RUSSELL FRANK INVESTMENT CO, 497, 2000-06-30

RUSSELL FRANK INVESTMENT CO
497, 2000-06-30

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<PAGE>

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

In Washington (253) 627-7001

STATEMENT OF ADDITIONAL INFORMATION

May 1, 2000 as Supplemented Through June 30, 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 Fund of Funds'
Prospectuses, which 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 the Fund of Funds' Annual Reports
to Shareholders for the year ended December 31, 1999. Copies of the Fund of
Funds' Annual Reports accompany this Statement. The Tax-Managed Global Equity
Fund did not issue any Shares in 1999 and therefore has not yet issued an Annual
Report to shareholders.

This Statement describes the Class C, Class D, Class E and Class S Shares
of the Equity Aggressive Strategy, Aggressive Strategy, Balanced Strategy,
Moderate Strategy and Conservative Strategy Funds and the Class C and Class S
Shares of the Tax-Managed Global Equity Fund (collectively, the "Fund of
Funds"), each of which invests in different combinations of other funds (the
"Underlying Funds") which invests in different combinations of stocks, bonds and
cash equivalents.

FUND INCEPTION DATE PROSPECTUS DATE
---- -------------- ---------------
<S> <C> <C>
Equity Aggressive Strategy Fund September 30, 1997 May 1, 2000
Aggressive Strategy Fund September 16, 1997 May 1, 2000
Balanced Strategy Fund September 16, 1997 May 1, 2000
Moderate Strategy Fund October 2, 1997 May 1, 2000
Conservative Strategy Fund November 7, 1997 May 1, 2000
Tax-Managed Global Equity Fund February 1, 2000 May 1, 2000
</TABLE>

The Underlying Funds in which the Fund of Funds currently invest commenced
operations on the dates indicated below:

FUND INCEPTION DATE
---- --------------
<S> <C>
Diversified Equity Fund September 5, 1985
Special Growth Fund September 5, 1985
Quantitative Equity Fund May 15, 1987
International Securities Fund September 5, 1985
Diversified Bond Fund September 5, 1985
Short Term Bond Fund October 30, 1981
Multistrategy Bond Fund January 29, 1993
Real Estate Securities Fund July 28, 1989
Emerging Markets Fund January 29, 1993
Tax-Managed Large Cap Fund (formerly Equity T Fund) October 7, 1996
Tax-Managed Small Cap Fund December 1, 1999
</TABLE>
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TABLE OF CONTENTS

CERTAIN TERMS USED IN THIS STATEMENT OF ADDITIONAL INFORMATION ARE DEFINED IN
THE GLOSSARY, WHICH BEGINS ON PAGE 58

<TABLE>
<CAPTION>
Page
<S> <C>
STRUCTURE AND GOVERNANCE............................................................................. 1
Organization and Business History................................................................. 1
Shareholder Meetings.............................................................................. 1
Controlling Shareholders.......................................................................... 2
Trustees and Officers............................................................................. 4

OPERATION OF FRIC.................................................................................... 9
Service Providers................................................................................. 9
Consultant........................................................................................ 9
Advisor and Administrator......................................................................... 10
Money Managers.................................................................................... 11
Distributor....................................................................................... 12
Custodian and Portfolio Accountant................................................................ 12
Transfer and Dividend Disbursing Agent............................................................ 13
Order Placement Designees......................................................................... 13
Independent Accountants........................................................................... 13
Codes of Ethics................................................................................... 13
Plan Pursuant to Rule 18f-3....................................................................... 15
Distribution Plan................................................................................. 16
Shareholder Services Plan......................................................................... 17
Underlying Fund Expenses.......................................................................... 18
Fund of Funds Operating Expenses.................................................................. 18
Purchase and Redemption of Fund of Funds Shares................................................... 18
Valuation of the Fund of Fund Shares.............................................................. 19
Pricing of Securities............................................................................. 19
Portfolio Turnover Rates of the Fund of Funds..................................................... 20
Portfolio Transaction Policies of the Underlying Funds............................................ 20
Brokerage Allocations............................................................................. 20
Brokerage Commissions............................................................................. 22
Yield and Total Return Quotations................................................................. 22

INVESTMENT RESTRICTIONS, POLICIES AND PRACTICES OF THE FUND OF FUNDS................................ 23
Investment Restrictions........................................................................... 23
Investment Policies and Practices of the Fund of Funds............................................ 24

INVESTMENT POLICIES OF THE UNDERLYING FUNDS.......................................................... 26
CERTAIN INVESTMENTS OF THE UNDERLYING FUNDS.......................................................... 29
TAXES................................................................................................ 47
MONEY MANAGER INFORMATION FOR UNDERLYING FUNDS....................................................... 48
RATINGS OF DEBT INSTRUMENTS.......................................................................... 51
FINANCIAL STATEMENTS................................................................................. 57
GLOSSARY............................................................................................. 58
</TABLE>
<PAGE>

STRUCTURE AND GOVERNANCE

ORGANIZATION AND BUSINESS HISTORY. FRIC commenced business operations as a
Maryland corporation in October 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 law governing
the operation of a Massachusetts business trust. The Board of Trustees ("Board")
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 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 $0.01 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. Each of the Fund of Funds described in this Statement,
other than the Tax-Managed Global Equity Fund which only offers Shares of
beneficial interest in the Class C and S Shares, offers Shares of beneficial
interest in the Class C, Class D, Class E and Class S Shares. The Class C,
Class D and Class E Shares are subject to a shareholder services fee of up to
0.25%. In addition, the Class D Shares are subject to a Rule 12b-1 fee of up to
0.75% (presently limited to 0.25%) and the Class C Shares are subject to a 0.75%
Rule 12b-1 fee. Unless otherwise indicated, "Shares" in this Statement refers
to the Class C, Class D and Class E Shares of the Fund of Funds, other than the
Tax-Managed Global Equity Fund, and Class C and Class S Shares of the Tax-
Managed Fund Global Equity Fund.

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
the outstanding Shares, or (iii) upon the Board's failure to honor the
shareholders' request described above, by shareholders holding at least 10% of
the outstanding Shares by giving notice of the special meeting to shareholders.
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.

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<PAGE>

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.

At March 31, 2000, the following shareholders owned 5% or more of any Class of
any Fund's Shares:

Aggressive Strategy Fund Class D - Security Trustee Co., Trustee, Karr Tuttle
Campbell Retirement Savings Plan, 2390 East Camelback Road, Suite 240,
Phoenix, AZ 85016-3434, 37.73%, record; Maltrust & Co., c/o Eastern Bank &
Trust AM & M, Attn: Retirement Plan Services, 3/rd/ Floor, 217 Essex Street,
Salem, MA 01970-3728, 31.85%, record, Webster Trust Co., Trustee, For Beecher
& Bennett 401K Profit Sharing Plan, Attn: Christopher Rand, 346 Main Street,
Kensington, CT 06037-2652, 8.32%, record; Security Trust Company, Trustee, FBO
Pace International LLC 401K Plan, 2390 East Camelback Road, Suite 240,
Phoenix, AZ 85016-3434, 6.64%, record.

Aggressive Strategy Fund Class E - Board of Pensions of the Church of God,
Inc., Trustees, Church of God Pension Plan, Attn: Doug Hamlin, P.O. Box 2559,
Anderson, IN 46018-2559, 10.66%, record; Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds,
101 Montgomery Street, San Francisco, CA 94104-4122, 7.37%, record.

Aggressive Strategy Fund Class S - Deborah M. Dahl, P.O. Box 357, Toledo, OR
97391-0357, 35.54%, record; Peter Killian Wilke & Anne Marie White Wilke,
Trustees, Peter K. Wilke & Anne M. Wilke Living Trust U/A DTD 10/20/92, 5 High
Bluff, Laguna Niguel, CA 92677-4259; 14.18%, record; Raymond James & Assoc.,
Inc., CSDN, James E. Ryan IRA R/O, 253 Miami Lakes Drive, Milford, OH 45150-
5810, 8.06%, record; W.R. Meadows, Inc. Profit Sharing Plan and 401K Plan
Trust, Aggressive, c/o Corus Asset Management, 2401 N. Halsted Street,
Chicago, IL 60614-2451, 6.46%, record.

Balanced Strategy Fund Class D - Bellingham Cold Storage Co. Profit Sharing
Retirement Plan, Security Trust Co., Trustee, 2390 East Camelback Road, Suite
240, Phoenix, AZ 85016-3434, 38.20%, record; Maltrust & Co., c/o Eastern Bank
& Trust AM & M, Attn: Retirement Plan Services, 3/rd/ Floor, 217 Essex Street,
Salem, MA 01970-3728, 35.24%, record; Security Trustee Co., Trustee, Karr
Tuttle Campbell Retirement Savings Plan, 2390 East Camelback Road, Suite 240,
Phoenix, AZ 85016-3434, 13.00%, record.

Balanced Strategy Fund Class E - Board of Pensions of the Church of God, Inc.,
Trustees, Church of God Pension Plan - ANNU., Attn: Doug Hamlin, P.O. Box
2559, Anderson, IN 46018-2559, 19.72%, record; NFSC FEBO #U19-000019, Firstar-
Reinvest, Chris Surges, P.O. Box 1787, Mutual Funds, 9/th/ Floor, Milwaukee,
WI 53201-1787, 8.42%, record; Board of Pensions of the Church of God, Inc.,
Trustees, Church of God Pension Plan, Attn: Doug Hamlin, P.O. Box 2559,
Anderson, IN 46018-2559, 8.17%, record; Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds,
101 Montgomery Street, San Francisco, CA 94104-4122, 6.00%, record.

Balanced Strategy Fund Class S - Robert W. Baird & Co., Inc., Trustee, FBO
Michael Blankenship Rollover IRA, A/C 1596-6289, P.O. Box 6052, Tallahassee,
FL 32314-6052, 16.54%, record; Frank Mannarino and Paul Nitz, Trustees Under
The Orthopedic Institute Pension Plan DTD 3/1/76, FBO Phyllis Ann Searcey, 813
East Dorothy Lane, Kettering, OH 45419-2008, 10.61%, record; Robert W. Baird &
Co., Inc., Trustee, FBO Conn E. Wittwer Rollover IRA, A/C 8757-1774, 911 West
Ballard Road, Spokane, WA 99208-8799, 7.76%, record; United Way of Madison
County, P.O. Box 1200, Anderson, IN 46015-1200, 6.51%, record; Marie L. Smith
& Steven F. Smith, JT TEN WROS, 5695 Algonguin Way, San Jose, CA 95138-2205,
6.05%, record; Marc & Tamara Beckman, Co-Trustees, Marc & Tamara Beckman
Revocable Living Trust DTD 2/2/99, 50 San Gregorio Court, Danville, CA 94526-
1544, 6.01% record.

Conservative Strategy Fund Class C - Elizabeth P. Ingoldsby, Trustee,
Ingoldsby Family Trust U/A DTD 4/5/82, 868 San Simeon Road, Arcadia, CA,
91007-6036, 14.23%, record; Rita N. Dunbar, 303 S. Raven Terrace, Inverness,
FL 34450-2755, 13.85%, record; Frank R. Manzano, Trustee, Stoottlemyer Trust
DTD 5/15/91, 3049 Alabama Street, La Crescenta, CA, 91214-2702, 11.29%,
record; Stephen L. Easley, 2251 Willow Drive, San Bernardino, CA, 92404-3113,
6.43%, record.

2
<PAGE>

Conservative Strategy Fund Class D - Maltrust & Co., c/o Eastern Bank & Trust
AM & M, Attn: Retirement Plan Services, 3/rd/ Floor, 217 Essex Street, Salem,
MA 01970-3728, 80.09%, record; Webster Trust Co., Trustee, For Beecher &
Bennett 401K Profit Sharing Plan, Attn: Christopher Rand, 346 Main Street,
Kensington, CT 06037-2652, 9.68%, record; Security Trust Co., Trustee, FBO Van
Doren Sales, Inc. 401K Retirement Plan, 2390 East Camelback Road, Suite 240,
Phoenix, AZ 85016-3434, 6.28%, record.

Conservative Strategy Fund Class E - Board of Pensions of the Church of God,
Inc., Trustees, Church of God Pension Plan, Attn: Doug Hamlin, P.O. Box 2559,
Anderson, IN 46018-2559, 16.51%, record; FTC & Co. Datalynx #T03, FBO Wesleyan
Pension Plan 403(B), P.O. Box 173736, Denver, CO 80217-3736, 9.35%, record;
Charles Schwab & Co., Inc., Special Custody Account for the Exclusive Benefit
of Customers, Attn: Mutual Funds, 101 Montgomery Street, San Francisco, CA
94104-4122, 6.73%, record; Citizens Bank of Batesville, Trustee, White River
Medical Center, Inc. 401K Plan, 3rd & College Streets, Batesville, AR 72503,
6.02%, record.

Conservative Strategy Fund Class S - Robert W. Baird & Co., Inc., Trustee, FBO
Dorothy Wood Rollover IRA, A/C 8769-9241, 580 Bloomfield Avenue, Apt. 12A,
West Caldwell, NJ 07006-7503, 56.10%, record; Velma Laureta Deremer, Trustee,
The Velma Laureta Deremer Revocable Living Trust UA DTD 09/07/1999, 7866 Horse
Ferry Road, Orlando, FL 32835-5966, 26.57%, record; Brock M. Lutz, Trustee,
Charlotte N. Martin Trust DTD 02/20/92, 748 South Spoede Road, Frontenac, MO
63131-2603, 10.00%, record; State Street Bank & Trust Co., Cust. for the IRA
of FBO Velma Laureta Deremer, 7866 Horse Ferry Road, Orlando, FL 32835-5966,
7.31%, record.

Equity Aggressive Strategy Fund Class E - NFSC FEBO #U19-000019, Firstar -
Reinvest, Chris Surges, P.O. Box 1787, Mutual Funds, 9/th/ Floor, Milwaukee,
WI 53201-1787, 23.91%, record; Board of Pensions of the Church of God, Inc.,
Trustees, Church of God Pension Plan, Attn: Doug Hamlin, P.O. Box 2559,
Anderson, IN 46018-2559, 11.00%, record; Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds,
101 Montgomery Street, San Francisco, CA 94104-4122, 10.71%, record; FTC & Co.
Datalynx #T03, FBO Wesleyan Pension Plan 403(B), P.O. Box 173736, Denver, CO
80217-3736, 5.69%, record.

Moderate Strategy Fund Class C - NFSC FEBO #0AB-918083, NFSC/FMTC IRA
Rollover, FBO Blaise F. Dinatale, 441 Springwood Drive, Verona, PA 15147-2623,
5.01%; record.

Moderate Strategy Fund Class D - Maltrust & Co., c/o Eastern Bank & Trust AM &
M, Attn: Retirement Plan Services, 3/rd/ Floor, 217 Essex Street, Salem, MA
01970-3728, 55.51%, record; Security Trust Co., Cust. For FBO Jumbo Foods
401(k), 2390 East Camelback Road, Suite 240, Phoenix, AZ 85016-3434, 23.46%,
record; Security Trust Co., Trustee, Karr Tuttle Campbell Retirement Savings
Plan, 2390 East Camelback Road, Suite 240, Phoenix, AZ 85016-3434, 10.30%,
record.

Moderate Strategy Fund Class E - Board of Pensions of the Church of God, Inc.,
Trustees, Church of God Pension Plan, Attn: Doug Hamlin, P.O. Box 2559,
Anderson, IN 46018-2559, 20.25%, record; FTC & Co. Datalynx #T03, FBO Wesleyan
Pension Plan 403(B), P.O. Box 173736, Denver, CO 80217-3736, 11.69%, record;
Charles Schwab & Co., Inc., Special Custody Account for the Exclusive Benefit
of Customers, Attn: Mutual Funds, 101 Montgomery Street, San Francisco, CA
94104-4122, 8.33%, record.

Moderate Strategy Fund Class S - State Street Bank & Trust Co., Cust. for the
IRA R/O FBO Gordon G. Powers, 12202 East Poinsettia Drive, Scottsdale, AZ
85259-3332, 32.59%, record; State Street Bank & Trust Co., Cust. FBO Mary Jo
Wendorff IRA R/O, 19 Vista Real Drive, Rolling Hills Estates, CA 90274-4227,
25.12%, record; Dorothy T. Robinson, Robert W. Ani, Carol W. Perkins,
Trustees, The Dorothy B. Tuck Trust DTD 06/08/99, 662 Via Los Altos, Laguna
Woods, CA 92653-4579, 14,78 %, record; Ruth T. Holmes TOD Martine Smith, P.O.
Box 39, Indian Trail, NC 28079-0039, 12.67%, record; Barbara J. Billings, 1953
Woodstock Road, White River JCT, VT 05001-9795, 8.38%, record; State Street
Bank & Trust Co., Cust. for the Rollover IRA of Steve Baumgras, 3727 South
Atlantic Avenue, Apt. 109, Daytona Beach, FL 32127-5212, 6.29%, record.

