers carries the highest rating, yet quality differences exist within
that tier. As a consequence, Duff & Phelps has incorporated gradations of
'I +' (one plus) and 'I (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 2--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.

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<PAGE>

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.

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.

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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- I+.

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 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-l."

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.

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FINANCIAL STATEMENTS

The 1999 annual financial statements of the Funds, including notes to the
financial statements and financial highlights and the Report of Independent
Accountants, are included in FRIC's Annual Reports to Shareholders. Copies of
these Annual Reports accompany this Statement and are incorporated herein by
reference.

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GLOSSARY

Bank instruments -- Include certificates of deposit, bankers' acceptances
and time deposits, and may include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee certificates of deposit ("Yankee
CDs"). 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 demonimated is
US dollars and held in the United States.

Board -- The Board of Trustees of FRIC.

Brady Bonds -- Product of the "Brady Plan," under which bonds are issued in
exchange for cash and certain of the country's outstanding commercial bank loans

Cash reserves -- The Funds, other than the Money Market Funds, are
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 of comparable quality to the Fund's permitted
investments. As an alternative to a Fund directly investing in money market
instruments, the Funds and their money managers may elect to invest the Fund's
cash reserves in FRIC's Money Market Fund. To prevent duplication of fees,
FRIMCo waives its management fee on that portion of a Fund's assets invested in
FRIC's Money Market Fund.

Code -- Internal Revenue Code of 1986, as amended.

Convertible security -- This is a fixed-income security (a bond or
preferred stock) that may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stock in a
corporation's capital structure but are usually subordinated to similar non-
convertible securities. The price of a convertible security is influenced by the
market value of the underlying common stock.

Covered call option -- A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire the securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an offsetting call option.

Custodian -- State Street Bank and Trust Company, FRIC's custodian and
portfolio accountant.

Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts, Global Depository Receipts, and other similar
securities convertible into securities of foreign issuers. 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 US securities markets.

Derivatives -- These include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts,
swaps and options on futures contracts on US government and foreign government
securities and currencies.

Distributor-- Russell Fund Distributors, Inc., the organization that sells
the Shares of the Funds under a contract with FRIC.

Equity derivative securities -- These include, among other instruments,
options on equity securities, warrants and futures contracts on equity
securities.

Financial Intermediary -- A bank trust department, registered investment
adviser, broker-dealer or other financial services organization that has been
selected by FRIMCo or by FRIC's Distributor.

FNMA-- Federal National Mortgage Association.

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<PAGE>

Forward commitments -- Each Fund may agree 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 the transactions are
consistent with the Fund's ability to manage its portfolio and meet redemption
requests. When effecting these transactions, liquid assets of a Fund of a dollar
amount sufficient to make payment for the portfolio securities to be purchased
are segregated on the Fund's records at the trade date and maintained until the
transaction is settled.

Forward currency contracts -- This is a contract individually negotiated
and privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date. The Funds generally do not enter into forward contracts with terms
greater than one year, and they typically enter into forward contracts only
under two circumstances. First, if a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the US dollar price of the security by entering into a forward
contract to buy the amount of a foreign currency needed to settle the
transaction. Second, if the Fund's money managers believe that the currency of a
particular foreign country will substantially rise or fall against the US
dollar, the Fund may enter into a forward contract to buy or sell the currency
approximating the value of some or all of the Fund's portfolio securities
denominated in the currency. A Fund will not enter into a forward contract if,
as a result, it would have more than one-third of its assets committed to such
contracts (unless it owns the currency that it is obligated to deliver or has
caused the Custodian to segregate segregable assets having a value sufficient to
cover its obligations). Although forward contracts are used primarily to protect
a Fund from adverse currency movements, they involve the risk that currency
movements will not be accurately predicted.

FRIC -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC.

FRIMCo -- Frank Russell Investment Management Company, FRIC's investment
adviser, administrator and transfer and dividend paying agent.

Funds -- The 23 investment series of FRIC described in this Statement. Each
Fund is considered a separate registered investment company (or RIC) for federal
income tax purposes, and each Fund has its own investment objective, policies
and restrictions.

Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually US government securities,
at a specified date and price. For example, a Fund may sell interest rate
futures contracts (i.e., enter into a futures contract to sell the underlying
debt security) in an attempt to hedge against an anticipated increase in
interest rates and a corresponding decline in debt securities it owns. A Fund
will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.

GNMA -- Government National Mortgage Association

Illiquid securities -- The Funds, other than the Money Market 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 maturing in more than seven days, that are
illiquid because of the absence of a readily available market or because of
legal or contractual resale restrictions. In the case of the Money Market Funds,
this restriction is 10% of each Fund's net assets. No Fund will invest more than
10% of its respective net assets (taken at current value) in securities of
issuers that may not be sold to the public without registration under the
Securities Act of 1933, as amended (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.

Institutional Funds -- Equity I, Equity II, Equity III, Equity Q,
International, Fixed Income I and Fixed Income III Funds, each a Fund of FRIC.

Investment grade -- Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB) or Moody's (at least Baa), or
unrated debt securities deemed to be of comparable quality by a money manager
using Board-approved guidelines.

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Lending portfolio securities -- Each Fund, other than each Money Market
Fund, may lend portfolio securities with a value of up to 33 1/3% of each Fund's
total assets. These 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 obligations as collateral in an amount equal to at least 102%
(for loans of US securities) or 105% (for non-US securities) of the current
market value of the loaned securities. The collateral is daily "marked-to-
market," 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. If the borrower of the securities fails 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.