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Tax Managed Global Equity Fund Class C - Susan A. McCullough & Charles
McCullough JT TEN, 17029 21/st/ Avenue S.W., Seattle, WA 98166-3315, 15.35%,
record; James G. Bazlen and Alice T. Bazlen, Trustees, The Jab Trust U/A DTD
2/6/97, 4421 East Horseshoe, Phoenix, AZ 85028-6138, 6.88%, record; Juella R.
Zenor, 8205 53/rd/ Street Court West, Tacoma, WA 98467-1971, 6.31%, record;
Kathryn Clarke Thompson, 6123 Del Monte Drive, Houston, TX 77057-3517, 6.09%,
record; NFSC FEBO #0NN-124710, Claude D. Baker MD, 5295 West Plymouth Drive,
Littleton, CO 80128-4930, 5.34%, record.

Tax Managed Global Equity Fund Class S - Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds,
101 Montgomery Street, San Francisco, CA 94104-4122, 24.03%, record; Thomas P.
Stayer & Victoria D. Stayer, JT TEN WROS, Fee In Lieu, 1146 Richards Road,
Allegany, NY 14706-9736, 8.28%, record; Lucinda Sharp Gates, P.O. Box 502,
Parkman, OH 44080-0502, 5.85%, record; Cinda Stayer Warner & R. Gregg Warner,
JT TEN WROS, Fee In Lieu, 1080 Richards Road, Allegany, NY 14706-9736, 5.80%,
record; Robert R. Thomas & Jane L. Thomas, Trustees, Robert R. Thomas & Jane
L. Thomas Trust U/A DTD 5/14/1999, 2672 Big Wagon Road, Alpine, CA 91901-3103,
5.66%, record.

At March 31, 2000, the following shareholders could be deemed to "control"
the following Fund of Funds because such shareholder owns more than 25% of the
voting Shares of the indicated Fund of Funds:

Aggressive Strategy Fund Class S - Deborah M. Dahl, P.O. Box 357, Toledo, OR
97391-0357, 35.54%, record.

Conservative Strategy Fund Class D - Maltrust & Co., c/o Eastern Bank & Trust
AM & M, Attn: Retirement Plan Services, 3/rd/ Floor, 217 Essex Street, Salem,
MA 01970-3728, 80.09%, record.

Moderate Strategy Fund Class D - Maltrust & Co., c/o Eastern Bank & Trust AM &
M, Attn: Retirement Plan Services, 3/rd/ Floor, 217 Essex Street, Salem, MA
01970-3728, 55.51%, record.

For information in this regard with respect to the Underlying Funds, refer to
the Statement of Additional Information for the Underlying Funds.

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 Frank Russell Investment Management Company ("FRIMCo"),
Frank Russell Company ("Russell") and the money managers. A Trustee may be
removed at

4
<PAGE>

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 $150,000 in the aggregate 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 ages, 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.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Principal Occupation(s)
Name, Age, Position(s) Held During the
Address with Fund Past 5 Years
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*George F. Russell, Trustee Emeritus and Also currently: Trustee Emeritus and Chairman Emeritus,
Jr., Born July 3, 1932 Chairman Emeritus Russell Insurance Funds; Director, Chairman of the Board and
since 1998. Chief Executive Officer, Russell Building Management Company,
909 A Street Inc.; Director and Chairman of the Board, Frank Russell
Tacoma, Washington Company; Director and Chairman of the Board, Frank Russell
98402-1616 Investments (Delaware), Inc.; Chairman Emeritus/Director
Emeritus, Frank Russell Trust Company; Chairman Emeritus,
Frank Russell Securities, Inc.; Director Emeritus, Frank
Russell Investment Management Company; Director, Chairman of
the Board and President, Russell 20/20 Association. From 1984
to December 1998, Trustee and Chairman of the Board of FRIC.
From August 1996 to December 1998, Trustee and Chairman of
the Board of Russell Insurance Funds.
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----------------------------------------------------------------------------------------------------------------
*Lynn L. Anderson, Trustee, President Also currently: Trustee, President and Chief Executive
Born April 22, 1939 and Chief Executive Officer, Russell Insurance Funds; Director, Chief Executive
Officer since 1987. Officer and Chairman of the Board, Russell Fund Distributors,
909 A Street Inc.; Trustee, Chairman of the Board, President, The SSgA
Tacoma, Washington Funds (investment company); Director and Chairman of the
98402-1616 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).
----------------------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE>

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
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----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE>

2025 Narrows View
Circle #232-D, P.O.
Box 1057
Gig Harbor, Washington
98335
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Raymond P. Tennison, Jr. Trustee since 2000. Also currently: Trustee, Russell Insurance Funds and President,
Born December 21, 1955 Simpson Investment Company and several additional subsidiary
companies, including Simpson Timber Company, Simpson Paper
1301 Fifth Avenue Company and Simpson Tacoma Kraft Company. Prior to July 1997,
Suite 2800 President and Board member, Simpson Paper Company. Trustee,
Seattle, Washington Simpson Employee Retirement Fund.
98101
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
*Mark E. Swanson, Treasurer and Chief Also currently: Treasurer and Chief Accounting Officer, Russell
Born November 26, 1963 Accounting Officer Insurance Funds; Director, Fund Administration Frank Russell
since 1998. Trust Company; Treasurer, Assistant Secretary and Principal
909 A Street Accounting Officer, SSgA Funds (investment company); Director of
Tacoma, Washington Fund Administration, Frank Russell Investment Management
98402-1616 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.
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*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 Company;
1991. Director and Chief Investment Officer, Frank Russell Investment
909 A Street Management Company; Director and Chief Investment Officer,
Tacoma, Washington Russell Fund Distributors, Inc.; Director-Futures Trading, Frank
98402-1616 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.
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</TABLE>

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<TABLE>
<CAPTION>
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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 Russell
Born October 8, 1941 Counsel since 1994. Insurance Funds; Director, Secretary and General Counsel,
Russell Real Estate Advisors, Inc. and Frank Russell Capital,
909 A Street Inc.; Secretary, General Counsel and Managing Director--Law and
Tacoma, Washington Government Affairs of Frank Russell Company; Secretary and
98402-1616 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 Funds, Russell
Born May 3, 1945 Investment Funds. 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>
PENSION OR ESTIMATED
RETIREMENT ANNUAL TOTAL
AGGREGATE BENEFITS BENEFITS COMPENSATION
COMPENSATION ACCRUED AS PART UPON FROM FRIC PAID
TRUSTEE FROM FRIC OF FRIC EXPENSES RETIREMENT 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>

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

8
<PAGE>

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:

Consultant Frank Russell Company

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

Money Managers for the Multiple professional
Underlying Funds discretionary investment
management organizations

Custodian and Portfolio Accountant State Street Bank and Trust
Company

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 Prospectus, 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) and 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 U.S. personnel
secunded to overseas enterprises. Russell Fiduciary Services Company, a wholly
owned subsidiary of Frank Russell Company, provides fiduciary services to
pension and welfare benefit plans and other institutional investors. The mailing
address of Frank Russell Company is 909 A Street, Tacoma, WA 98402

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.

9
<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 (in the case of the Underlying Funds)
and custodian. FRIMCo also develops the investment programs for each of the
Funds, selects money managers for the Underlying 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 Underlying Funds' Liquidity Portfolios. (See, "Investment
Policies of the Underlying Funds -- Liquidity Portfolios.") FRIMCo also acts as
FRIC's transfer agent and dividend disbursing agent. FRIMCo, as agent for FRIC,
pays the money managers' fees for the Underlying Funds, as a fiduciary for the
Underlying Funds, out of the advisory fee paid by the Underlying 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 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 Prospectuses for the Underlying Funds' annual percentage rates.)

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

Fund of Funds 12/31/99* 12/31/98 12/31/97**
------------- --------- -------- ----------
Equity Aggressive Fund $ 403,512 $ 151,953 $ 1,140
Aggressive Strategy Fund 312,714 96,256 1,727
Balanced Strategy Fund 650,215 277,200 1,187
Moderate Strategy Fund 94,535 30,361 151
Conservative Strategy Fund 35,959 6,465 8

* No Shares of the Tax-Managed Global Equity Fund were issued during any of
the periods shown above.

** The Fund of Funds, other than the Tax-Managed Global Equity Fund, commenced
operations during calendar year 1997 and therefore incurred management fees
due to FRIMCo for only a portion of the year 1997. However, FRIMCo
voluntarily agreed to waive its management fee (including its advisory and
administrative fees) during the years ended December 31, 1999, 1998 and
1997.

While FRIMCo will perform investment advisory services for the Fund of
Funds (i.e., determining the percentages of the Underlying Funds which will be
purchased by each Fund of Funds, and periodically adjusting the percentages and
the Underlying Funds), FRIMCo has waived and/or reimbursed its management,
advisory and, except for the Tax-Managed Global Equity Fund, administrative fees
since each Fund of Fund's inception and has contractually agreed to continue the
waiver of advisory fee through February 28, 2001 and, except for the Tax-Managed
Global Equity Fund, the waiver of administrative fees through November 30, 2000.
Advisory fees do not vary among classes of Shares. Administrative fees for the
Tax-Managed Global Equity Fund are, and for each other Fund of Funds after
November 30, 2000 will be, borne by the Underlying Funds in accordance with the
Funds' Special Servicing Agreements. For the fiscal years ended December 31,
1999, 1998 and 1997, respectively, FRIMCo waived fees in the following amounts:
Equity Aggressive Strategy Fund: $403,512, $151,953 and $1,140; Aggressive
Strategy Fund: $312,714, $96,256 and $1,727; Balanced Strategy Fund: $650,215,
$277,200 and $1,187; Moderate Strategy Fund: $94,535, $30,361 and $151; and
Conservative Strategy Fund: $35,959, $6,465 and $8. For the fiscal years ended
December 31, 1999, 1998 and 1997, respectively, FRIMCo reimbursed the Fund of
Funds in the following amounts: Equity Aggressive Strategy Fund, $11,875,
$74,469 and $61,796; Aggressive Strategy Fund, $11,979, $62,426 and $64,455;
Balanced Strategy Fund, $12,780, $126,140 and $62,956; Moderate Strategy Fund,
$10,913, $52,221 and $56,786; and Conservative Strategy Fund, $3,912, $46,954
and $87,167. No Shares of the Tax-Managed Global Equity Fund were issued during
these periods. Each of the Fund of Funds will indirectly bear their
proportionate share of the combined advisory and administrative fees paid by the
Underlying Funds in which

10
<PAGE>

they invest. While a shareholder of a Fund of Funds will also bear a
proportionate part of the combined advisory and administrative fees paid by an
Underlying Fund, those fees paid are based upon the services received by the
respective Underlying Fund.

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

YEARS ENDED
-----------
12/31/99 12/31/98 12/31/97
----------- ---------- ----------
Diversified Equity $11,377,505 $9,580,094 $6,906,245
Special Growth 5,867,193 5,901,577 4,556,999
Quantitative Equity 11,129,142 9,056,015 6,616,377
International Securities 9,446,953 8,859,189 7,751,289
Diversified Bond 3,695,482 3,407,594 2,755,500
Short Term Bond 2,269,960 1,216,062 1,184,588
Multistrategy Bond 3,667,917 3,241,445 2,225,087
Real Estate Securities 5,193,244 5,183,218 4,428,351
Emerging Markets 4,222,210 4,020,121 4,167,163
Tax-Managed Large Cap 3,180,328 1,463,604 375,054
Tax-Managed Small Cap* 18,536 -- --
Tax Exempt Bond 498,685 525,312 361,226
Tax Free Money Market 491,260 429,613 266,939

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

Effective May 1, 1996 through April 30, 2000, FRIMCo has contractually agree
to waive a portion of its combined advisory and administrative fees for the
Multistrategy Bond Fund, to the extent Fund level expenses exceed 0.80% of
average daily net assets on an annual basis, FRIMCo waived fees in the amounts
of $126,393, $57,035 and $327,074 for the years ended December 31, 1997, 1998
and 1999, respectively. As a result of the waivers, the Fund paid advisory and
administrative fees equal to $2,225,087, $3,184,410 and $3,340,842 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 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 exceeds 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 fees for the
year ended December 31, 1999. The Tax-Managed Small Cap 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. The money managers of the Underlying Funds 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 Underlying
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 offshore
vehicles and/or for accounts which have no business relationship with the Frank
Russell Company organization.

11
<PAGE>

From its advisory fees received from the Underlying Funds, 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 of the Underlying Funds 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>
Diversified Equity $1,996,005 $2,556,100 $2,908,409 0.23% 0.21% 0.20%
Special Growth 1,914,056 2,419,648 2,249,925 0.40% 0.39% 0.36%
Quantitative Equity 1,648,992 2,153,019 2,623,428 0.19% 0.19% 0.18%
International Securities 3,188,600 3,505,016 3,429,899 0.39% 0.37% 0.34%
Diversified Bond 462,945 529,842 555,643 0.08% 0.07% 0.07%
Short Term Bond 410,761 414,057 795,354 0.17% 0.17% 0.17%
Multistrategy Bond 751,497 990,456 1,046,997 0.21% 0.19% 0.18%
Real Estate Securities 1,529,207 1,757,612 1,711,842 0.29% 0.29% 0.28%
Emerging Markets 2,369,288 2,230,317 2,151,950 0.68% 0.66% 0.65%
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 Exempt Bond 179,885 252,321 305,104 0.25% 0.23% 0.19%
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 its 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 Underlying 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:

Domestic Custody (Underlying Funds) - (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 ( Underlying Funds) - (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
(Underlying Funds) - (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 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. Portfolio transaction
charges for the Fund of Funds

12
<PAGE>

are equal to $5.00 each. In addition, interest earned on uninvested cash
balances will be used to offset the Fund of Funds' and Underlying Funds'
custodian expense, as applicable.

FUND ACCOUNTING:

Domestic Fund Accounting Underlying Funds - (i) $10,000 per portfolio; and (ii)
0.015% of average daily net assets. International Fund Accounting Underlying
Funds - (i) $24,000 per portfolio per year; and (ii) 0.03% of month end net
assets. Fund of Funds Account - $12,000 per portfolio; Yield calculation
services Fund of Funds and Underlying Funds - $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 per-account 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. The Fund of Funds' investments
in the Underlying Funds will not be charged a fee. 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
Underlying Funds can invest. Personal investments are subject to the regulatory
and disclosure provisions of the respective Codes. In addition, each Money
Manager 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 an Underlying Fund advised by that Money Manager may invest.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Is personal investing Are investments in securities owned by the advised
Money Manager allowed? Fund allowed?

-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEW Capital Management, Yes No
L.P.
-------------------------------------------------------------------------------------------------------------------
Alliance Capital Yes Yes, but not in securities with pending or possible
Management L.P. client buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Barclays Global Fund Yes Yes, but not in securities with pending or possible
Advisors N.A. client buy or sell orders and certain blackouts apply
to securities of Barclays PLC and securities
underwritten by Barclays affiliates
-------------------------------------------------------------------------------------------------------------------
BlackRock Financial Yes Yes, but not in securities with pending or possible
Management client buy or sell orders
-------------------------------------------------------------------------------------------------------------------
</TABLE>

13
<PAGE>

<TABLE>
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
buy or sell orders
-------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------
Equinox Capital Yes Yes, but not in securities with pending or possible client
Management, Inc. buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Fidelity Management Yes Cannot purchase securities on a restricted list
Trust Company
-------------------------------------------------------------------------------------------------------------------
Fiduciary International, Yes Yes, but not in securities with pending or possible client
Inc. buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Foreign & Colonial Yes Cannot purchase securities on a restricted list
Emerging 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, Yes Yes, but not in securities with pending or possible client
Ltd. 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 Yes Cannot purchase securities on a restricted list
Management
-------------------------------------------------------------------------------------------------------------------
Lincoln Capital Yes Yes, but not in securities with pending or possible client
Management Company buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Marsico Capital Severely restricts No
Management, LLC personal trading except
for a limited number of
specific transactions
such as purchase of
mutual fund shares,
commercial paper, etc.
-------------------------------------------------------------------------------------------------------------------
Mastholm Asset Yes Yes, but not in securities with pending or possible client
Management, LLC buy or sell orders
-------------------------------------------------------------------------------------------------------------------
MFS Institutional Yes Yes, but not in securities with pending or possible client
Advisors, 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 Yes Yes, but not in securities with pending or possible client
Management LLC buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Nicholas Applegate Yes Yes, but not in securities with pending or possible client
Capital Management buy or sell orders
-------------------------------------------------------------------------------------------------------------------
</TABLE>

14
<PAGE>

<TABLE>
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 Yes Yes, but not in securities with pending or possible client
Management buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Sanford C. Bernstein & Yes Yes, subject to blackouts and other restrictions
Co., 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 Yes Yes, but not in securities with pending or possible client
Management, Inc. buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Standish, Ayer & Wood, Yes Cannot purchase securities on a restricted list
Inc.
-------------------------------------------------------------------------------------------------------------------
STW Fixed Income Yes Yes, but not in securities with pending or possible client
Management 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 Yes Yes, but not in securities with pending or possible client
Management Ltd. buy or sell orders or in securities of which 10% or more
are held in portfolios managed by Suffolk
-------------------------------------------------------------------------------------------------------------------
Turner Investment Yes Yes, but not in securities with pending or possible client
Partners buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Weiss, Peck & Greer, Yes Yes, but not in securities with pending or possible client
L.L.C. 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 the Tax-Managed Global Equity Funds. 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. For purposes of this
Statement of Additional Information, each Fund that issues multiple classes of
Shares is referred to as a "Multiple Class Fund." The key features of the Rule
18f-3 plan are as follows: Shares of each class of a Multiple Class Fund
represent an equal pro rata interest in the underlying assets of that Fund, and
generally have identical voting, dividend, liquidation, and other rights,
preferences, powers, restrictions, limitations, qualifications and terms and
conditions, except that: (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)

15
<PAGE>

each class of Shares offered in connection with a shareholder servicing plan may
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 and Class D Shares,
which are described in the respective Funds' Prospectus. In adopting the
Distribution Plan, a majority of the Trustees, including a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of 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 and Class D Shares, by such Selling Agents, and (b) the
Distributor for distribution services provided by it, and related expenses
incurred, including payments by the Distributor to compensate Selling Agents for
providing support services. The Distribution Plan is a compensation-type plan.
As such, FRIC makes no distribution payments to the Distributor with respect to
Class C and Class D 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 and Class D Shares for any activities or expenses primarily
intended to result in the sale of Class C 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 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
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 Class C or Class D Shares held by or for the customers of the Financial
Intermediaries.

16
<PAGE>

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 and
Class D 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):

Fund of Funds Class C Class D
------------- ------- -------
Equity Aggressive Strategy Fund $28,827 $10,594
Aggressive Strategy Fund 50,849 9,961
Balanced Strategy Fund 85,150 10,153
Moderate Strategy Fund 10,299 3,983
Conservative Strategy Fund 3,270 2,429

No Tax-Managed Global Equity Fund Class C Shares were issued during the year
ended December 31, 1999.

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 Fund of Funds ("Servicing Plan"). The
Servicing Plan was adopted on April 22, 1996 and amended on June 3, 1998,
November 9, 1998, August 9, 1999 and November 22, 1999.

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
Class A, Class C, Class D 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
Class A, Class C, Class D 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 Shares of Class A, Class
C, Class D or Class E may exceed, on an annual basis, 0.25% of the average daily
net asset value of that Fund's Class A, Class C, Class D, or Class E 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 Fund of Funds' Class C, Class D and
Class E Shares accrued expenses in the following amounts payable to the
Distributor, for the year ended December 31, 1999:

Fund of Funds Class C Class D Class E
------------- ------- ------- -------
Equity Aggressive Strategy Fund $ 9,609 $10,594 $383,309
Aggressive Strategy Fund 16,950 9,961 285,803
Balanced Strategy Fund 28,383 10,153 611,678
Moderate Strategy Fund 3,433 3,983 87,119
Conservative Strategy Fund 1,090 2,429 32,439

No Class A Shares were issued during the year ended December 31, 1999.

17
<PAGE>

UNDERLYING FUND EXPENSES

The Underlying Funds will pay all their expenses other than those expressly
assumed by FRIMCo. The principal expense of the Underlying Funds is the annual
advisory fee and annual administrative fee, each payable to FRIMCo. The
Underlying Funds' other expenses include: fees for independent accountants,
legal, transfer agent, registrar, custodian, dividend disbursement, and
portfolio and shareholder recordkeeping services, and maintenance of tax records
payable to Frank Russell Company; 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
its Trustees, officers, employees, shareholders, distributors and agents with
respect thereto.

Whenever an expense can be attributed to a particular Underlying Fund, the
expense is charged to that Underlying Fund. Other common expenses are allocated
among the Underlying Funds based primarily upon their relative net assets.

As of the date of this Statement, FRIMCo has voluntarily agreed to waive
and/or reimburse until February 28, 2001 all or a portion of its advisory and
administrative fees with respect to certain Underlying Funds.

FUND OF FUNDS OPERATING EXPENSES

Each Fund of Funds is expected to have a low operating expense ratio
although, as a shareholder of the Underlying Funds, each Fund of Funds
indirectly bears its pro rata share of the advisory fees charged to, and
expenses of operating, the Underlying Funds in which it invests. It is currently
contemplated that all other operating expenses (shareholder servicing, legal,
accounting, etc.) except for the 0.20% advisory fee and any Rule 12b-1 Fees and
Shareholder Service Fees will be paid for in accordance with these Special
Servicing Agreements (each a "Servicing Agreement") among each Fund of Funds,
its Underlying Funds and FRIMCo. Under the Servicing Agreement, FRIMCo arranges
for all services pertaining to the operations of the Fund of Funds, including
transfer agency services but not including any services covered by the Fund of
Funds' advisory fee or any Rule 12b-1 or Shareholder Service Fees. However, it
is expected that the additional assets invested in the Underlying Funds by the
Fund of Funds will produce economies of operations and other savings for the
Underlying Funds which will exceed the cost of the services required for the
operation of the Fund of Funds. In this case, the Servicing Agreement provides
that the officers of FRIC, at the direction of the Trustees, may apply such
savings to payment of the aggregate operating expenses of Fund of Funds which
have invested in that Underlying Fund, so that the Underlying Fund will bear
those operating expenses in proportion to the average daily value of the shares
owned by the Fund of Funds, provided that no Underlying Fund will bear such
operating expenses in excess of the estimated savings to it. In the event that
the aggregate financial benefits to the Underlying Funds do not exceed the costs
of the Fund of Funds, the Servicing Agreement provides that FRIMCo will bear
that portion of costs determined to be greater than the benefits. Those costs
include Fund accounting, custody, auditing, legal, blue sky and, as well as
organizational, transfer agency, prospectus, shareholder reporting, proxy,
administrative and miscellaneous expenses.

PURCHASE AND REDEMPTION OF FUND OF FUNDS SHARES

Minimum Investment Requirements. You may be eligible to purchase Fund of
-------------------------------
Funds Shares if you do not meet the applicable required minimum investment. The
Fund of 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 of Funds, and the minimum investment required has not been waived for you,
the Funds of 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.

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<PAGE>

The Fund of Funds may also waive the required minimum initial investment for
IRAs and UGMAs and similar vehicles on which an explicit or practical initial
investment restriction is imposed by a regulatory body.

Stale Checks. If you do not cash a dividend, distribution, or redemption
------------
check within 180 days from the date it was issued, the Funds of 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 Fund of Funds will deem the unchased 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 Fund of 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 THE FUND OF FUNDS SHARES

The net asset value per share of each Class of Shares is calculated
separately for each Fund of Funds on each business day on which Shares are
offered or orders to redeem are tendered. A business day is one on which the New
York Stock Exchange is open for trading. Currently, the New York Stock Exchange
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.

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.

PRICING OF SECURITIES

The Class S Shares of the Underlying Funds held by each Fund of Funds are
valued at their net asset value. The Emerging Markets, International Securities,
Diversified Bond and Multistrategy Bond Funds' portfolio securities actively
trade on foreign exchanges which may trade on Saturdays and on days that the
Underlying 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 the Class S Shares of the Underlying Fund when a
shareholder (such as a Fund of Funds) is not able to purchase or redeem
Underlying Fund Shares. Further, because foreign securities markets may close
prior to the time the Underlying Funds determine net asset value, events
affecting the value of the portfolio securities occurring between the time
prices are determined and the time the Underlying Funds calculate net asset
value may not be reflected in the calculation of net asset value unless FRIMCo
determines that a particular event would materially affect the net asset value.

19
<PAGE>

PORTFOLIO TURNOVER RATES OF THE FUND OF FUNDS

The portfolio turnover rate for each Fund of Funds is calculated by dividing
the lesser of purchases or sales of Underlying Fund Shares for the particular
year, by the monthly average value of the Underlying Fund Shares owned by the
Fund of Funds during the year. The Fund of Funds will purchase or sell
Underlying Fund Shares to: (i) accommodate purchases and sales of each Fund of
Funds' Shares; (ii) change the percentages of each Fund of Funds' assets
invested in each of the Underlying Funds in response to market conditions; and
(iii) maintain or modify the allocation of each Fund of Funds' assets among the
Underlying Funds generally within the percentage limits described in the
Prospectus.

The portfolio turnover rates for the last two years for each Fund of Funds
were:

YEARS ENDED
-----------
Fund of Funds 12/31/99 12/31/98
------------- -------- --------
Equity Aggressive Strategy Fund 76.20% 73.95%
Aggressive Strategy Fund 71.44 93.08
Balanced Strategy Fund 64.63 78.85
Moderate Strategy Fund 120.04 175.58
Conservative Strategy Fund 125.01 169.79

No Tax-Managed Global Equity Fund Shares were issued during the periods ending
December 31, 1998 or 1999.

PORTFOLIO TRANSACTION POLICIES OF THE UNDERLYING FUNDS

Decisions to buy and sell securities for the Underlying Funds are made by the
money managers for the assets assigned to them, and by FRIMCo or the money
manager for the Underlying Funds' Liquidity Portfolios. The Underlying Funds,
other than the Tax-Managed Large Cap, Tax-Managed Small Cap and Tax Exempt Bond
Funds, do not give significant weight to attempting to realize long-term, rather
than short-term, capital gains while making portfolio investment decisions. The
portfolio turnover rates for certain multi-manager Underlying Funds are likely
to be somewhat higher than the rates for comparable mutual funds with a single
money manager. The money managers make decisions to buy or sell securities
independently from other money managers. Thus, one money manager could be
selling a security when another money manager for the same Underlying Fund (or
for another series of FRIC) is purchasing the same security. In addition, when a
money manager's services are terminated and another retained, the new manager
may significantly restructure the portfolio. These practices may increase the
Underlying Funds' portfolio turnover rates, realization of gains or losses,
brokerage commissions and other transaction based costs. The Underlying 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, such Funds' ability to change
money managers may be constrained. The annual portfolio turnover rates for each
of the Underlying Funds for the periods ended December 31, 1999 and 1998,
respectively, were as follows: Diversified Equity Fund, 110% and 100%; Special
Growth Fund, 112% and 129%; Quantitative Equity Fund, 90% and 77%; International
Securities Fund, 121% and 68%; Diversified Bond Fund, 152% and 217%; Short Term
Bond Fund, 177% and 130%; Multistrategy Bond Fund, 134% and 335%; Real Estate
Securities Fund, 43% and 43%; and Emerging Markets Fund, 95% and 59%; Tax-
Managed Large Cap Fund, 48% and 51%; Tax-Managed Small Cap 3% for 1999 (did not
commence operations until December 1, 1999); and Tax Exempt Bond Fund, 119% and
74%.

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 of the Underlying Fund. FRIC's advisory agreements

20
<PAGE>

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 Underlying Fund. Securities will
ordinarily be purchased in the primary markets, and the money manager shall
consider all factors it deems relevant in assessing the best overall terms
available for any transaction, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any (for the specific transaction and on a continuing basis).

In addition, the 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 Underlying Fund, FRIMCo
and/or to the money manager (or their affiliates). FRIMCo and the money managers
are authorized to cause the Underlying 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 ordinarily to effect a significant portion of
FRIC's total brokerage business for the Underlying Funds with broker- dealers
affiliated with its money managers. However, a money manager may effect
portfolio transactions for the segment of an Underlying 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 Underlying 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 Underlying Fund will receive
competitive execution, price and commissions. Where brokerage transactions are
effected by money managers on behalf of the Underlying 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 Underlying Fund other
than those Underlying Funds which invest principally in fixed income securities.
All Underlying Funds may also effect portfolio transactions on an agency basis
through, and pay brokerage commissions to, the brokerage affiliates of money
managers.

21
<PAGE>

BROKERAGE COMMISSIONS

The Board reviews, at least annually, the commissions paid by the Underlying
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 Underlying 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.

For information regarding brokerage commissions paid by the Underlying Funds
and the Underlying Funds' holdings of securities issued by the top ten broker
dealers used by those Funds, refer to the Statement of Additional Information
for the Underlying Funds.

YIELD AND TOTAL RETURN QUOTATIONS

The Fund of 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 Fund of 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 of
Funds are reinvested at the price stated in the Prospectus 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 one or more classes
of Shares will be reported in the applicable Prospectus.

Yields are computed by using standardized methods of calculation required by
the SEC. Similar to average annual total return calculations, a Fund of Funds
calculates yields for each class of Shares which it offers. Yields for the Fund
of Funds, which do not invest primarily in money market instruments, are
calculated by dividing the net investment income per share earned during a 30-
day (or one month) period by the maximum offering price per share on the last
day of the period, according to the following formula:

YIELD = 2[(a-b+1)/6/ -1]
----------------
cd

Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = average daily number of Shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period.

22
<PAGE>

The yields for the Fund of Funds investing primarily in fixed-income
instruments are reported in the Prospectus. Yield may fluctuate daily and does
not provide a basis for determining future yields.

Tax-equivalent yield for the Tax Exempt Bond Fund is 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 yield
for the Tax Exempt Bond Fund is reported in the Funds' respective Prospectus.

Each Fund of Funds 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 of Funds may compare its performance with various industry
standards of performance, including Lipper Analytical Services, Inc. or other
industry publications, business periodicals, rating services and market indices.

INVESTMENT RESTRICTIONS, POLICIES AND
PRACTICES OF THE FUND OF FUNDS

Each Fund of Funds' 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 Fund
of Funds' investment objectives are set forth in the respective Prospectus.

INVESTMENT RESTRICTIONS. Each Fund of Funds 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
of Funds will:

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

3. Acquire more than 5% of the outstanding voting securities, or 10% of all
of the securities, of any one issuer, except with respect to Shares of FRIC
Funds.

4. Invest in companies for the purpose of exercising control or management.

5. Purchase or sell real estate; provided that each Fund of Funds may invest
in the Real Estate Securities Fund, which may own 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.

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.

23
<PAGE>

8. Purchase securities on margin or effect short sales (except that a Fund
of Funds may obtain such short-term credits as may be necessary for the
clearance of purchases or sales of securities).

9. Engage in the business of underwriting securities issued by others or
purchase securities subject to legal or contractual restrictions on disposition.

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.

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
entry into "repurchase agreements;" or (ii) the lending of portfolio securities
in the manner generally described in the Fund of Funds' Prospectus in the
section titled "Investment Policies, Restrictions and Risks of the Fund of Funds
and Tax-Managed Funds -- Lending Portfolio Securities."

12. Purchase or sell options.

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 (and as
described below).

14. Purchase from or sell portfolio securities to the officers, the Trustees
or other "interested persons" (as defined in the 1940 Act) of FRIC, including
the Underlying Funds' 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, entering into permissible reverse
repurchase agreements, or issuing shares of beneficial interest in multiple
classes.

Because of their investment objectives and policies, the Fund of Funds will
concentrate more than 25% of their assets in the mutual fund industry. In
accordance with the Fund of Funds' investment policies set forth in the
Prospectus, each of the Fund of Funds may invest more than 25% of its assets in
the Underlying Funds. However, each of the Underlying Funds in which each Fund
of Funds will invest (other than the Real Estate Securities Fund) will not
concentrate more than 25% of its total assets in any one industry. 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.