Liquidity portfolio -- FRIMCo will manage or will select a money manager to
exercise investment discretion for approximately 5%-15% of Diversified Equity,
Equity Income, Quantitative Equity, International Securities, Real Estate
Securities, Emerging Markets, Special Growth, Tax-Managed Large Cap, Equity I,
Equity II, Equity III, Equity Q and International Funds' assets assigned to a
Liquidity portfolio. The Liquidity portfolio will be used to temporarily create
an equity exposure for cash balances until those balances are invested in
securities or used for Fund transactions.

Money Market Funds -- Money Market, US Government Money Market and Tax-Free
Money Market Funds, each a Fund of FRIC. Each Money Market Fund seeks to
maintain a stable net asset value of $1 per share.

Moody's-- Moody's Investors Service, Inc., an NRSRO

Municipal obligations -- Debt obligations issued by states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, or multi-state agencies
or authorities the interest from which is exempt from federal income tax,
including the alternative minimum tax, in the opinion of bond counsel to the
issuer. Municipal obligations include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities. Municipal obligations may include
project, tax anticipation, revenue anticipation, bond anticipation, and
construction loan notes; tax-exempt commercial paper; fixed and variable rate
notes; obligations whose interest and principal are guaranteed or insured by the
US government or fully collateralized by US government obligations; industrial
development bonds; and variable rate obligations.

Net asset value (NAV) -- The value of a Fund is determined by deducting the
Fund's liabilities from the total assets of the portfolio. The net asset value
per share is determined by dividing the net asset value of the Fund by the
number of its Shares that are outstanding.

NRSRO-- A nationally recognized statistical rating organization, such as
S&P or Moody's

NYSE -- New York Stock Exchange

Options on securities, securities indexes and currencies -- A Fund may
purchase call options on securities that it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the risk
of a substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A Fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the US
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A Fund
may purchase put and call options on stock indexes in order to hedge against
risks of stock market or industry-wide stock price fluctuations.

PFIC-- A passive foreign investment company. Emerging Markets Fund may
purchase interests in an issuer that is considered a PFIC under the Code.

Prime rate -- The interest rate charged by leading US banks on loans to
their most creditworthy customers

Repurchase agreements -- A 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)
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should fall below the repurchase price, the Fund could incur a loss. Subject to
the overall limitations described in "Illiquid Securities" in this Glossary, a
Fund will not invest more than 15% (10%, in the case of each Money Market Fund)
of its net assets (taken at current market value) in repurchase agreements
maturing in more than seven days.

Reverse repurchase agreements -- A Fund may enter into reverse repurchase
agreements to meet redemption requests when a money manager determines that
selling portfolio securities would be inconvenient or disadvantageous. A reverse
repurchase agreement is a transaction where 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
transferred security, 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, are
segregated on the Fund's records while a reverse repurchase agreement is in
effect.

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

Russell-- Frank Russell Company, consultant to FRIC and to the Funds

S&P -- Standard & Poor's Ratings Group, an NRSRO

S&P 500 -- Standard & Poor's 500 Composite Price Index

SEC -- US Securities and Exchange Commission

Shares -- The Class Shares in the Funds described in the Prospectuses. Each
Class Share of a Fund represents a share of beneficial interest in the Fund

Statement -- FRIC's Statement of Additional Information

Transfer Agent-- FRIMCo, in its capacity as FRIC's transfer and dividend
paying agent

US -- United States

US government obligations -- These include US Treasury bills, notes, bonds
and other obligations issued or guaranteed by the US government, its agencies or
instrumentalities. US Treasury bills, notes and bonds, and GNMA participation
certificates, are issued or guaranteed by the US government. Other securities
issued by US government agencies or instrumentalities are supported only by the
credit of the agency or instrumentality (for example, those issued by the
Federal Home Loan Bank) whereas others, such as those issued by FNMA, have an
additional line of credit with the US Treasury.

Variable rate obligation -- Municipal obligations with a demand feature
that typically may be exercised within 30 days. The rate of return on variable
rate obligations is readjusted periodically according to a market rate, such as
the Prime rate. Also called floating rate obligations.

Warrants -- Typically, a warrant is a long-term option that permits the
holder to buy a specified number of shares of the issuer's underlying common
stock at a specified exercise price by a particular expiration date. A warrant
not exercised or disposed of by its expiration date expires worthless.

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<PAGE>

1940 Act -- The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of FRIC and the Funds.

1933 Act-- The Securities Act of 1933, as amended.

61
<PAGE>

FRANK RUSSELL INVESTMENT
------------------------
COMPANY
-------
File No. 2-71299 and 811-3153
1933 Act Post-Effective
Amendment. No. 47
1940 Act Amendment No. 47

PART C
OTHER INFORMATION
-----------------

Item 23. Exhibits
--------

(a) 1.1 Master Trust Agreement (incorporated by reference to Item 24(b)(1)(a)
filed under Post-Effective Amendment No. 32)

1.2 Amendment No. 1 to Master Trust Agreement dated November 29, 1984
(incorporated by reference to Item 24(b)(1)(b) filed under Post-
Effective Amendment No. 32)

1.3 Amendment No. 2 to Master Trust Agreement dated May 29, 1985
(incorporated by reference to Item 24(b)(1)(c) filed under Post-
Effective Amendment No. 32)

1.4 Amendment No. 3 to Master Trust Agreement dated January 26, 1987
(incorporated by reference to Item 24(b)(1)(d) filed under Post-
Effective Amendment No. 32)