INVESTMENT POLICIES AND PRACTICES OF THE FUND OF FUNDS

REPURCHASE AGREEMENTS. Each Fund of Funds 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 the next day). The securities purchased by a Fund of Funds have a
total value in excess of the value of the repurchase agreement and are held by
Fund of Funds' Custodian until repurchased. Repurchase agreements assist a Fund
of Funds in being invested fully while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. The Fund of 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 FRIMCo.

MONEY MARKET INSTRUMENTS. Each Fund of Funds may invest in securities
maturing within 397 days or less at the time from the trade date or such other
date upon which a Fund of Funds' interest in a security is subject to market
action. Each Fund of Funds will follow procedures reasonably designed to assure
that the prices so determined approximate the current market value of the Fund's
securities. The procedures also address such matters

24
<PAGE>

as diversification and credit quality of the securities the Fund of Funds
purchase, and were designed to ensure compliance by the Funds with the
requirements of Rule 2a-7 of the 1940 Act.

ILLIQUID SECURITIES. The expenses of registration of restricted securities
that are illiquid (excluding securities that may be resold by the Fund of Funds
pursuant to Rule 144A, as explained in the Prospectus) may be negotiated at the
time such securities are purchased by a Fund of Funds. When registration is
required, a considerable period may elapse between a decision to sell the
securities and the time the sale would be permitted. Thus, the Fund of Funds may
not be able to obtain as favorable a price as that prevailing at the time of the
decision to sell. A Fund of Funds also may acquire, through private placements,
securities having contractual resale restrictions, which might lower the amount
realizable upon the sale of such securities.

The guidelines adopted by the Board for the determination of liquidity of
securities take into account trading activity for the 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.

25
<PAGE>

INVESTMENT POLICIES OF THE UNDERLYING FUNDS

The investment objective and principal investment strategy for each of the
Underlying Funds is provided in their Prospectuses. The following table
illustrates the investments that the Underlying Funds primarily invest in or are
permitted to invest in.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Diversified Special Quantitative International Diversified Short Term
Equity Growth Equity Securities Bond Bond
Type of Practice Fund Fund Fund Fund Fund Fund
------------------- ----------- ---------- ------------ ------------- ----------- ------------
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stocks................................ X X X X
---------------------------------------------------------------------------------------------------------------------------------
Common stock equivalents (warrants).......... X X X X
---------------------------------------------------------------------------------------------------------------------------------
Common stock equivalents (options)........... X X X X
---------------------------------------------------------------------------------------------------------------------------------
Common stock equivalents
(convertible debt securities).............. X X X X X
---------------------------------------------------------------------------------------------------------------------------------
Common stock equivalents
(depository receipts)...................... 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
---------------------------------------------------------------------------------------------------------------------------------
US government securities..................... X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
Municipal obligations........................ X
---------------------------------------------------------------------------------------------------------------------------------
Investment company securities................ X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
Foreign securities........................... X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Multistrategy Real Estate Emerging Tax-Managed Tax-Managed
Bond Securities Markets Large Cap Small Cap Tax Exempt
Type of Practice Fund Fund Fund Fund Fund Fund
------------------- ------------- ----------- -------- ----------- ----------- ----------
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stocks............................... X X X X
---------------------------------------------------------------------------------------------------------------------------------
Common stock equivalents (warrants)......... X X X X
---------------------------------------------------------------------------------------------------------------------------------
Common stock equivalents (options).......... X X X X
---------------------------------------------------------------------------------------------------------------------------------
Common stock equivalents
(convertible debt securities)............. X X
---------------------------------------------------------------------------------------------------------------------------------
Common stock equivalents
(depository receipts).....................
---------------------------------------------------------------------------------------------------------------------------------
Preferred stocks............................ 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
---------------------------------------------------------------------------------------------------------------------------------
Municipal obligations....................... X X
---------------------------------------------------------------------------------------------------------------------------------
Investment company securities............... X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
Foreign securities.......................... X X X X X
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

26
<PAGE>

Other Investment Practices of the Underlying Funds. The Underlying Funds use
--------------------------------------------------
investment techniques commonly used by other mutual funds. The table below
summarizes the principal investment practices of the Underlying Funds, each of
which may involve certain special risks. The Glossary located at the back of
the SAI describes each of the investment techniques identified below.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Diversified Special Quantitative International Diversified Short Term
Equity Growth Equity Securities Bond Bond
Type of Practice 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
---------------------------------------------------------------------------------------------------------
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>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Multistrategy Real Estate Emerging Tax-Managed Tax-Managed Tax Exempt
Bond Securities Markets Large Cap Small Cap Bond
Type of Practice 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 X
---------------------------------------------------------------------------------------------------------
When-issued and
forward commitment
securities........ X X X X
---------------------------------------------------------------------------------------------------------
Reverse repurchase
agreements........ X X X X
---------------------------------------------------------------------------------------------------------
Lending portfolio
securities not to
exceed 33 1/3%
of total Fund
assets............ 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
---------------------------------------------------------------------------------------------------------
Write (sell) call
and put options on
securities,
securities indexes
and foreign
currencies(3)..... X X X
---------------------------------------------------------------------------------------------------------
Purchase options on
securities,
securities
indexes, and
currencies(3)..... 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
---------------------------------------------------------------------------------------------------------
Liquidity
portfolios........ X X X X
---------------------------------------------------------------------------------------------------------
Credit and Liquidity
Enhancements...... X
---------------------------------------------------------------------------------------------------------
</TABLE>

27
<PAGE>

____________________
(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, Multistrategy Bond,
Short Term Bond and Emerging Markets 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.

Cash Reserves. Each Fund of Funds and each Underlying Fund (the "Funds")
-------------
and its money managers may elect to invest a 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 Fund of Funds and the
Underlying 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 Fund of Funds and
Underlying Funds investing in them treat such investments as the purchase and
redemption of money market fund shares. Any Fund of Funds or Underlying 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 the Fund of Funds or Underlying Funds
will be voted by the Trustees of FRIC in the same proportion as the shares of
the money market fund that are held by shareholders who are not Fund of Funds or
Underlying Funds. Fund of Funds and Underlying Funds investing in a money market
fund effectively do not pay advisory or administrative management fees to a
money market fund and thus do no 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.

Liquidity Portfolio. An Underlying Fund at times has to sell portfolio
-------------------
securities in order to meet redemption requests. The selling of securities may
effect an Underlying Fund's performance since the money manager sells the
securities for other than investment reasons. An Underlying 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, however, to the investment objectives of the Diversified Equity,
Special Growth, Quantitative Equity, International Securities, Tax-Managed Large
Cap and Tax-Managed Small Cap Funds. The more cash these Underlying 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 until those
cash reserves are invested in securities or used for Underlying Fund
transactions. This will enable those four Underlying Funds to hold cash while
receiving a return on the cash which is similar to holding equity securities.

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

28
<PAGE>

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 OF THE UNDERLYING FUNDS

Repurchase Agreements. An Underlying Fund may enter into repurchase
---------------------
agreements with the seller, a bank or securities dealer, who agrees to
repurchase the securities at the Underlying Fund's cost plus interest within a
specified time (normally one day). The securities purchased by an Underlying
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 an
Underlying Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Underlying 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 Underlying Funds' money
managers.

Reverse Repurchase Agreements. An Underlying Fund may enter into reverse
-----------------------------
repurchase agreements to meet redemption requests where the liquidation of
portfolio securities is deemed by the Underlying Fund's money manager to be
inconvenient or disadvantageous. A reverse repurchase agreement is a
transaction whereby an Underlying 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 Underlying Fund retains record ownership of the
security involved including the right to receive interest and principal
payments. At an agreed upon future date, the Underlying Fund repurchases the
security by paying an agreed upon purchase price plus interest. Liquid assets of
an Underlying Fund equal in value to the repurchase price, including any accrued
interest, will be segregated on the Underlying Fund's records while a reverse
repurchase agreement is in effect.

High Risk Bonds. The Underlying Funds, other than the Emerging Markets, 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" securities, although Moody's
considers securities rated Baa, and S&P considers bonds rated BBB, to have some
speculative characteristics. The Underlying Funds, other than Emerging Markets,
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, 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 Multistrategy Bond Fund) 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 Underlying 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 Multistrategy
Bond, Short Term Bond and Emerging Markets

29
<PAGE>

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.

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

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 an Underlying 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 Underlying Fund's Shares.

Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated securities may be more complex than for
issuers of other investment grade securities, and the ability of an Underlying
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 Emerging Markets, Short Term Bond, and
Multistrategy Bond 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 Underlying 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 Underlying 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

30
<PAGE>

security, an Underlying 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 Underlying Funds pursuant to
Rule 144A, as explained in their respective Prospectuses) may be negotiated at
the time such securities are purchased by an Underlying 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, an Underlying Fund
may not be able to obtain as favorable a price as that prevailing at the time of
the decision to sell. An Underlying 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. An Underlying 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 an Underlying Fund's ability to manage its investment portfolio
and meet redemption requests. An Underlying 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 Underlying 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 Securities and
Emerging Markets Funds may occasionally engage in "free trade" transactions in
which delivery of securities sold by the Underlying 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 an Underlying Fund if the
other party to the "free trade" transaction fails to complete the transaction
after the Fund has tendered cash payment or securities, as the case may be.

Lending Portfolio Securities. Cash collateral received by an Underlying 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 Underlying 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 Underlying Fund and the lending agent.

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

An Underlying Fund 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, an
Underlying Fund must immediately pay the amount of the shortfall to the
borrower.

Options And Futures. The Underlying 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 Underlying Funds may also use those instruments,
provided that FRIC's Board determines that their use is consistent with the
Underlying Funds' investment objectives, and provided that their use is
consistent with restrictions applicable to options and futures contracts
currently eligible for use by the Underlying 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).

31
<PAGE>

Options On Securities And Indexes. Each Underlying Fund 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
Underlying 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 Underlying Funds' ability to hold illiquid securities. The
Underlying 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.

An Underlying Fund may purchase a call option on securities to protect
against substantial increases in prices of securities the Underlying Fund
intends to purchase pending its ability or desire to purchase such securities in
an orderly manner. An Underlying 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.

An Underlying 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 Underlying 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 Underlying Fund. For a
call option on an index, the option is covered if the Underlying Fund maintains
with the Custodian liquid assets equal to the contract value. A call option is
also covered if the Underlying 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 Underlying Fund maintains liquid
assets equal to the exercise price in a segregated account with the Custodian. A
put option is also covered if the Underlying 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 Underlying Fund in liquid assets in a segregated account with
the Custodian.

If an option written by an Underlying 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 an Underlying 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.

32
<PAGE>

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 Underlying Fund desires.

An Underlying 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 Underlying 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 Underlying
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 an Underlying Fund is
an asset of the Fund. The premium received for an option written by an
Underlying 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 an Underlying
Fund seeks to close out an option position. If an Underlying 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 an Underlying 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, an Underlying 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 an Underlying Fund writes a put
option, it is exposed during the term of the option to a decline in the price of
the underlying security.

If trading were suspended in an option purchased by an Underlying Fund, the
Underlying Fund would not be able to close out the option. If restrictions on
exercise were imposed, the Underlying 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 Underlying Fund is covered by an option on the same index purchased by the
Fund, movements in the index may result in a loss to the Fund; however, such
losses may be mitigated by changes in the value of the Fund's securities during
the period the option was outstanding.

Options On Foreign Currency. An Underlying Fund may buy or 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

33
<PAGE>

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 an Underlying 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. None of the Underlying Funds, other than the Multistrategy Bond and
Emerging Markets Funds, currently intends to write or purchase such options.

Futures Contracts And Options On Futures Contracts. An Underlying 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 their 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 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
ECU. It is expected that other futures contracts will be developed and traded in
the future.

An Underlying 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 on option on a futures contract of the same series.

There can be no assurance that a liquid market will exist at a time when an
Underlying 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 an Underlying Fund
from liquidating an unfavorable position and the Fund would remain obligated to
meet margin requirements until the position is closed.

An Underlying 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. An Underlying 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). An Underlying 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.

34
<PAGE>

An Underlying 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"). An Underlying 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 Underlying Fund will
limit its use of futures contracts and options on futures contracts to hedging
transactions. For example, an Underlying 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, an Underlying 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 an Underlying
Fund, the Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or US government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Underlying Fund
upon termination of the contract, assuming all contractual obligations have been
satisfied. Each Underlying Fund expects to earn interest income on its initial
margin deposits.

A futures contract held by an Underlying Fund is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Underlying 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 an
Underlying 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 Underlying Fund will mark-to- market its open
futures positions.

An Underlying 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 Underlying 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 Underlying 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 Underlying 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. An
--------------------------------------------------------------
Underlying 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, an Underlying 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 Underlying
Fund may "cover" its position by purchasing a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held by the Fund.

When selling a futures contract, an Underlying 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 Underlying Fund may

35
<PAGE>

"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 Underlying 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).

When selling a call option on a futures contract, an Underlying 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 Underlying 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, an Underlying 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 Underlying 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 CFTC pursuant to
which the Underlying Funds avoid being deemed to be a "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 an Underlying 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.

36
<PAGE>

There can be no assurance that a liquid market will exist at a time when an
Underlying 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 an Underlying Fund from liquidating an
unfavorable position and the Underlying 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,
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 an Underlying 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
------------------
Diversified Equity, Special Growth, Quantitative Equity, International
Securities, Emerging Markets, Tax-Managed Large Cap and Tax-Managed Small Cap
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, an Underlying 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
Underlying Fund's cash reserves will always be fully exposed to equity market
performance.

Financial futures contracts may be used by the International Securities,
Diversified Bond, Short Term Bond, Multistrategy Bond, Emerging Markets 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 the
Fund's portfolio would decline, but the futures contract value would decrease,
partly offsetting the loss in value of the fixed-income security by enabling the
Underlying Fund to repurchase the futures contract at a lower price to close out
the position.

The Underlying 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, an Underlying 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, an Underlying
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 Underlying 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.

37
<PAGE>

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 Underlying 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, an
Underlying 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
Underlying Fund against any rise in the foreign exchange rate which may add
additional costs to acquiring the foreign security position. The Underlying Fund
may also purchase call or put options on foreign currency futures contracts to
obtain a fixed foreign exchange rate. The Underlying Fund may purchase a call
option or write a put option on a foreign exchange futures contract to hedge
against a decline in the foreign exchange rates or the value of its foreign
securities. The Underlying Fund may write a call option on a foreign currency
futures contract as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.

Risk Factors. There are certain investment risks in using futures contracts
------------
and/or options as a hedging technique. One risk is the imperfect correlation
between price movement of the futures contracts or options and the price
movement of the portfolio securities, stock index or currency subject of the
hedge. The risk increases for the Tax Exempt Bond Fund since financial futures
contracts that may be engaged in involve 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 an Underlying Fund to be unable to close out the futures contract
thereby affecting a Fund's hedging strategy.

In addition, foreign currency options and foreign currency futures involve
additional risks. Such transactions may not be regulated as effectively as
similar transactions in the United States; may not involve a clearing mechanism
and related guarantees; and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities. The value of such
positions could also be adversely affected by (1) other complex foreign,
political, legal and economic factors, (2) lesser availability than in the
United States of data on which to make trading decisions, (3) delays in an
Underlying 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 International Securities, Diversified Bond, Short Term Bond,
Multistrategy Bond and Emerging Markets 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 U.S. 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 Underlying 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 Underlying Funds' portfolio securities
are or are expected to be denominated. An Underlying 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. An Underlying 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

38
<PAGE>

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 Underlying 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 an Underlying 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 Underlying 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, an
Underlying 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
Underlying Fund will obtain, on the same maturity date, the same amount of the
currency which it is obligated to deliver. If the Underlying 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 Underlying Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency that it has agreed to sell. There can be no assurance that new forward
currency or offsets will be available to a Fund.

Upon maturity of a forward currency contract, the Underlying 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. An
Underlying 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 Underlying Funds.

The cost to an Underlying 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, an Underlying Fund may be able
to contract to sell the currency at a price above the devaluation level that it
anticipates. An Underlying Fund will not enter into a currency transaction if,
as a result, it will fail to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), for a given year.

Forward foreign currency contracts are not regulated by the SEC. They are
traded through financial institutions acting as market-makers. In the forward
foreign currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.

The market for forward currency contracts may be limited with respect to
certain currencies. These factors will restrict an Underlying Fund's ability to
hedge against the risk of devaluation of currencies in which the Fund holds a
substantial quantity of securities and are unrelated to the qualitative rating
that may be assigned to any particular portfolio security. Where available, the
successful use of forward contracts draws upon a money manager's special skills
and experience with respect to such instruments and usually depends on the money
manager's ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an

39
<PAGE>

unexpected manner, a Fund may not achieve the anticipated benefits of forward
contracts or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts and
options on futures contracts, there are no daily price fluctuation limits with
respect to forward contracts, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the prices of such instruments and movements in
the price of the securities and currencies hedged or used for cover will not be
perfect. In the case of proxy hedging, there is also a risk that the perceived
linkage between various currencies may not be present or may not be present
during the particular time the Underlying Funds are engaged in that strategy.

An Underlying Fund's ability to dispose of its positions in forward
contracts will depend on the availability of active markets in such instruments.
It is impossible to predict the amount of trading interest that may exist in
various types of forward contracts. Forward foreign currency contracts may be
closed out only by the parties entering into an offsetting contract. Therefore,
no assurance can be given that an Underlying 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 an Underlying Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, (5) lesser trading
volume and (6) that a perceived linkage between various currencies may not
persist throughout the duration of the contracts

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

40
<PAGE>

Bank Instruments. The Diversified Bond, Short Term Bond and Multistrategy
----------------
Bond 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.

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 Multistrategy Bond Fund intends to invest in indexed
commercial paper, and then only for hedging purposes.

US Government Obligations. The types of US government obligations the
-------------------------
Underlying 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
("GNMA") 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 Underlying Funds may invest in fixed-rate and floating or variable
rate US government obligations. The Underlying 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.

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

41
<PAGE>

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 Underlying 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 GNMA, which is a wholly-owned US
government corporation within the Department of Housing and Urban Development.
Government-related issuers include the Federal Home Loan Mortgage Corporation
("FHLMC"), a corporate instrumentality of the United States created pursuant to
an Act of Congress, and which is owned entirely by the Federal Home Loan Banks,
and the Federal National Mortgage Association ("FNMA"), a government sponsored
corporation owned entirely by private stockholders. Commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may be the originators of
the underlying mortgage loans as well as the guarantors of the mortgage-related
securities.

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
prepaid principal on a CMO are paid, in most cases, monthly. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA. CMOs are structured into multiple classes (or "tranches"), with each class
bearing a different stated maturity.

Asset-Backed Securities. Asset-backed securities represent undivided
-----------------------
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities. Payments of
principal and interest are passed through to holders of the securities and are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee by another entity or by priority to
certain of the borrower's other securities. The degree of enhancement varies,
generally applying only until exhausted and covering only a fraction of the
security's par value. If the credit enhancement held by an Underlying Fund has
been exhausted, and if any required payments of principal and interest are not
made with respect to the underlying loans, the Underlying 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 an Underlying Fund to a lower rate of return upon
issued byreinvestment 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.

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<PAGE>

Municipal Bonds. Municipal bonds generally have maturities of more than one
year when issued and have two principal classifications - General Obligation
Bonds and Revenue Bonds.

GENERAL OBLIGATION BONDS - are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.

REVENUE BONDS - are payable only from the revenues derived from a
particular facility or group of facilities or from the proceeds of special
excise or other specific revenue service.

INDUSTRIAL DEVELOPMENT BONDS - are a type of revenue bond and do not
generally constitute the pledge of credit of the issuer of such bonds. The
payment of the principal and interest on such bonds is dependent on the
facility's user to meet its financial obligations and the pledge, if any,
of real and personal property financed as security for such payment.
Industrial development bonds are issued by or on behalf of public
authorities to raise money to finance public and private facilities for
business, manufacturing, housing, ports, pollution control, airports, mass
transit and other similar type projects.

Municipal Notes. Municipal notes generally have maturities of one year or
less when issued and are used to satisfy short-term capital needs. Municipal
notes include:

TAX ANTICIPATION NOTES - are issued to finance working capital needs
of municipalities and are generally issued in anticipation of future tax
revenues.

BOND ANTICIPATION NOTES - are issued in expectation of a municipality
issuing a long-term bond in the future. Usually the long-term bonds provide
the money for the repayment of the notes.

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 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.

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<PAGE>

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.

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 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

44
<PAGE>

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 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

45
<PAGE>

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
-----------------------------
Underlying 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.

Other Debt Securities. Multistrategy Bond Fund 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 Fund 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 Multistrategy Bond Fund 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.

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<PAGE>

TAXES

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

Distributions of Net Investment Income. The Fund of 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 of Funds, constitutes
its net investment income from which dividends may be paid to you. Any
distributions by a Fund of Funds 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 Fund of Funds may derive capital gains
and losses in connection with sales or other dispositions of their portfolio
securities which are made up, for the most part, of Shares of the Underlying
Funds. 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 of Funds will
be taxable to you as long-term capital gain, regardless of how long you have
held your Shares in the Fund of Funds. Any net short-term or long-term capital
gains realized by a Fund of Funds (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 of Funds.

Information on the Tax Character of Distributions. Each Fund of Funds 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 of Funds' 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 or
capital gains earned during the period of your investment in a Fund of Funds.

Taxes
-----

Election to be Taxed as a Regulated Investment Company. Each Fund of Funds
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 of Funds 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 of Funds as a regulated
investment company if it determines such course of action to be beneficial to
you. In such case, a Fund of Funds 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 of
Funds's available earnings and profits.

Excise Tax Distribution Requirements. The Code requires a Fund of Funds 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 of Funds 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 of Funds'
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 of Funds 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 of Funds Shares will be disallowed to the extent that you purchase other
Shares in such Fund of Funds (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.

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<PAGE>

MONEY MANAGER INFORMATION
FOR THE UNDERLYING FUNDS

DIVERSIFIED EQUITY FUND

Alliance Capital Management L.P. is a limited partnership whose (i) general
partner, Alliance Capital Management Corporation, is a wholly owned subsidiary
of AXA Financial, Inc. (formerly The Equitable Companies Incorporated) ("AXF")
and (ii) majority unit holder is ACMC, Inc., an indirect wholly owned subsidiary
of AXF. AXA, a French insurance company, owns approximately 58.4% of the common
stock of AXF.

Barclays Global Fund Advisors N.A. is a wholly-owned subsidiary of Barclays
Global Investors, N.A.

Equinox Capital Management, LLC is 100% employee owned, with majority
ownership held by Ron Ulrich.

Jacobs Levy Equity Management, Inc. is owned by Bruce Jacobs and Kenneth
Levy.

Marsico Capital Management, LLC is owned 50% by Marsico Management Holdings,
LLC and 50% by TFM Holdings, LLLP. Marsico Management Holdings is a wholly
owned subsidiary of Bank of America, N.A. which in turn is a wholly owned
subsidiary of Bank of America Corporation. TFM Holdings, LLLP is a Colorado
limited liability limited partnership whose sole general partner is TFM
Managers, Inc. which is wholly-owned by Thomas F. Marsico.

Peachtree Asset Management is a division of SSB Citi Fund Management LLC.
SSB Citi Fund Management LLC is 100% owned by Salomon Smith Barney Holdings,
Inc. which is a wholly owned subsidiary of Citigroup Inc.

Sanford C. Bernstein & Co., Inc. is controlled by its Board of Directors.
The Board consists of Lewis A. Sanders, Roger Hertog, Andrew S. Adelson, Kevin
R. Brine, Charles C. Cahn, Jr., Marilyn G. Fedak, Arthur W. Fried, Michael L.
Goldstein, Thomas S. Hexner, Jerry M. Lieberman, Marc O. Mayer, Jean M. Reid and
Francis H. Trainer, Jr.

Strong Capital Management, Inc. is a corporation controlled by Richard S.
Strong.

Suffolk Capital Management, Inc. is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.

Turner Investment Partners Inc. is a corporation controlled by Robert E.
Turner.

Westpeak Investment Advisors, LP is a wholly-owned subsidiary of Nvest
Companies, L.P. ("Nvest Companies"). Nvest Companies' managing general partner,
Nvest Corporation, is an indirect, wholly-owned subsidiary of Metropolitan Life
Insurance Company ("MetLife"), which also owned, as of January 31, 1999,
approximately 48% of the limited partnership interests in Nvest Companies.
Nvest Companies' advising general partner, Nvest, L.P., is a publicly-traded
company listed on the New York Stock Exchange.

SPECIAL GROWTH FUND

CapitalWorks Investment Partners, LLC is a liability company controlled by
its members who include John D. Wylie, Jack C. Marshall, Mark J. Correnti and
Donovan T. Garcia.

Delphi Management, Inc. is 100% owned by Scott Black.

Fiduciary International, Inc. is an indirect wholly-owned subsidiary of
Fiduciary Trust Company International, a New York state chartered bank.

GlobeFlex Capital, L.P. is a California limited partnership. Its general
partners are Robert J. Anslow, Jr. and Marina L. Marrelli.

Jacobs Levy Equity Management, Inc. See: Diversified Equity Fund.

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<PAGE>

Sirach Capital Management, Inc. is a wholly-owned subsidiary of United Asset
Management Company, a publicly traded corporation.

Westpeak Investment Advisors, L.P. See: Diversified Equity Fund.

QUANTITATIVE EQUITY FUND

Barclays Global Fund Advisors. See: Diversified Equity Fund.

Franklin Portfolio Associates LLC is a Massachusetts limited liability
company owned by Mellon Financial Corporation.

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

Jacobs Levy Equity Management, Inc. See: Diversified Equity Fund.

INTERNATIONAL SECURITIES FUND

Driehaus Capital Management, Inc. is controlled and wholly-owned by Richard
H. Driehaus.

Delaware International Advisers Limited is an indirect, wholly-owned
subsidiary of Lincoln National Corporation, a publicly traded company.

Fidelity Management Trust Company is a wholly-owned subsidiary of FMR Corp.
Members of the Edward C. Johnson 3rd family are predominant owners of a class of
shares of common stock representing approximately 49% of the voting power of FMR
Corp.

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

Marvin & Palmer Associates, Inc. is controlled and majority owned by David F.
Marvin and Stanley Palmer.

Mastholm Asset Management, LLC is a Washington limited liability company that
is controlled by the following members: Douglas R. Allen, Thomas M. Garr, Robert
L. Gernstetter, Joseph P. Jordan, Arthur M. Tyson and Theordore J. Tyson.

Montgomery Asset Management LLC is a Delaware limited liability company with
majority ownership held by Commerzbank AG, a foreign banking organization.

Oechsle International Advisors is a Delaware limited liability company that
is controlled by its member manager, Oechsle Group, LLC, a Delaware limited
liability company. Oechsle Group, LLC is controlled by the following members:
S. Dewey Keesler, Stephen P. Langer, L. Sean Roche and Warren R. Walker.

Sanford C. Bernstein & Co., Inc. See: Diversified Equity Fund.

The Boston Company Asset Management, LLC is a wholly owned, indirect
subsidiary of Mellon Financial Corporation, a publicly held corporation.

DIVERSIFIED BOND FUND

Lincoln Capital Management Company is over 50% owned by John Cole, Dave
Fowler, Jay Freedman, Parker Hall, Peter Knez, Kenneth Meyer and Alan Sebulsky.

49
<PAGE>

2000, Allianz of America, Inc., ("A of A") will acquire (the "Acquisition")
majority ownership of PIMCO Advisors and its subsidiaries, including PIMCO.
After the closing of the Acquisition, A of A will own approximately 70% of the
outstanding partnership interests in PIMCO Advisors. Pacific Life Insurance
Company will retain its approximately 30% interest in an indirect general
partner of PIMCO Advisors. In connection with the Acquisition, A of A will enter
into a put/call arrangement for the possible disposition of Pacific Life
Insurance Company's indirect interest in PIMCO Advisors.

Standish, Ayer & Wood, Inc. is organized as a Sub-chapter S Corporation and
is 100% owned by its twenty-five directors, with no director having more than
25% ownership.

SHORT TERM BOND FUND

BlackRock Financial Management operates as a partially owned independent
subsidiary of the PNC Bank. On October 1, 1999 the firm completed an initial
public offering ("IPO") of its common stock. Currently, 14% of BlackRock stock
is publicly held, PNC Bank owns approximately 70%, and BlackRock's employees own
16%.

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

STW Fixed Income Management Ltd. is a Bermuda exempted company. William H.
Williams III is the sole shareholder.

MULTISTRATEGY BOND FUND

Lazard Asset Management is a division of Lazard Freres & Co. LLC (LF&Co) a
broker/dealer which is a New York limited liability company.

Miller, Anderson & Sherrerd, LLP ("MAS") is a Pennsylvania limited liability
partnership. MAS is wholly-owned by indirect subsidiaries of Morgan Stanley
Dean Witter & Co., and is a division of Morgan Stanley Dean Witter Investment
Management.

Pacific Investment Management Company. See: Diversified Bond Fund.

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

REAL ESTATE SECURITIES FUND

AEW Capital Management, L.P. is a wholly-owned affiliate of Nvest Companies,
L.P. ("Nvest"). Nvest is a publicly held limited partnership. Metropolitan
Life Insurance Company owns approximately 48% of Nvest. AEW Capital Management,
Inc., a wholly-owned subsidiary of Nvest Holdings, Inc., is the general partner,
and Nvest is the sole limited partner of AEW Capital Management, L.P.

Cohen & Steers Capital Management is a corporation whose two principals,
Robert H. Steers and Martin Cohen, control the corporation within the meaning of
the 1940 Act.

Security Capital Global Capital Management Group Incorporated is an indirect,
wholly-owned subsidiary of Security Capital, a publicly traded corporation.

EMERGING MARKETS FUND

Foreign & Colonial Emerging Markets Limited is a wholly-owned subsidiary of
Hypo Foreign & Colonial Management (Holding) Limited ("HFCM"), the holding
company of the Foreign & Colonial Group of Fund managers. HFCM is controlled by
Bayerische Hypo-und Vereinsbank AG, the second largest commercial bank in
Germany.

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<PAGE>

Genesis Asset Managers Limited is a limited liability company organized under
the laws of the state of Guernsey, the Channel Islands. Genesis Asset Managers
Limited is affiliated with and has common investment executives with the Genesis
Group of fund management companies. The Genesis Group, whose holding company is
Genesis Holdings International Limited, is controlled 55% by management and
associated interests, and the balance held by outside shareholders, with the
largest single holding being 15%.

Nicholas-Applegate Capital Management is a California limited partnership
whose general partner is Nicholas-Applegate Capital Management Holdings, L.P., a
California limited partnership whose general partner is Nicholas-Applegate
Capital Management Holdings, Inc., a California corporation controlled by Arthur
E. Nicholas.

Sanford C. Bernstein & Co. Inc. See: Diversified Equity Fund.

Schroders Investment Management North America Limited is 100% owned by
Schroders plc, which is publicly traded on the London Stock Exchange.

TAX-MANAGED LARGE CAP

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

TAX-MANAGED SMALL CAP

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

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.

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<PAGE>

well safeguarded during other good and bad times over the future. Uncertainty
of position characterizes bonds in this class.

B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may be small.

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

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

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

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

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

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

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

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

BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. While bonds with this rating normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than debt in higher rated
categories.

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

BB -- Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt that
is assigned an actual implied BBB- rating.

B -- Bonds rated B have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.

CCC -- Bonds rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.

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<PAGE>

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.

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.

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S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a variable rate demand or double feature.

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used to denote the put option (for example,
"AAA/A-1+") or if the nominal maturity is short, a rating of "SP-1+/AAA" is
assigned.

COMMERCIAL PAPER RATINGS.

MOODY'S:

Commercial paper rated Prime by Moody's is based upon its evaluation of many
factors, including: (l) management of the issuer; (2) the issuer's industry
or industries and the speculative-type risks which may be inherent in certain
areas; (3) the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6)
trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issue; and (8)
recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations.

Relative differences in these factors determine whether the issuer's
commercial paper is rated Prime-l, Prime-2, or Prime-3.

Prime-1 - indicates a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced
by the following characteristics: (1) leading market positions in well
established industries; (2) high rates of return on funds employed; (3)
conservative capitalization structures with moderate reliance on debt and
ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternative
liquidity.

Prime-2 - indicates a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.

S&P:

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

A-1 -- This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.

A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.

DUFF & PHELPS, INC.:

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irrevocable letters of credit, and current maturities of long-term debt.
Asset-backed commercial paper is also rated according to this scale.

Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is
the level of an obligor's reliance on short-term funds on an ongoing basis.

The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carries the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+'
(one plus) and '1-' (one minus) to assist investors in recognizing those
differences.

Duff 1+ -- Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free US Treasury short-
term obligations.