1.5 Amendment No. 4 to Master Trust Agreement dated February 23, 1989
(incorporated by reference to Item 24(b)(1)(e) filed under Post-
Effective Amendment No. 32)

1.6 Amendment No. 5 to Master Trust Agreement dated May 11, 1992
(incorporated by reference to Item 24(b)(1)(f) filed under Post-
Effective Amendment No. 32)

1.7 Amendment No. 6 to Master Trust Agreement dated March 19, 1996
(incorporated by reference to Item 24(b)(1)(g) filed under Post-
Effective Amendment No. 32)

1.8 Amendment No. 7 to Master Trust Agreement dated April 22, 1996
(incorporated by reference to Item 24(b)(1)(h) filed under Post-
Effective Amendment No. 33)

1.9 Amendment No. 8 to Master Trust Agreement dated November 4, 1996
(incorporated by reference to Item 24(b)(1)(i) filed under Post-
Effective Amendment No. 36)
<PAGE>

1.10 Amendment No. 9 to Master Trust Agreement dated April 27, 1998
(incorporated by reference to Item 24(b)(1)(j) filed under Post-
Effective Amendment No. 40)

1.11 Amendment No. 10 to Master Trust Agreement dated April 27, 1998
(incorporated by reference to Item 24(b)(1)(k) filed under Post-
Effective Amendment No. 40)

1.12 Amendment No. 11 to Master Trust Agreement dated June 3, 1998
(incorporated by reference to Item 24(b)(1)(l) filed under Post-
Effective Amendment No. 40)

1.13 Amendment No. 12 to Master Trust Agreement dated October 5, 1998
(incorporated by reference to Item 24(b)(1)(m) filed under Post-
Effective Amendment No. 41)

1.14 Amendment No. 13 to Master Trust Agreement dated November 9, 1998
(incorporated by reference to Item 24(b)(1)(n) filed under Post-
Effective Amendment No. 41)

1.15 Amendment No. 14 to Master Trust Agreement dated April 26, 1999
(incorporated by reference to Item 24(b)(1)(n) filed under Post-
Effective Amendment No. 44)

1.16 Amendment No. 15 to Master Trust Agreement dated June 28, 1999
(incorporated by reference to Item 24(b)(1)(n) filed under Post-
Effective Amendment No. 44)

1.17 Amendment No. 16 to Master Trust Agreement dated August 9, 1999
(incorporated by reference to Item 24(b)(1)(n) filed under Post-
Effective Amendment No. 44)

1.18 Amendment No. 17 to Master Trust Agreement dated August 9, 1999
(incorporated by reference to Item 24(b)(1)(n) filed under Post-
Effective Amendment No. 44)

1.19 Amendment No. 18 to Master Trust Agreement dated August 9, 1999
(incorporated by reference from Post-Effective Amendment No. 46)

1.20 Amendment No. 19 to Master Trust Agreement dated August 9, 1999
(incorporated by reference from Post-Effective Amendment No. 46)

1.21 Amendment No. 20 to Master Trust Agreement dated August 7, 2000

(b) 1.1 Bylaws dated August 8, 1984 (incorporated by reference to Item
24(b)(2) filed under Post-Effective Amendment No. 38)
<PAGE>

(c) 1.1 Form of Shares of Beneficial Interest for the Equity I, Equity II,
Equity III, Fixed Income I, Fixed Income II, International and Money
Market Funds (incorporated by reference to Item 24(b)(4)(a) filed
under Post-Effective Amendment No. 39)

1.2 Form of Shares of Beneficial Interest for the Diversified Equity,
Special Growth, Equity Income, Diversified Bond, Volatility
Constrained Bond, International Securities, Limited Volatility Tax
Free and U.S. Government Money Market Funds (incorporated by reference
to Item 24(b)(4)(b) filed under Post-Effective Amendment No. 39)

1.3 Form of Shares of Beneficial Interest for the Quantitative Equity,
Equity Q and Tax Free Money Market Funds (incorporated by reference to
Item 24(b)(4)(c) filed under Post-Effective Amendment No. 39)

1.4 Form of Shares of Beneficial Interest for the Real Estate Securities
Fund (incorporated by reference to Item 24(b)(4)(d) filed under Post-
Effective Amendment No. 39)

(d) 1.1 Advisory Agreement with Frank Russell Investment Management Company
dated January 1, 1999 (incorporated by reference to Item 23(4)(a)(1)
filed under Post-Effective Amendment No. 42)

1.2 Form of Letter Agreement adding Tax-Managed Equity Aggressive Strategy
(later renamed Tax-Managed Global Equity), Tax-Managed Aggressive
Strategy, Tax-Managed Moderate Strategy, Tax-Managed Conservative
Strategy and Tax-Managed Small Cap Funds to the Advisory Agreement
(incorporated by reference to Item 23(4)(a)(2) filed under Post-
Effective Amendment No. 44)

2.1 Service Agreement with Frank Russell Company and Frank Russell
Investment Management Company dated May 1, 1987 (incorporated by
reference to Item 24(b)(5)(b)(1) filed under Post-Effective Amendment
No. 38)

2.2 Letter Agreement with Frank Russell Company and Frank Russell
Investment Management Company dated May 1, 1989 adding Real Estate
Securities Fund to the Service Agreement (incorporated by reference to
Item 24(b)(5)(b)(2) filed under Post-Effective Amendment No. 38)

2.3 Amendment No. 1 to Service Agreement dated July 1, 1992 with Frank
Russell Company and Frank Russell Investment Management Company
changing services and fees (incorporated by reference to Item
24(b)(5)(b)(3) filed under Post-Effective Amendment No. 38)

2.4 Letter Agreement dated August 24, 1992 adding Fixed Income III,
Multistrategy Bond and Emerging Markets Funds to the Service Agreement
<PAGE>

(incorporated by reference to Item 24(b)(5)(b)(4) filed under Post-
Effective Amendment No. 38)

2.5 Amendment No. 2 to the Service Agreement dated August 1995 with Frank
Russell Company and Frank Russell Investment Management Company
(incorporated by reference to Item 24(b)(5)(b)(5) filed under Post-
Effective Amendment No. 32)

2.6 Letter Agreement dated March 14, 1996 with State Street Bank and Trust
Company for development of a Tax Accounting System (incorporated by
reference to Item 24(b)(5)(b)(7) filed under Post-Effective Amendment
No. 32)

3.1 Yield Calculation Services Agreement dated August 2, 1988 with State
Street Bank and Trust Company (incorporated by reference from Post-
Effective Amendment No. 46)

3.2 Letter Agreement to the Yield Calculation Services Agreement dated May
1, 1989 adding the Real Estate Securities Fund (incorporated by
reference from Post-Effective Amendment No. 46)

3.3 Letter Agreement to the Yield Calculation Services Agreement dated
August 24, 1992 adding the Fixed Income III and Multistrategy Bond
Funds (incorporated by reference from Post-Effective Amendment No. 46)

3.4 Letter Agreement to the Yield Calculation Services Agreement dated
August 24, 1992 adding the Fixed Income III and Multistrategy Bond
Funds (incorporated by reference from Post-Effective Amendment No. 46)

3.5 Letter Agreement to the Yield Calculation Services Agreement dated
April 12, 1996 adding the Equity T Fund (later renamed the Tax-Managed
Large Cap Fund) (incorporated by reference to Item 24(b)(5)(b)(6)
filed under Post-Efective Amendment No. 32)

3.5 Letter Agreement to the Yield Calculation Services Agreement dated
January 28, 1997 adding Aggressive Strategy, Balanced Strategy,
Moderate Strategy, Conservative Strategy and Equity Balanced Strategy
Funds (incorporated by reference to Item 24(b)(5)(b)(8) filed under
Post-Effective Amendment No. 36)

3.6 Letter Agreement to the Yield Calculation Services Agreement dated
January 26, 1999 redesignating Class C Shares as Class E Shares and
the existing shares of Institutional Funds to Class I Shares
(incorporated by reference to Item 23(4)(b)(9) filed under Post-
Effective Amendment No. 42)

3.7 Letter Agreement to the Yield Calculation Services Agreement dated
January 26, 1999 redesignating Premier Adviser Class Shares as Premier
Class Shares
<PAGE>

and Premier Institutional Class Shares as Class E Shares
(incorporated by reference to Item 23(4)(b)(10) filed under Post-
Effective Amendment No. 42)

3.8 Form of Letter Agreement to the Yield Calculation Services Agreement
adding Tax-Managed Equity Aggressive Strategy (later renamed Tax-
Managed Global Equity), Tax-Managed Aggressive Strategy, Tax-Managed
Moderate Strategy, Tax-Managed Conservative Strategy and Tax-Managed
Small Cap Funds (incorporated by reference to Item 23(4)(b)(11) filed
under Post-Effective Amendment No. 44)

3.9 Form of Letter Agreement to the Yield Calculation Services Agreement
redesignating existing Class S Shares as Class I Shares for the Money
Market and Tax Free Money Market Funds and creating new Class S Shares
for those Funds, and adding Class E Shares to the Tax-Managed Large
Cap and Tax-Managed Small Cap Funds

4.1 Form of Portfolio Management Contract, as amended, with Money Managers
and Frank Russell Investment Management Company (incorporated by
reference to Item 23(4)(c)(3) filed under Post-Effective Amendment No.
44)

5.1 Administrative Agreement with Frank Russell Investment Management
Company dated January 1, 1999 (incorporated by reference to Item
23(4)(d)(1) filed under Post-Effective Amendment No. 42)

5.2 Form of Letter Agreement to the Administrative Agreement adding Tax-
Managed Equity Aggressive Strategy (later renamed Tax-Managed Global
Equity), Tax-Managed Aggressive Strategy, Tax-Managed Moderate
Strategy, Tax-Managed Conservative Strategy and Tax-Managed Small Cap
Funds. (incorporated by reference to Item 23(4)(d)(2) filed under
Post-Effective Amendment No. 44)

(e) 1.1 Distribution Agreement with Russell Fund Distributors, Inc. dated
January 1, 1999 due to change in control (incorporated by reference to
Item 23(5)(a)(16) filed under Post-Effective Amendment No. 42)

1.2 Letter Agreement to the Distribution Agreement with Russell Fund
Distributors adding Class C Shares of Short Term Bond Fund and Class C
and E Shares of Tax Exempt Bond Fund (incorporated by reference to
Post-Effective Amendment No. 42)
<PAGE>

1.3 Form of Letter Agreement adding Tax-Managed Equity Aggressive Strategy
(later renamed Tax-Managed Global Equity), Tax-Managed Aggressive
Strategy, Tax-Managed Moderate Strategy, Tax-Managed Conservative
Strategy and Tax-Managed Small Cap Funds to the Distribution
Agreement. (incorporated by reference to Item 23(5)(a)(8) filed under
Post-Effective Amendment No. 44)