Duff 1 -- Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.

Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.

Good Grade

Duff 2 -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

Satisfactory Grade

Duff 3 -- Satisfactory liquidity and other protection factors qualify issue
as to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.

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.

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<PAGE>

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.

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
F1+.

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.

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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-1."

TBW-3 -- The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest
in a timely fashion is considered adequate.

TBW-4 -- The lowest rating category; this rating is regarded as non-
investment grade and therefore speculative.

FINANCIAL STATEMENTS

The 1999 annual financial statements of the Fund of Funds, including notes
to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the Fund of Funds Annual Report to
Shareholders. A copy of the Fund of Funds' Annual Report dated December 31, 1999
accompanies this Statement and is incorporated herein by reference.

57
<PAGE>

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 denominated is
US dollars and held in the United States.

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.

Board -- The Board of Trustees of FRIC.

Cash reserves -- The Underlying 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 an
Underlying 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.

58
<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
advisor, administrator and transfer and dividend paying agent.

Funds -- The 32 investment series of FRIC. 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 Underlying 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. No Underlying 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.

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.

Lending portfolio securities -- Each Underlying 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

59
<PAGE>

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,
Special Growth, Quantitative Equity, International Securities, Real Estate
Securities and Emerging Markets 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 -- An Underlying 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

60
<PAGE>

Fund (102% at the time of agreement) should fall below the repurchase price, the
Fund could incur a loss. Subject to the overall limitations described in
"Illiquid Securities" in this Glossary, a Fund will not invest more than 15% of
its net assets (taken at current market value) in repurchase agreements maturing
in more than seven days.

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

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

Underlying Funds -- The FRIC Funds in which the Fund of Funds invest in.

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.

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<PAGE>

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.

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.

62
<PAGE>

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

STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000 as Supplemented Through June 30, 2000

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. Copies of the Funds' Annual
Reports accompany this Statement.

As of the date of this Statement, FRIC is comprised of the following
Funds, each of which commenced operations on the date indicated:

<TABLE>
<CAPTION>
Fund Inception
Fund Date Prospectus Date
---- ---- ---------------
<S> <C> <C>
Equity I Fund October 15, 1981 May 1, 2000
Equity II Fund December 28, 1981 May 1, 2000
Equity III Fund November 27, 1981 May 1, 2000
Equity Q Fund May 29, 1987 May 1, 2000
Tax-Managed Large Cap Fund (formerly October 7, 1996 May 1, 2000
Equity T Fund)
Tax-Managed Small Cap Fund December 1, 1999 May 1, 2000
International Fund January 31, 1983 May 1, 2000
Emerging Markets Fund January 29, 1993 May 1, 2000
Fixed Income I Fund October 15, 1981 May 1, 2000
Fixed Income III Fund January 29, 1993 May 1, 2000
Money Market Fund October 15, 1981 May 1, 2000
Diversified Equity Fund September 5, 1985 May 1, 2000
Special Growth Fund September 5, 1985 May 1, 2000
Equity Income Fund September 5, 1985 May 1, 2000
Quantitative Equity Fund May 15, 1987 May 1, 2000
International Securities Fund September 5, 1985 May 1, 2000
Real Estate Securities Fund July 28, 1989 May 1, 2000
Diversified Bond Fund September 5, 1985 May 1, 2000
Short Term Bond Fund October 30, 1981 May 1, 2000
Multistrategy Bond Fund January 29, 1993 May 1, 2000
Tax Exempt Bond Fund September 5, 1985 May 1, 2000
U.S. Government Money Market Fund September 5, 1985 May 1, 2000
Tax Free Money Market Fund May 8, 1987 May 1, 2000
</TABLE>

A shareholder of the Equity I, Equity II Equity III, Equity Q, International,
Fixed Income I or Fixed Income III Funds may enter into a separate agreement
with Frank Russell Investment Management Company ("FRIMCo") to obtain certain
services from, and pay a separate quarterly individual shareholder investment
services fee directly to, FRIMCo. The amount of the fee is based upon the assets
subject to the applicable agreement and the services obtained under that
agreement. A shareholder of the other Funds does not execute such an agreement
to acquire such services and pays no such fees. In each case, FRIMCo may charge
fees to a shareholder for non-investment services provided directly to that
shareholder.

Each of the Funds (except the money market funds) 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." Seven of the Funds, the Equity I, Equity II, Equity
III, Equity Q, International, Fixed Income I and Fixed Income III Funds, are
referred to in this Statement as the "Institutional Funds." Unless otherwise
indicated, this Statement relates to all classes of Shares of the Funds.

--------------------------------------------------------------------------------
Fund Class C Class E Class S Class I Class Y
--------------------------------------------------------------------------------
Equity I X X X
--------------------------------------------------------------------------------
Equity II X X X
--------------------------------------------------------------------------------
Equity III X X X
--------------------------------------------------------------------------------
Equity Q X X X
--------------------------------------------------------------------------------
Tax-Managed Large Cap X X
--------------------------------------------------------------------------------
Tax-Managed Small Cap X X
--------------------------------------------------------------------------------
International X X X
--------------------------------------------------------------------------------
Emerging Markets X X X
--------------------------------------------------------------------------------
Fixed Income I X X X
--------------------------------------------------------------------------------
Fixed Income III X X X
--------------------------------------------------------------------------------
Money Market X
--------------------------------------------------------------------------------
Diversified Equity X X X
--------------------------------------------------------------------------------
Special Growth X X X
--------------------------------------------------------------------------------
Equity Income X X X
--------------------------------------------------------------------------------
Quantitative Equity X X X
--------------------------------------------------------------------------------
International Securities X X X
--------------------------------------------------------------------------------
Real Estate Securities X X X
--------------------------------------------------------------------------------
Diversified Bond X X X
--------------------------------------------------------------------------------
Short Term Bond X X X
--------------------------------------------------------------------------------
Multistrategy Bond X X X
--------------------------------------------------------------------------------
Tax Exempt Bond X X X
--------------------------------------------------------------------------------
U.S. Government Money Market X
--------------------------------------------------------------------------------
Tax Free Money Market X
--------------------------------------------------------------------------------
<PAGE>

TABLE OF CONTENTS

CERTAIN TERMS USED IN THIS STATEMENT ARE DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGE 69

Page
<S> <C>
STRUCTURE AND GOVERNANCE...................................................................... 1
Organization and Business History...................................................... 1
Shareholder Meetings................................................................... 1
Controlling Shareholders............................................................... 1
Trustees and Officers.................................................................. 7

OPERATION OF FRIC............................................................................. 12
Service Providers...................................................................... 12
Consultant............................................................................. 12
Advisor and Administrator.............................................................. 13
Money Managers......................................................................... 14
Distributor............................................................................ 15
Custodian and Portfolio Accountant..................................................... 15
Transfer and Dividend Disbursing Agent................................................. 16
Order Placement Designees.............................................................. 16
Independent Accountants................................................................ 16
Code of Ethics......................................................................... 16
Plan Pursuant to Rule 18f-3............................................................ 18
Distribution Plan...................................................................... 19
Shareholder Services Plan.............................................................. 20
Fund Expenses.......................................................................... 21
Purchase and Redemption of Fund Shares................................................. 22
Valuation of Fund Shares............................................................... 22
Valuation of Portfolio Securities...................................................... 23
Portfolio Transaction Policies......................................................... 23
Portfolio Turnover Rate................................................................ 24
Brokerage Allocations.................................................................. 24
Brokerage Commissions.................................................................. 25
Yield and Total Return Quotations...................................................... 27

INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS..................................... 28
Investment Restrictions................................................................ 28
Investment Policies.................................................................... 31
Certain Investments.................................................................... 35

TAXES......................................................................................... 52

MONEY MANAGER INFORMATION..................................................................... 56

RATINGS OF DEBT INSTRUMENTS................................................................... 62

FINANCIAL STATEMENTS.......................................................................... 68

GLOSSARY...................................................................................... 69
</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'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 12b-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, Class Y, 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.

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 March 31, 2000, the following shareholders owned 5% or more of any Class of
any Fund's Shares:

Diversified Bond Fund Class C - NFSC FEBO #0NN-101451, NFSC/FMTC IRA Rollover
FBO Bobby J. Lane, 1845 Putnam Drive, Bartlesville, OK 74006-6805, 6.02%,
record.

Diversified Bond Fund Class E - Zions First National Bank, Trustee, Tucker,
Sadler Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT 84130-0880,
23.38%, record; Carey & Co., Huntington National Bank, Attn: Mutual Funds
MC1024, P.O. Box 1558, Columbus, OH 43216-1558, 13.61%, record; Maltrust &
Co., c/o Eastern Bank & Trust/Gibraltar, Attn: Retirement Plan Services 3/rd/
Floor, 217 Essex Street, Salem, MA 01970-3728, 12.02%, record; Metropolitan
National Bank, Trustee for William Gary Darwin MD, PA PS, P.O. Box 8010,
Little Rock, AR 72203-8010, 9.03%, record; Metropolitan National Bank, Trustee
for Bowie Cass Electric Co-op Retirement Plan, P.O. Box 8010, Little Rock, AR
72203-8010, 9.02%, record; The Citizens Bank of Batesville Employee 401(k)
Profit Sharing Plan, 3/rd/ & College Street, Batesville, AR 72501, 6.12%,
record.

Diversified Bond Fund Class S - Citizens Bank, Saginaw, Attn: Trust/Investment
Department, 101 North Washington, Saginaw, MI 48607-1206, 15.97%, record;
Balanced Strategy Fund, c/o Frank Russell Investment Company, P.O. Box 1591,
Tacoma, WA 98401-1591, 12.34%, record.

Diversified Equity Fund Class E - Maltrust & Co., c/o Eastern Bank &
Trust/Gibraltar, Attn: Retirement Plan Services 3/rd/ Floor, 217 Essex Street,
Salem, MA 01970-3728, 36.96%, record; Zions First National Bank, Trustee,
Tucker, Sadler Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT 84130-
0880, 5.54%, record; Bowie Cass Electric Co-op 401(k), 111 Center Street,
Little Rock, AR 72201-4402, 5.05%, record.

Emerging Markets Fund Class E - Security Trust Co., Trustee, Karr Tuttle
Campbell Retirement Savings Plan, 2390 East Camelback Road, Suite 240,
Phoenix, AZ 85016-3434, 14.67%, record; Junior Achievement, Inc. Retirement
Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 13.77%, record;
Northern Colorado Water Conservancy Defined Benefit Plan, 1441 Wazee Street,
Apt. 104, Denver, CO 80202-5952, 5.69%, record.

Emerging Markets Fund Class S - Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery Street, San Francisco, CA 94104-4122, 7.44%, record; Var & Co.,
First Trust, N.A., Funds Accounting, P.O. Box 64482, St. Paul, MN 55164-0482,
5.78%, record.

Equity I Fund Class E - FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI 49423-9166, 37.90%, record; Northern Colorado Water Conservancy
Defined Benefit Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952,
7.38%, record; Security Trust Co., Trustee, Karr Tuttle Campbell Retirement
Savings Plan, 2390 East Camelback Road, Suite 240, Phoenix, AZ 85016-3434,
5.86%, record.

Equity I Fund Class I - Var & Co., First Trust, N.A., Funds Accounting, P.O.
Box 64482, St. Paul, MN 55164-0482, 10.35%, record; Charles Schwab & Co.,
Inc., Special Custody Account for the Exclusive Benefit of Customers, Attn:
Mutual Funds, 101 Montgomery Street, San Francisco, CA 94104-4122, 6.84%,
record.

Equity I Fund Class Y - JATO Reinv, National City Bank of Minneapolis, Attn:
Trust Department, P.O. Box E 1919, Minneapolis, MN 55480, 100.00%, record.

Equity II Fund Class E - FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 48.68%, record; US Bank NA Cust. for Daily
Valued Retirement Program, First Trust Center (SPEN 0402), 180 East 5/th/
Street, St. Paul, MN 55101-2667, 6.55%, record; Junior Achievement, Inc.
Retirement Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 5.92%,
record.

Equity II Fund Class I - Charles Schwab & Co., Inc., Special Custody Account
for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101 Montgomery
Street, San Francisco, CA 94104-4122, 8.35%, record; Var & Co., First Trust,
N.A., Funds Accounting, P.O. Box 64482, St. Paul, MN 55164-0482, 5.62%,
record.

Equity II Fund Class Y - JATO Reinv, National City Bank of Minneapolis, Attn:
Trust Department, P.O. Box E 1919, Minneapolis, MN 55480, 100.00%, record.

2
<PAGE>

Equity III Fund Class E - FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 24.23%, record; Security Trust Co., Trustee,
Karr Tuttle Campbell Retirement Savings Plan, 2390 East Camelback Road, Suite
240, Phoenix, AZ 85016-3434, 18.12%, record; Junior Achievement, Inc.
Retirement Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 16.51%,
record; Advisors Trust Company Master IRA, 1441 Wazee Street, Apt. 104,
Denver, CO 80202-5952, 5.08%, record.

Equity III Fund Class I - Var & Co., First Trust, N.A., Funds Accounting, P.O.
Box 64482, St. Paul, MN 55164-0482, 9.50%, record; International Shipowners
Reinsurance Co., S.A., B.P. 841, L-2018, Luxembourg, 7.05%, record; Shaw's
Supermarkets, Inc., Super SVGS & Prot-Max Growth, P.O. Box 600, 140 Laurel
Street, East Bridgewater, MA 02333-0600, 6.37%, record; Carey & Co.,
Huntington National Bank, Attn: Mutual Funds MC1024, P.O. Box 1558, Columbus,
OH 43216-1558, 5.09%, record.

Equity III Fund Class Y - Frank Russell Investment Management Company, Attn:
Mark Swanson, P.O. Box 1591, Tacoma, WA 98401-1591, 100.00%, record.

Equity Income Fund Class C - Robert W. Baird & Co., Inc., Trustee, FBO Wayne
K. Saiki Rollover IRA, A/C 7267-3056, 73-4909 Anini Street, Kailua Kona, HI
96740-9235, 9.18%, record; Robert W. Baird & Co., Inc., Trustee, FBO Neil
Thomas Anderson SEP IRA, A/C 1141-8184, 3107 Ramshorn Drive, Castle Rock, CO
80104-9087, 6.59%, record.

Equity Income Fund Class E - Metropolitan National Bank, Trustee for William
Gary Darwin MD, PA PS, P.O. Box 8010, Little Rock, AR 72203-8010, 25.59%,
record; Carey & Co., Huntington National Bank, Attn: Mutual Funds MC1024, P.O.
Box 1558, Columbus, OH 43216-1558, 19.78%, record; Bowie Cass Electric Co-op
401(k), 111 Center Street, Little Rock, AR 72201-4402, 14.14%, record; The
Citizens Bank of Batesville Employee 401(k) Profit Sharing Plan, 3/rd/ &
College Street, Batesville, AR 72501, 12.27%, record; Citizens Bank of
Batesville, Trustee, White River Medical Center, Inc. 401(k) Plan, 3/rd/ &
College Streets, Batesville, AR 72503, 10.67%, record.

Equity Income Fund Class S - Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery Street, San Francisco, CA 94104-4122, 5.96%, record.

Equity Q Fund Class E - FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI, 49423-9166, 42.53%, record; Security Trust Co., Trustee, Karr
Tuttle Campbell Retirement Savings Plan, 2390 East Camelback Road, Suite 240,
Phoenix, AZ 85016-3434, 12.57%, record; Junior Achievement, Inc. Retirement
Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 6.94%, record.

Equity Q Fund Class I - Var & Co., First Trust, N.A., Funds Accounting, P.O.
Box 64482, St. Paul, MN 55164-0482, 11.97%, record; Charles Schwab & Co.,
Inc., Special Custody Account for the Exclusive Benefit of Customers, Attn:
Mutual Funds, 101 Montgomery Street, San Francisco, CA 94104-4122, 6.38%,
record.

Equity Q Fund Class Y - JATO Reinv, National City Bank of Minneapolis, Attn:
Trust Depart., P.O. Box E 1919, Minneapolis, MN 55480, 100.00%, record.

Fixed Income I Fund Class E - FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 25.09%, record; Junior Achievement, Inc.,
Retirement Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 17.15%,
record; Northern Colorado Water Conservancy, Defined Benefit Plan, 1441 Wazee
Street, Apt. 104, Denver, CO 80202-5952, 11.69%, record.