1.4 Form of Letter Agreement to the Distribution Agreement redesignating
existing Class S Shares as Class I Shares for the Money Market and Tax
Free Money Market Funds and creating new Class S Shares for those
Funds, and adding Class E Shares to the Tax-Managed Large Cap and Tax-
Managed Small Cap Funds

(f) 1.1 Bonus or Profit Sharing Plans (none)

(g) 1.1 Custodian Contract with State Street Bank and Trust Company dated
October 31, 1988 (incorporated by reference to Item 24(b)(8)(a) filed
under Post-Effective Amendment No. 38)

1.2 Letter Agreement dated May 1, 1989 adding Real Estate Securities Fund
to the Custodian Contract (incorporated by reference to Item
24(b)(8)(b) filed under Post-Effective Amendment No. 38)

1.3 Letter Agreement dated August 24, 1992 adding Fixed Income III and
Multistrategy Bond Funds to the Custodian Contract (incorporated by
reference to Item 24(b)(8)(c) filed under Post-Effective Amendment No.
38)

1.4 Letter Agreement dated October 27, 1992 adding Emerging Markets Fund
to the Custodian Contract (incorporated by reference to Item
24(b)(8)(d) filed under Post-Effective Amendment No. 38)

1.5 Amendment No. 1 to Custodian Contract dated January 31, 1994 with
State Street Bank and Trust Company amending Section 3.5 of the
Agreement (incorporated by reference to Item 24(b)(8)(e) filed under
Post-Effective Amendment No. 38)

1.6 Form of Amendment to Custodian Contract with State Street Bank and
Trust Company amending Sections 2.2 and 2.7 of the Agreement
(incorporated by reference to Item 24(b)(8)(f) filed under Post-
Effective Amendment No. 38)

1.7 Amendment dated October 31, 1998 to the Custodian Contract with State
Street Bank amending Section 2.7 of the Agreement (incorporated by
reference to Item 24(b)(8)(g) filed under Post-Effective Amendment No.
38)

1.8 Amendment to the Fee Schedule of the Custodian Contract with State
Street Bank and Trust Company (incorporated by reference to Item
24(b)(8)(h) filed under Post-Effective Amendment No. 38)
<PAGE>

1.9 Amendment to the Custodian Contract dated August 11, 1995 with State
Street Bank and Trust Company for addition of Omnibus accounts
(incorporated by reference to Item 24(b)(8)(i) filed under Post-
Effective Amendment No. 32)

1.10 Amendment to the Custodian Contract dated April 18, 1994 with State
Street Bank and Trust Company amending Section 7 of the Fee Schedule
for all Funds except the Emerging Markets Fund (incorporated by
reference to Item 24(b)(8)(j) filed under Post-Effective Amendment No.
32)

1.11 Amendment to the Custodian Contract dated August 7, 1995 with State
Street Bank and Trust Company amending Section 7 of the Fee Schedule
for the Emerging Markets Fund (incorporated by reference to Item
24(b)(8)(k) filed under Post-Effective Amendment No. 32)

1.12 Amendment to the Custodian Contract dated April 12, 1996 with State
Street Bank and Trust Company adding Equity T Fund (later renamed Tax-
Managed Large Cap Fund) (incorporated by reference to Item 24(b)(8)(l)
filed under Post-Effective Amendment No. 32)

1.13 Amendment to the Custodian Contract dated January 28, 1997 with State
Street Bank and Trust Company adding Aggressive Strategy, Balanced
Strategy, Moderate Strategy, Conservative Strategy and Equity Balanced
Strategy Funds (incorporated by reference to Item 24(b)(8)(m) filed
under Post-Effective Amendment No. 36)

1.14 Form of Amendment to the Custodian Contract with State Street Bank and
Trust Company adding Tax-Managed Equity Aggressive Strategy (later
renamed Tax-Managed Global Equity), Tax-Managed Aggressive Strategy,
Tax-Managed Moderate Strategy, Tax-Managed Conservative Strategy and
Tax-Managed Small Cap Funds (incorporated by reference to Item
23(7)(n) filed under Post-Effective Amendment No. 44)

(h) 1.1 Transfer and Dividend Disbursing Agency Agreement dated April 1, 1988
with Frank Russell Investment Management Company (incorporated by
reference to Item 24(b)(9)(a)(1) filed under Post-Effective Amendment
No. 38)

1.2 Letter Agreement and Amended Schedule A dated May 1, 1989 adding Real
Estate Securities Fund to the Transfer and Dividend Disbursing Agency
Agreement (incorporated by reference to Item 24(b)(9)(a)(2) filed
under Post-Effective Amendment No. 38)

1.3 Letter Agreement and Amended Schedule A dated August 24, 1992 adding
Fixed Income III, Multistrategy Bond and Emerging Markets Funds to the
Transfer and Dividend Disbursing Agency Agreement (incorporated by
reference to Item 24(b)(9)(a)(3) filed under Post-Effective Amendment
No. 38)
<PAGE>

1.4 Letter Agreement and Amended Schedule A dated August 11, 1995 adding
omnibus accounts to the Transfer Agency and Dividend Disbursing Agency
Agreement (incorporated by reference to Item 24(b)(9)(a)(4) filed
under Post-Effective Amendment No. 32)

1.5 Letter Agreement dated April 10, 1996 adding Equity T Fund (later
renamed Tax-Managed Large Cap Fund) to the Transfer and Dividend
Disbursing Agency Agreement (incorporated by reference to Item
24(b)(9)(a)(5) filed under Post-Effective Amendment No. 32)