Fixed Income I Fund Class I - Var & Co., First Trust, N.A., Funds Accounting,
P.O. Box 64482, St. Paul, MN 55164-0482, 8.25%, record; First Tennessee Bank
NA, First Tennessee Bank FBO, Knox County Reinvest A/C, Attn: Trust
Securities-Third Floor, 165 Madison Avenue, Memphis, TN 38103-2723, 5.24%,
record.

Fixed Income I Fund Class Y - JATO Reinv, National City Bank of Minneapolis,
Attn: Trust Depart., P.O. Box E 1919, Minneapolis, MN 55480, 100.00%, record.

3
<PAGE>

Fixed Income III Fund Class E - Advisors Trust Company FBO Building Industry
Associates Profit Sharing Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-
5952, 22.59%, record; Ear, Nose and Throat Physicians of North Mississippi, PA
401(k) Profit Sharing Plan -- Aggressive, P.O. Box, 2180, Tupelo, MS 38803-
2180, 18.60%, record; Fusion Ceramics, Inc. Profit Sharing Plan, P.O. Box 127,
Carrollton, OH 44615-0127, 15.40%, record; National 4-H Council, 1441 Wazee
Street, Apt. 104, Denver, CO 80202-5952, 11.24%, record; Arnold W. Magasinn,
Trustee, Peter Hauber 1992 CRUT, 1441 Wazee Street, Apt. 104, Denver, CO
80202-5952, 10.03%, record; Arnold W. Magasinn, Trustee, Brigitte A. Hauber
1992 CRUT, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 8.77%, record;
Ear, Nose and Throat Physicians of North Mississippi, PA 401(k) Profit Sharing
Plan -- Balanced, P.O. Box, 2180, Tupelo, MS 38803-2180, 6.26%, record.

Fixed Income III Fund Class I - Var & Co., First Trust, N.A., Funds
Accounting, P.O. Box 64482, St. Paul, MN 55164-0482, 14.81%, record.

Fixed Income III Fund Class Y - Frank Russell Investment Management Company,
Attn: Mark Swanson, P.O. Box 1591, Tacoma, WA 98401-1591, 100.00%, record.

International Fund Class E - FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 18.46%, record; Junior Achievement, Inc.
Retirement Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 11.59%,
record; Northern Colorado Water Conservancy Defined Benefit Plan, 1441 Wazee
Street, Apt. 104, Denver, CO 80202-5952, 6.31%, record; Advisors Trust Company
FBO Building Industry Associates Profit Sharing Plan, 1441 Wazee Street, Apt.
104, Denver, CO 80202-5952, 6.02%, record; The Fund for American Studies, 1441
Wazee Street, Apt. 104, Denver, CO 80202-5952, 5.64%, record.

International Fund Class I - Var & Co., First Trust, N.A., Funds Accounting,
P.O. Box 64482, St. Paul, MN 55164-0482, 11.04%, record; Charles Schwab & Co.,
Inc., Special Custody Account for the Exclusive Benefit of Customers, Attn:
Mutual Funds, 101 Montgomery Street, San Francisco, CA 94104-4122, 7.17%,
record.

International Fund Class Y - JATO Reinv, National City Bank of Minneapolis,
Attn: Trust Department, P.O. Box 1919, Minneapolis, MN 55480, 100.00%, record.

International Securities Fund Class E - Maltrust & Co., c/o Eastern Bank &
Trust/Gibraltar, Attn: Retirement Plan Services 3/rd/ Floor, 217 Essex Street,
Salem, MA 01970-3728, 15.66%, record; Zions First National Bank, Trustee,
Tucker, Sadler Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT 84130-
0880, 10.93%, record; Metropolitan National Bank, Trustee for Bowie Cass
Electric Co-op Retirement Plan, P.O. Box 8010, Little Rock, AR 72203-8010,
8.27%, record; Carey & Co., Huntington National Bank, Attn: Mutual Funds
MC1024, P.O. Box 1558, Columbus, OH 43216-1558, 6.46%, record; Metropolitan
National Bank Defined Benefit Plan, 111 Center Street, Little Rock, AR 72201-
4402, 5.42%, record.

Multi-Strategy Bond Fund Class E - Metropolitan National Bank, Trustee for
Bowie Cass Electric Co-op Retirement Plan, P.O. Box 8010, Little Rock, AR
72203-8010, 20.57%, record; Zions First National Bank, Trustee, Tucker, Sadler
Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT 84130-0880, 9.22%,
record; Maltrust & Co., c/o Eastern Bank & Trust/Gibraltar, Attn: Retirement
Plan Services 3/rd/ Floor, 217 Essex Street, Salem, MA 01970-3728, 8.17%,
record; Arkansas Womens Center Employees Pension Plan, 9501 Lile Drive, Suite
888, Little Rock, AR 72205-6233, 7.89%, record; Metropolitan National Bank,
Trustee for William Gary Darwin MD, PA PS, P.O. Box 8010, Little Rock, AR
72203-8010, 6.71%, record; James L. Lee Jr., DDS, Profit Sharing Plan, 1501
South Waldron, Suite 200, Fort Smith, AR 72903-2565, 5.82%, record; Terry
Fiddler, DDS, Money Purchase & Profit Sharing Plan, 562 Locust Street, Conway,
AR 72032-5349, 5.59%, record.

Multi-Strategy Bond Fund Class S - Balanced Strategy Fund, c/o Frank Russell
Investment Company, P.O. Box 1591, Tacoma, WA 98401-1591, 10.19%, record;
Aggressive Strategy Fund, c/o Frank Russell Investment Company, P.O. Box 1591,
Tacoma, WA 98401-1591, 7.61%, record.

Quantitative Equity Fund Class E - Zions First National Bank, Trustee, Tucker,
Sadler Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT 84130-0880,
9.24%, record; Bowie Cass Electric Co-op 401(k), 111 Center Street, Little
Rock, AR 72201-4402, 7.84%, record; Carey & Co., Huntington National Bank,
Attn: Mutual Funds MC1024, P.O. Box

4
<PAGE>

1558, Columbus, OH 43216-1558, 6.27%, record; Metropolitan National Bank,
Trustee of Crews & Assoc. 401(k) Plan, Metropolitan National Bank, 111 Center
Street, Little Rock, AR 72201-4402, 6.19%, record; Citizens Bank of
Batesville, Trustee, White River Medical Center, Inc. 401(k) Plan, 3/rd/ &
College Streets, Batesville, AR 72503, 5.77%, record; Metropolitan National
Bank, Trustee for Bowie Cass Electric Co-op Retirement Plan, P.O. Box 8010,
Little Rock, AR 72203-8010, 5.59%, record; Metropolitan National Bank Defined
Benefit Plan, 111 Center Street, Little Rock, AR 72201-4402, 5.51%, record.

Real Estate Securities Fund Class C - Robert W. Baird & Co., Inc., Trustee,
FBO Albert R. Vandam IRA, A/C 8564-0301, 6 Tilden Road, Scituate, MA 02066-
3924, 5.75%, record.

Real Estate Securities Fund Class E - FM Co., Huntington National Bank, One
Financial Plaza, Holland, MI, 49423-9166, 19.83%, record; Junior Achievement,
Inc. Retirement Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952,
15.87%, record; Northern Colorado Water Conservancy Defined Benefit Plan, 1441
Wazee Street, Apt. 104, Denver, CO 80202-5952, 8.05%, record.

Real Estate Securities Fund Class S - Var & Co., First Trust, N.A., Funds
Accounting, P.O. Box 64482, St. Paul, MN 55164-0482, 5.72%, record.

Short Term Bond Fund Class C - State Street Bank & Trust Co., Cust. for the
IRA R/O FBO Lester J. Waguespack, 248 Tall Timbers Road, New Caney, TX 77357-
2826, 46.08%, record; Executive Mouldings, Inc., c/o Fred Gutnick, 2711
Wilkinson Boulevard, Charlotte, NC 28208-5619, 11.22%, record; Donaldson,
Lufkin, Jenrette Securities Corporation, Inc., FBO Margaret R. Krystyniak,
P.O. Box 2052, Jersey City, NJ 07303-2052, 11.10%, record; Donaldson, Lufkin,
Jenrette Securities Corporation, Inc., FBO Joan W. Terrill, Trustee, P.O. Box
2052, Jersey City, NJ 07303-2052, 6.42%, record; NFSC FEBO #0NN-115673,
NFSC/FMTC IRA Rollover FBO Jeraldine Fries, P.O. Box 2424, Bartlesville, OK
74005-2424, 5.15%, record.

Short Term Bond Fund Class E - Junior Achievement, Inc. Retirement Plan, 1441
Wazee, Street Apt. 104, Denver, CO 80202-5952, 38.01%, record; Zions First
National Bank, Trustee, Tucker, Sadler Profit Sharing Plan, P.O. Box 30880,
Salt Lake City, UT 84130-0880, 5.96%, record; Advisors Trust Company Master
IRA, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 5.36%, record.

Short Term Bond Fund Class S - Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery Street, San Francisco, CA 94104-4122, 6.58%, record; First
Tennessee Bank NA, First Tennessee Bank FBO Knox County Reinvest A/C, Attn:
Trust Securities-Third Floor, 165 Madison Avenue, Memphis, TN 38103-2723,
5.00%, record.

Special Growth Fund Class E - Maltrust & Co., c/o Eastern Bank &
Trust/Gibraltar, Attn: Retirement Plan Services 3/rd/ Floor, 217 Essex Street,
Salem, MA 01970-3728, 11.60%, record; Wabanc & Co., 717 West Sprague Avenue,
Spokane, WA 99201-3922, 11.58%, record; Bowie Cass Electric Co-op 401(k), 111
Center Street, Little Rock, AR 72201-4402, 9.86%, record; Metropolitan
National Bank, Trustee for Bowie Cass Electric Co-op Retirement Plan, P.O. Box
8010, Little Rock, AR 72203-8010, 7.20%, record.

Special Growth Fund Class S - Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery Street, San Francisco, CA 94104-4122, 5.10%, record.

Tax Exempt Bond Fund Class C - NFSC FEBO #0NN-122416, Raymond F. Haring, 11170
Jerryson Drive, Grand Ledge, MI 48837-9180, 25.17%, record; Margaret M. Link,
520 Skyway Drive, Grand Junction, CO 81503-4401, 20.21%, record; Kathryn
Clarke Thompson, Trustee, Test TR for Kathryn Clarke Thompson Created Art IV
of Will & Codicils of Guy Bryan Thompson, Deceased, 6123 Del Monte Drive,
Houston, TX 77057-3517, 16.77%, record; Kathryn Clarke Thompson, 6123 Del
Monte Drive, Houston, TX 77057-3517, 14.79%, record; NFSC FEBO #0NN-104531,
Betty Jo Clemens, Trustee, Betty Jo Clemens Revocable Trust U/A 11/10/97, 9651
Rapid City Road N.W., Rapid City, MI 49676-9485, 7.67%, record.

Tax Exempt Bond Fund Class E - Jeanne Blanche Fisher, Trustee, Fisher Family
Trust A U/A DTD 07/06/1978, 1441 Wazee Street, Apt. 104, Denver, CO 80202-
5952, 13.79%, Gary Deward Brown & Johanna L. Brown Inter Vivos Trust

5
<PAGE>

DTD 6/7/82, 1441 Wazee Street, Suite 104, Denver, CO 80202-5952, 9.29%,
record; Birgit Lane Revocable Trust U/D/T DTD May 14, 1993, 1441 Wazee Street,
Suite 104, Denver, CO 80202-5952, 9.05%, record; Arnold W. And Vicki F.
Magasinn, Trustees of Magasinn Family Trust 10/5/87, 1441 Wazee Street, Apt.
104, Denver, CO 80202-5952, 7.87%, record; James D. Duvall III, Trustee, James
D. Duvall III 1993 Charitable Remainder Unitrust, 1441 Wazee Street, Apt. 104,
Denver CO 80202-5952, 6.34%, record; James T. and Jane Anderson, 1441 Wazee
Street, Apt. 104, Denver, CO 80202-5952, 5.99%, record; Linda F. West,
Trustee, Anthony L. West 1993 Charitable Remainder Unitrust, 1441 Wazee
Street, Apt. 104, Denver, CO 80202-5952, 5.37%, record; Esther S. Akiyana,
Trustee of Survivors Trust of Akiyama Living Trust, 1441 Wazee Street, Apt.
104, Denver, CO 80202-5952, 5.28%, record.

Tax Free Money Market Fund - Citizens Bank, Saginaw, Attn: Trust/Investment
Department, 101 North Washington, Saginaw, MI 48607-1206, 24.06%, record; Tax
Exempt Bond Master Account #GU8C, c/o Frank Russell Investment Management
Company, Attn: Operations Department, P.O. Box 1591, Tacoma, WA 98401-1591,
10.88%, record; Steven L. Marcus Trust, 43 Elliot Hill Road, Natick, MA 01760-
5564, 5.82%, record.

Tax-Managed Large Cap Fund Class C - WEDCO, Inc., P.O. Box 1131, Reno, NV
89504-1131, 15.35%, record; Fred S. Gutnick & Frances H. Gutnick, JT TEN WROS,
7050 Buckland Road, Charlotte, NC 28278-9781, 5.29%, record.

Tax-Managed Large Cap Fund Class S - Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds,
101 Montgomery Street, San Francisco, CA 94104-4122, 22.15%, record; Indiana
Trust 5, Indiana Trust & Investment Management Company, P.O. Box 5149,
Mishawaka, IN 46546-5149, 7.38%, record.

Tax-Managed Small Cap Fund Class C - Marjorie B. Baer Revocable Family Trust,
21186 Hamlin Drive, Boca Raton, FL 33433-7433, 14.87%, record; Parks Anderson
& Ginger E. Anderson TEN COM, 4617 252/nd/ Avenue S.E., Issaquah, WA 98029-
7606, 9.38%, record.

Tax-Managed Small Cap Fund Class S - Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds,
101 Montgomery Street, San Francisco, CA 94104-4122, 23.52%, record; Green
Investment Account, 9604 North 43/rd/ Place, Phoenix, AZ 85028-5119, 6.84%,
record; Indiana Trust 5, Indiana Trust & Investment Management Company, P.O.
Box 5149, Mishawaka, IN 46546-5149, 5.83%, record.

At March 31, 2000, the following shareholders could be deemed "control" the
following Funds because such shareholder owns more than 25% of the voting Shares
of the indicated Fund:

Diversified Equity Fund Class E - Maltrust & Co., c/o Eastern Bank &
Trust/Gibraltar, Attn: Retirement Plan Services 3/rd/ Floor, 217 Essex Street,
Salem, MA 01970-3728, 36.96%, record.

Equity I Fund Class E - FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI 49423-9166, 37.90%, record.

Equity I Fund Class Y - JATO Reinv, National City Bank of Minneapolis, Attn:
Trust Department, P.O. Box E 1919, Minneapolis, MN 55480, 100.00%, record.

Equity II Fund Class E - FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 48.68%, record.

Equity II Fund Class Y - JATO Reinv, National City Bank of Minneapolis, Attn:
Trust Department, P.O. Box E 1919, Minneapolis, MN 55480, 100.00%, record.

Equity III Fund Class Y - Frank Russell Investment Management Company, Attn:
Mark Swanson, P.O. Box 1591, Tacoma, WA 98401-1591, 100.00%, record.

Equity Income Fund Class E - Metropolitan National Bank, Trustee for William
Gary Darwin MD, PA PS, P.O. Box 8010, Little Rock, AR 72203-8010, 25.59%,
record.

6
<PAGE>

Equity Q Fund Class E - FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI, 49423-9166, 42.53%, record.

Equity Q Fund Class Y - JATO Reinv, National City Bank of Minneapolis, Attn:
Trust Depart., P.O. Box E 1919, Minneapolis, MN 55480, 100.00%, record.

Fixed Income I Fund Class E - FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 25.09%, record.

Fixed Income I Fund Class Y - JATO Reinv, National City Bank of Minneapolis,
Attn: Trust Depart., P.O. Box E 1919, Minneapolis, MN 55480, 100.00%, record.

Fixed Income III Fund Class Y - Frank Russell Investment Management Company,
Attn: Mark Swanson, P.O. Box 1591, Tacoma, WA 98401-1591, 100.00%, record.

International Fund Class Y - JATO Reinv, National City Bank of Minneapolis,
Attn: Trust Department, P.O. Box 1919, Minneapolis, MN 55480, 100.00%, record.

Short Term Bond Fund Class C - State Street Bank & Trust Co., Cust. for the
IRA R/O FBO Lester J. Waguespack, 248 Tall Timbers Road, New Caney, TX 77357-
2826, 46.08%, record.