1.6 Letter Agreement and Amended Schedule A dated November 5, 1996 adding
Aggressive Strategy, Balanced Strategy, Moderate Strategy,
Conservative Strategy and Equity Balanced Strategy Funds to the
Transfer and Dividend Disbursing Agency Agreement (incorporated by
reference to Item 24(b)(9)(a)(6) filed under Post-Effective Amendment
No. 36)

1.7 Form of Letter Agreement and Amended Schedule to Transfer and Dividend
Disbursing Agreement redesignating Class C Shares as Class E Shares
and the existing shares of the Institutional Funds as Class I Shares
(incorporated by reference to Item 23(8)(a)(7) filed under Post-
Effective Amendment No. 42)

1.8 Letter Agreement to Transfer and Dividend Disbursing Agreement dated
December 1, 1998 redesignating Premier Adviser Class Shares as Premier
Class Shares and Premier Institutional Class Shares as Class E Shares
(incorporated by reference to Item 23(5)(a)(7) filed under Post-
Effective Amendment No. 42)

1.9 Form of Letter Agreement to Transfer and Dividend Disbursing Agency
Agreement for reimbursement for lost shareholder search expenses
(incorporated by reference to Item 23(8)(a)(9) filed under Post-
Effective Amendment No. 43)
<PAGE>

1.10 Form of Letter Agreement adding Tax-Managed Equity Aggressive Strategy
(later renamed Tax-Managed Global Equity), Tax-Managed Aggressive
Strategy, Tax-Managed Moderate Strategy, Tax-Managed Conservative
Strategy and Tax-Managed Small Cap Funds to Transfer and Dividend
Disbursing Agency Agreement (incorporated by reference to Item
23(8)(a)(10) filed under Post-Effective Amendment No. 44)

1.11 Form of Letter Agreement and Amended Schedule A revising fee schedule
with respect to Transfer and Dividend Disbursing Agency Agreement
(incorporated by reference from Post-Effective Amendment No. 46)

1.12 Form of Letter Agreement and Amended Schedule A revising fee schedule
with respect to Transfer and Dividend Disbursing Agency Agreement

2.1 General forms of Frank Russell Investment Management Company's Asset
Management Services Agreements with Bank Trust Departments and with
other clients (incorporated by reference to Item 24(b)(9)(b) filed
under Post-Effective Amendment No. 38)

2.2 General forms of Frank Russell Investment Management Company's Asset
Management Services Agreement with its clients (incorporated by
reference to Item 24(b)(9)(c) filed under Post-Effective Amendment No.
38)

2.3 General form of Frank Russell Investment Management Company's Asset
Management Services Agreement with Private Investment Consulting
clients of Frank Russell Company (incorporated by reference to Item
24(b)(9)(c) filed under Post-Effective Amendment No. 38)

2.4 General Form of Frank Russell Investment Management Company Asset
Management Services Agreement with non-compete clause customers
(incorporated by reference to Item 24(b)(9)(f) filed under Post-
Effective Amendment No. 38)

4.1 Letter Agreements regarding fee waivers & reimbursements

5.1 Credit Agreement dated as of December 30, 1999 among Frank Russell
Investment Company, Bank of America, N.A., State Street Bank and Trust
Company and Other Banks (incorporated by reference from Post-Effective
Amendment No. 46)

6.1 Form of Revised Shareholder Servicing Plan

(i) 1.1 Opinion and Consent of Counsel (to be filed by amendment)

(j) 1.1 Other Opinions - Consent of Independent Accountants

1.2 Limited Powers of Attorney of Frank Russell Investment Company
Trustees dated January 15, 1996 with respect to Amendments to the SEC
Registration
<PAGE>

Statements of Frank Russell Investment Company (incorporated by
reference to Item 24(b)(11)(b) filed under Post Effective Amendment
No. 38)

1.3 Limited Powers of Attorney of additional Frank Russell Investment
Company Trustees dated December, 1999 with respect to Amendments to
the SEC Registration Statements of Frank Russell Investment Company
(incorporated by reference from Post-Effective Amendment No. 46)

(k) 1.1 Financial Statements omitted from Item 22 (none)

(l) 1.1 Agreement dated October 5, 1981 related to Initial Capital provided by
Frank Russell Company (incorporated by reference to Item 24(b)(13)
filed under Post-Effective Amendment No. 38)

(m) 1.1 Form of revised Rule 12b-1 Distribution Financing Plan

(n) 1.1 Financial Data Schedule (none)

(o) 1.1 Form of Multiple Class Plan Pursuant to Rule 18f-3

(p) Codes of Ethics of the following information advisors and sub-advisors:

1.1 Frank Russell Investment Management Company (incorporated by reference
from Post-Effective Amendment No. 46)

1.2 AEW Capital Management, L.P. (incorporated by reference from Post-
Effective Amendment No. 46)

1.3 Alliance Capital Management L.P. (incorporated by reference from Post-
Effective Amendment No. 46)

1.4 Barclays Global Fund Advisors N.A. (incorporated by reference from
Post-Effective Amendment No. 46)

1.5 BlackRock Financial Management (incorporated by reference from Post-
Effective Amendment No. 46)

1.6 The Boston Company Asset Management (incorporated by reference from
Post-Effective Amendment No. 46)

1.7 CapitalWords International Partners (incorporated by reference from
Post-Effective Amendment No. 46)

1.8 Cohen & Steers (incorporated by reference from Post-Effective
Amendment No. 46)

1.9 Delaware International Advisors Limited (incorporated by reference
from Post-Effective Amendment No. 46)

1.10 Delphi Management, Inc. (incorporated by reference from Post-Effective
Amendment No. 46)

1.11 Driehaus Capital Management, Inc.

1.12 Equinox Capital Management, Inc. (incorporated by reference from Post-
Effective Amendment No. 46)

1.13 Fidelity Management Trust Company (incorporated by reference from
Post-Effective Amendment No. 46)
<PAGE>

1.14 Fiduciary International, Inc. (incorporated by reference from Post-
Effective Amendment No. 46)

1.15 Foreign & Colonial Emerging Markets Limited (incorporated by reference
from Post-Effective Amendment No. 46)

1.16 Franklin Portfolio Associates LLC (incorporated by reference from
Post-Effective Amendment No. 46)

1.17 Geewax, Terker & Company (incorporated by reference from Post-
Effective Amendment No. 46)

1.18 Genesis Asset Managers, LTd. (incorporated by reference from Post-
Effective Amendment No. 46)

1.19 GlobeFlex Capital, L.P. (incorporated by reference from Post-Effective
Amendment No. 46)

1.20 Jacobs Levy Equity Management, Inc. (incorporated by reference from
Post-Effective Amendment No. 46)

1.21 J.P. Morgan Investment Management, Inc. (incorporated by reference
from Post-Effective Amendment No. 46)

1.22 Lazard Asset Management (incorporated by reference from Post-Effective
Amendment No. 46)

1.23 Lincoln Capital Management Company (incorporated by reference from
Post-Effective Amendment No. 46)

1.24 Marsico Capital Management, LLC (incorporated by reference from Post-
Effective Amendment No. 46)

1.25 Marvin & Palmer Associates, Inc.

1.26 Mastholm Asset Management, LLC (incorporated by reference from Post-
Effective Amendment No. 46)

1.27 MFS Institutional Advisors, Inc. (incorporated by reference from Post-
Effective Amendment No. 46)

1.28 Miller, Anderson & Sherrerd, LLP (incorporated by reference from Post-
Effective Amendment No. 46)

1.29 Montgomery Asset Management LLC (incorporated by reference from Post-
Effective Amendment No. 46)

1.30 Nicholas Applegate Capital Management (incorporated by reference from
Post-Effective Amendment No. 46)

1.31 Oechsle International Advisors, LLC (incorporated by reference from
Post-Effective Amendment No. 46)

1.32 Pacific Investment Management Company (incorporated by reference from
Post-Effective Amendment No. 46)

1.33 Peachtree Asset Management (incorporated by reference from Post-
Effective Amendment No. 46)

1.34 Sanford C. Bernstein & Co., Inc. (incorporated by reference from Post-
Effective Amendment No. 46)

1.35 Schroders Capital Management International Limited (incorporated by
reference from Post-Effective Amendment No. 46)

1.36 Security Capital Global Capital Management Group (incorporated by
reference from Post-Effective Amendment No. 46)

1.37 Sirach Capital Management, Inc. (incorporated by reference from Post-
Effective Amendment No. 46)
<PAGE>

1.38 Standish, Ayer & Wood, Inc. (incorporated by reference from Post-
Effective Amendment No. 46)

1.39 STW Fixed Income Management Ltd. (incorporated by reference from Post-
Effective Amendment No. 46)

1.40 Strong Capital Management (incorporated by reference from Post-
Effective Amendment No. 46)

1.41 Suffolk Capital Management Ltd. (incorporated by reference from Post-
Effective Amendment No. 46)

1.42 Turner Investment Partners (incorporated by reference from Post-
Effective Amendment No. 46)

1.43 Weiss, Peck & Greer, L.L.C. (incorporated by reference from Post-
Effective Amendment No. 46)

1.44 Westpeak Investment Advisors, L.P. (incorporated by reference from
Post-Effective Amendment No. 46)

Item 24. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
None

Item 25. Indemnification
---------------

Incorporated by reference to Item 27 filed under Post-Effective
Amendment No. 6.

Item 26. Business and Other Connections of Investment Advisor
----------------------------------------------------

See Registrant's prospectus sections "The Purpose of the Fund--Multi-
Style, Multi-Manager Diversification," "The Money Managers," "Money
Manager Profiles," and "Management of the Funds," the Statement of
Additional Information sections "Structure and Governance--Trustees
and Officers," and "Operation of Investment Company--Consultant."

Item 27. Principal Underwriters
----------------------

(a) SSgA Funds

(b) Russell Fund Distributors, Inc. is the principal underwriter of
the Registrant. The directors and officers of Russell Fund
Distributors, Inc., their principal business address, and
positions and offices with the Registrant and Russell Fund
Distributors, Inc. are set forth below:
<PAGE>

<TABLE>
<CAPTION>
Name and Positions and Position and
Principal Business Officers with Offices with
Address Registrant Underwriter
------------- -------------- -------------
<S> <C> <C>
George F. Russell, Jr. Trustee Emeritus, Chairman None
Emeritus

Lynn L. Anderson Trustee, President, Chief Director, Chairman of the Board
Executive Officer, Chairman and Chief Executive Officer
of the Board

Mark E. Swanson Treasurer and Chief None
Accounting Officer

Karl J. Ege Secretary and General Counsel Secretary and General Counsel

Peter F. Apanovitch Manager of Short Term None
Investment Funds

Randall P. Lert Director of Investments Director

J. David Griswold None Assistant Secretary and Associate
General Counsel

Gregory J. Lyons Assistant Secretary and Assistant Secretary
Associate General Counsel

Deedra S. Walkey Assistant Secretary None

Amy Osler Assistant Secretary None

Rick J. Chase Assistant Treasurer None

Kimberly A. Stoll Assistant Treasurer None

B. James Rohrbacher None Director of Compliance and
Internal Audit, Chief Compliance
Officer

Linda L. Gutmann None Treasurer and Controller

Carla L. Anderson None Assistant Secretary

John James None Assistant Secretary

Mary Beth Rhoden Assistant Secretary None
</TABLE>

Item 28. Location of Accounts and Records
--------------------------------
All accounts and records required to be maintained by section 31(a) of
the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained in the
following locations:

FRIC FRIMCo
---- ------
Frank Russell Investment Company Frank Russell Investment
909 A Street Management Company
Tacoma, Washington 98402 909 A Street
Tacoma, Washington 98402

SS MM
-- --
State Street Bank & Trust Company Money Managers
1776 Heritage Drive JA4N See, Prospectus Section
---
North Quincy, Massachusetts 02171 "Money Manager Profiles"
for Names and Addresses

Rule 31a-1
----------
(a) Records forming basis for financial statements - at
principal offices of SS, FRIC, FRIMCo, and MM for each
entity
(b) FRIC Records:
(1) SS - Journals, etc.
(2) SS - Ledgers, etc.
(3) Inapplicable
(4) FRIC - Corporate charter, etc.
(5) MM - Brokerage orders
(6) MM - Other portfolio purchase orders
(7) SS - Contractual commitments
(8) SS and FRIC - Trial balances
(9) MM - Reasons for brokerage allocations
(10) MM - Persons authorizing purchases and sales
(11) FRIC and MM - Files of advisory material
(12) ---
(c) Inapplicable
(d) FRIMCo - Broker-dealer records, to the extent applicable
(e) Inapplicable
(f) FRIMCo and MM - Investment adviser records

Item 29. Management Services
-------------------
None except as described in Parts A and B.

Item 30. Undertakings
------------
Registrant has elected to include its Management's discussion of Fund
performance required under N-1A, Item 5A in its annual report.
Registrant therefore undertakes to provide annual reports without
charge to any recipient of a Prospectus who requests the information.
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, Frank Russell Investment Company has duly
caused this Post Effective Amendment No. 47 to its Registration Statements to be
signed on its behalf by the undersigned thereto duly authorized, in the City of
Tacoma, and State of Washington, on this 30th day of August, 2000.

FRANK RUSSELL INVESTMENT COMPANY
--------------------------------
Registrant

By: /s/ Lynn L. Anderson
---------------------------------------
Lynn L. Anderson, Trustee and President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on August 30, 2000.

Signatures Title
---------- ----

/s/ Lynn L. Anderson Trustee and President,
----------------------------
Lynn L. Anderson in his capacity as
Chief Executive Officer

/s/ Mark E. Swanson Treasurer, in his capacity
----------------------------
Mark E. Swanson as Chief Accounting Officer

____________________________ Trustee
Paul E. Anderson*

____________________________ Trustee
Paul Anton, PhD*

____________________________ Trustee
William E. Baxter*

____________________________ Trustee
Kristianne Blake*

____________________________ Trustee
Lee C. Gingrich*

____________________________ Trustee
Eleanor W. Palmer*

____________________________ Trustee
Raymond P. Tennison, Jr.*

By: /s/ Gregory J. Lyons Assistant Secretary
-------------------------
Gregory J. Lyons

* Original Powers of Attorney authorizing the President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary, and each of them
singly to sign this Amendment on behalf of each member of the Board of Trustees
of Frank Russell Investment Company which have been filed with the Securities
and Exchange Commission.
<PAGE>

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Name of Exhibit Exhibit Number
--------------- --------------
----------------------------------------------------------------------------------------------------
<S> <C>
Amendment No. 20 to Master Trust (a)1.21
Agreement dated August 7, 2000
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Form of Letter Agreement to the Yield (d)3.9
Calculation Services Agreement dated
August 25, 2000 redesignating existing
Class S Shares as Class I Shares for
the Money Market and Tax Free Money
Market Funds and creating new Class S
Shares for those Funds, and adding
Class E Shares to the Tax-Managed Large
Cap and Tax-Managed Small Cap Funds
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Form of Letter Agreement amending the (e)1.4
Distribution Agreement redesignating
existing Class S Shares as Class I
Shares for the Money Market and Tax
Free Money Market Funds and creating
new Class S Shares for those Funds, and
adding Class E Shares to the
Tax-Managed Large Cap and Tax-Managed
Small Cap Funds
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Form of Letter Agreement and Amended (h)1.12
Schedule A (h) 1.11
with respect to Transfer and Dividend
Disbursing Agency Agreement
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

<TABLE>
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
<S> <C>
Letter Agreements regarding fee waivers (h)4.1
and reimburesments
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Form of Revised Shareholder Servicing (h)6.1
Plan
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Opinion and Consent of Counsel To be filed by amendment
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Consent of Independent Accountants (j)1.1
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Form of revised Rule 12b1-1 Distribution (m)1.1
Financing Plan
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Form of Multiple Class Plan Pursuant to (o)1.1
Rule 18f-3
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Driehaus Capital Management, Inc. Code (p)1.11
of Ethics
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Marvin & Palmer Associates, Inc. Code of (p)1.25
Ethics
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

FRANK RUSSELL INVESTMENT COMPANY

FILE NO. 2-71299
FILE NO. 811-3153
-----------------

EXHIBITS
--------

Listed in Part C, Item 23
To Post-Effective Amendment No. 46
and Amendment No. 46
to
Registration Statement on Form N-1A
Under
Securities Act of 1933
and
Investment Company Act of 1940