Short Term Bond Fund Class E - Junior Achievement, Inc. Retirement Plan, 1441
Wazee, Street Apt. 104, Denver, CO 80202-5952, 38.01%, record.

Tax Exempt Bond Fund Class C - NFSC FEBO #0NN-122416, Raymond F. Haring, 11170
Jerryson Drive, Grand Ledge, MI 48837-9180, 25.17%, record.

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.

7
<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Principal Occupation(s)
Name, Age, Position(s) Held During the
Address with Fund Past 5 Years
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*George F. Trustee Also currently: Trustee Emeritus and Chairman Emeritus,
Russell, Jr., Born Emeritus and Russell Insurance Funds; Director, Chairman of the Board and
July 3, 1932 Chairman Chief Executive Officer, Russell Building Management Company,
Emeritus since Inc.; Director and Chairman of the Board, Frank Russell
909 A Street 1998. Company; Director and Chairman of the Board, Frank Russell
Tacoma, Investments (Delaware), Inc.; Chairman Emeritus/Director
Washington Emeritus, Frank Russell Trust Company; Chairman Emeritus,
98402-1616 Frank Russell Securities, Inc.; Director Emeritus, Frank
Russell Investment Management Company; Director, Chairman of
the Board and President, Russell 20/20 Association. From 1984
to December 1998, Trustee and Chairman of the Board of FRIC.
From August 1996 to December 1998, Trustee and Chairman of
the Board of Russell Insurance Funds.
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
*Lynn L. Trustee, President Also currently: Trustee, President and Chief Executive
Anderson, and Chief Officer, Russell Insurance Funds; Director, Chief Executive
Born April 22, Executive Officer Officer and Chairman of the Board, Russell Fund Distributors,
1939 since 1987. Inc.; Trustee, Chairman of the Board, President, The SSgA
Funds (investment company); Director and Chairman of the
909 A Street Board, Frank Russell Investment Management Company; Chairman
Tacoma, of the Board, Frank Russell Trust Company; Director and
Washington Chairman of the Board, Frank Russell Investment Company PLC;
98402-1616 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, present, President, Anderson Management Group LLC
1931 (architectural design and manufacturing). 1984 to 1996,
President, Vancouver Door Company, Inc.
23 Forest Glen Lane
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, international markets for small corporations). 1991-1994,
1919 Adjunct Professor, International Marketing, University of
Washington, Tacoma, Washington.
PO Box 212
Gig Harbor,
Washington 98335
----------------------------------------------------------------------------------------------------------------
</TABLE>

8
<PAGE>

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 Director
Born May 5, 1926 of Frank Russell Trust Company. Retired.

9
<PAGE>

10
<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
909 A Street Company.
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>

11
<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:

Consultant Frank Russell Company

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

Money Managers Multiple professional
discretionary
investment management
organizations

Custodian and Portfolio Accountant State Street Bank and
Trust Company

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.

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.

12
<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>
Diversified Equity $11,377,505 $9,580,094 $6,906,245
Special Growth 5,867,193 5,901,577 4,556,999
Equity Income 1,793,367 2,039,971 1,721,974
Quantitative Equity 11,129,142 9,056,015 6,616,377
International Securities 9,446,953 8,859,189 7,751,289
Real Estate Securities 5,193,244 5,183,218 4,428,351
Diversified Bond 3,695,482 3,407,594 2,755,500
Multistrategy Bond 3,667,917 3,241,445 2,225,087
Tax Exempt Bond 498,685 525,312 361,226
U.S. Government Money Market 392,940 372,920 542,075
Tax Free Money Market 491,260 429,613 266,939
Equity I 8,904,910 7,626,293 6,457,044
Equity II 4,636,747 3,792,749 3,226,955
Equity III 1,179,507 1,403,784 1,381,167
Equity Q 7,390,737 6,563,229 6,049,752
Tax-Managed Large Cap (formerly Equity T) 3,180,328 1,463,604 375,054
Tax-Managed Small Cap* 18,536 -- --
International 8,145,109 7,709,349 7,576,927
Emerging Markets 4,222,210 4,020,121 4,167,163
Fixed Income I 3,037,359 2,631,177 2,149,298
Fixed Income III 2,521,293 2,380,980 1,835,798
Short Term Bond 2,269,960 1,216,062 1,184,588
Money Market 5,108,573 2,719,009 1,805,170
</TABLE>

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

13
<PAGE>

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

Effective May 1, 1996 until April 30, 2000, FRIMCo contractually agreed to waive
a portion of its combined advisory and administrative fees for the Multistrategy
Bond Fund, to the extent Fund level expenses exceed 0.80% of average daily net
assets on an annual basis. FRIMCo waived fees in the amounts of $126,393,
$57,035 and $327,074 for the years ended December 31, 1997, 1998 and 1999,
respectively. As a result of the waivers, the Fund paid advisory and
administrative fees equal to $2,225,087, $3,184,410 and $3,340,842 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.

14
<PAGE>

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>
Equity I $2,425,193 $2,646,978 $2,988,941 0.23% 0.21% 0.20%
Equity II 1,716,048 1,973,599 2,296,509 0.40% 0.39% 0.36%
Equity III 439,093 421,765 342,095 0.19% 0.18% 0.17%
Fixed Income I 542,745 620,482 702,784 0.08% 0.07% 0.07%
Short Term Bond 410,761 414,057 795,354 0.17% 0.17% 0.17%
Fixed Income III 692,500 861,391 854,445 0.21% 0.19% 0.18%
International 3,947,057 3,863,814 3,785,779 0.39% 0.37% 0.34%
Equity Q 1,958,721 2,026,435 2,286,487 0.19% 0.19% 0.18%
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%
Emerging Markets 2,369,288 2,230,317 2,151,950 0.68% 0.66% 0.65%
Diversified Equity 1,996,005 2,556,100 2,908,409 0.23% 0.21% 0.20%
Special Growth 1,914,056 2,419.648 2,249,925 0.40% 0.39% 0.36%
Equity Income 410,481 460,134 384,336 0.19% 0.18% 0.17%
Diversified Bond 462,945 529,842 555,643 0.08% 0.07% 0.07%
International Securities 3,188,600 3,505,016 3,429,899 0.39% 0.37% 0.34%
Multistrategy Bond 751,497 990,456 1,046,997 0.21% 0.19% 0.18%
Quantitative Equity 1,648,992 2,153,019 2,623,428 0.19% 0.19% 0.18%
Real Estate Securities 1,529,207 1,757,612 1,711,842 0.29% 0.29% 0.28%
Tax Exempt Bond 179,885 252,321 305,104 0.25% 0.23% 0.19%
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:

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

15
<PAGE>

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 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
-------------------------------------------------------------------------------------------------------------------------
BlackRock Financial Yes Yes, but not in securities with pending or possible client
Management buy or sell orders
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

16
<PAGE>

<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
buy or sell orders
--------------------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------------------------------------------------------
Mastholm Asset Management, Yes Yes, but not in securities with pending or possible client
LLC buy or sell orders
--------------------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

17
<PAGE>

<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 the 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. For purposes of this
Statement of Additional Information, each Fund that issues multiple classes of
Shares is referred to as a "Multiple Class Fund." The key features of the Rule
18f-3 plan are as follows: Shares of each class of a Multiple Class Fund
represent an equal pro rata interest in the underlying assets of that Fund, and
generally have identical voting, dividend, liquidation, and other rights,
preferences, powers, restrictions, limitations, qualifications and terms and
conditions, except that: (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.

18
<PAGE>

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 and Class D Shares for any activities or expenses primarily intended to
result in the sale of Class C 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
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."

19
<PAGE>

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
-------
Diversified Equity $ 48,812
Special Growth 17,589
Equity Income 4,462
Quantitative Equity 44,277
International Securities 23,083
Real Estate Securities 6,108
Diversified Bond 18,815
Tax-Managed Large Cap 133
Tax-Managed Small Cap 65
Short Term Bond 4,312
Multistrategy Bond 23,746
Tax Exempt Bond 1,305
Emerging Markets 4,363

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 and November 22, 1999.

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.

20
<PAGE>

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
------- -------
Diversified Equity $ 16,275 $ 30,910
Special Growth 5,863 14,559
Equity Income 1,487 2,535
Quantitative Equity 14,759 19,846
International Securities 7,694 12,644
Real Estate Securities 2,036 11,042
Diversified Bond 6,272 12,364
Tax-Managed Large Cap 44 --
Tax-Managed Small Cap 22 --
Short-Term Bond 1,437 14,758
Equity I -- 59,737
Equity II -- 40,342
Equity III -- 10,187
Fixed I -- 52,962
Fixed III -- 3,713
International -- 43,755
Equity Q -- 37,958
Emerging Markets 1,454 8,362
Diversified Equity 16,275 30,910
Real Estate Securities 2,036 11,042
Special Growth 5,863 14,559
Equity Income 1,487 2,535
Short-Term Bond 1,437 14,758
Diversified Bond 6,272 12,364
International Securities 7,694 12,644
Multistrategy Bond 7,915 8,153
Tax Exempt Bond 435 4,872
Quantitative Equity 14,759 19,846

No Class A Shares were issued during the year ended December 31, 1999.

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 Money Market,
Tax Exempt Bond, 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 February 28, 2001 all or a portion of its aggregate
combined advisory and administrative fees with respect to certain Funds.

21
<PAGE>

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.

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 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.

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

22
<PAGE>

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 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.

23
<PAGE>

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
-------- --------
Equity I 112% 101%
Equity II 112 129
Equity III 146 136
Equity Q 90 75
Tax-Managed Large Cap (formerly Equity T) 48 51
Tax-Managed Small Cap* 3 --
International 119 64
Emerging Markets 95 59
Fixed Income I 139 227
Fixed Income III 131 342
Diversified Equity 110 100
Special Growth 112 129
Equity Income 138 150
Quantitative Equity 90 77
International Securities 121 68
Real Estate Securities 43 43
Diversified Bond 152 217
Short Term Bond 177 130
Multistrategy Bond 134 335
Tax Exempt Bond 119 74

* 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).

24
<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.

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 Funds were:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Equity I $2,508,532 $ 2,185,029 $2,525,291
Equity II 1,236,438 1,111,879 743,450
Equity III 544,612 671,292 540,862
Equity Q 1,295,797 1,328,183 1,323,995
Tax-Managed Large Cap (formerly Equity T) 403,032 176,555 40,539
Tax-Managed Small Cap* 26,712 -- --
</TABLE>

25
<PAGE>

International 5,068,657 3,100,978 2,679,272
Emerging Markets 2,035,042 1,414,084 1,722,534
Diversified Equity 2,438,549 2,137,221 2,340,509
Special Growth 1,226,126 1,362,922 828,211
Equity Income 615,257 732,684 515,622
Quantitative Equity 1,450,748 1,404,098 1,069,927
International Securities 4,794,982 2,865,227 2,193,334
Real Estate Securities 1,029,242 1,127,266 641,659
----------- ----------- -----------
Total $24,673,726 $19,617,418 $17,165,205
=========== =========== ===========

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

The principal reasons for changes in several Funds' brokerage commissions for
the three years were (1) changes in Fund asset size, (2) changes in market
conditions, and (3) changes in money managers of certain Funds, which required
substantial portfolio restructurings, resulting in increased securities
transactions and brokerage commissions.

Fixed Income I, Fixed Income 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 the 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, Lufking & 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%.

26
<PAGE>

During the year ended December 31, 1999, the Funds purchased securities issued
by the following regular brokers or dealers as defined by Rule 10b-1 of the 1940
Act, each of which is one of the Funds' ten largest brokers or dealers by dollar
amounts of securities executed or commissions received on behalf of the Funds.
The value of broker-dealer securities held as of December 31, 1999, was as
follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Salomon
FUND Merrill Morgan Goldman Credit Paine Smith
Lynch Stanley Sachs Citibank Suisse Webber Barney
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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, the Funds did not have any holdings in their 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:

27
<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

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.

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.

28
<PAGE>

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.

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

29
<PAGE>

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.

30
<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>
------------------------------------------------------------------------------------------------------------------------------------
US Tax
Tax- Tax Short Government Free
Emerging Tax-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>

31
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Fixed Fixed
Type of Portfolio Equity I Equity II Equity III Equity Q International Income I Income II
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 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 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 Multistrated
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.

32
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
US Tax
Real Tax- Tax- Tax Short Government Free
Estate Emerging Managed Managed Special Exempt Term Money Money Money
Type of Portfolio Securities Markets Large Cap Small Cap Growth Bond Bond Market Market Market
Securities Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund
---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-----------------------------------------------------------------------------------------------------------------------------------
<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 portfolios........... 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.

33
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Fixed Fixed
Type of Portfolio Equity I Equity II Equity III Equity Q International Income I Income IIII
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 portfolios................. 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.

34
<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.

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.

35
<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."

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.

36
<PAGE>

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.

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.

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,

39
<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).

41
<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.

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,

42
<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.

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<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

44
<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.

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 the Multistrategy Bond Fund.

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.

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<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.

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.

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

47
<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.

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.

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<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.

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 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.

50
<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.

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

51
<PAGE>

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.

Taxes
-----

52
<PAGE>

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 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

53
<PAGE>

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>
-----------------------------------------------------------------------------------------------------------------------
Real Estate Emerging Markets Short Term Bond Diversified Bond Multistrategy
Year Securities Fund Fund Fund Fund Bond Fund
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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) -- --
-----------------------------------------------------------------------------------------------------------------------
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>

54
<PAGE>

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.

55
<PAGE>

MONEY MANAGER INFORMATION

DIVERSIFIED EQUITY FUND

Alliance Capital Management L.P. is a limited partnership whose (i)
general partner, Alliance Capital Management Corporation, is a wholly owned
subsidiary of AXA Financial, Inc. (formerly The Equitable Companies
Incorporated) ("AXF") and (ii) majority unit holder is ACMC, Inc., an indirect
wholly owned subsidiary of AXF. AXA, a French insurance company, owns
approximately 58.4% of the common stock of AXF.

Barclays Global Fund Advisors N.A. is a wholly-owned subsidiary of
Barclays Global Investors, N.A.

Equinox Capital Management, LLC is 100% employee owned, with majority
ownership held by Ron Ulrich.

Jacobs Levy Equity Management, Inc. is owned by Bruce Jacobs and Kenneth
Levy.

Marsico Capital Management, LLC is owned 50% by Marsico Management
Holdings, LLC and 50% by TFM Holdings, LLLP. Marsico Management Holdings is a
wholly owned subsidiary of Bank of America, N.A. which in turn is a wholly owned
subsidiary of Bank of America Corporation. TFM Holdings, LLLP is a Colorado
limited liability limited partnership whose sole general partner is TFM
Managers, Inc. which is wholly-owned by Thomas F. Marsico.

Strong Capital Management, Inc. is a corporation controlled by Richard S.
Strong.

Suffolk Capital Management, Inc. is a wholly owned subsidiary of United
Asset Management Company, a publicly traded corporation.

Turner Investment Partners Inc. is a corporation controlled by Robert E.
Turner.

Westpeak Investment Advisors, LP is a wholly-owned subsidiary of Nvest
Companies, L.P. ("Nvest Companies"). Nvest Companies' managing general partner,
Nvest Corporation, is an indirect, wholly-owned subsidiary of Metropolitan Life
Insurance Company ("MetLife"), which also owned, as of January 31, 1999,
approximately 48% of the limited partnership interests in Nvest Companies. Nvest
Companies' advising general partner, Nvest, L.P., is a publicly-traded company
listed on the New York Stock Exchange.

SPECIAL GROWTH FUND

CapitalWorks Investment Partners, LLC is a liability company controlled by
its members who include John D. Wylie, Jack C. Marshall, Mark J. Correnti and
Donovan T. Garcia.

Delphi Management, Inc. is 100% owned by Scott Black.

Fiduciary International, Inc. is an indirect wholly-owned subsidiary of
Fiduciary Trust Company International, a New York state chartered bank.

GlobeFlex Capital, L.P. is a California limited partnership. Its general
partners are Robert J. Anslow, Jr. and Marina L. Marrelli.

Jacobs Levy Equity Management, Inc. See: Diversified Equity Fund.

56
<PAGE>

Sirach Capital Management, Inc. is a wholly-owned subsidiary of United
Asset Management Company, a publicly traded corporation.

Westpeak Investment Advisors, L.P. See: Diversified Equity Fund.

EQUITY INCOME FUND

Barclays Global Fund Advisors, See: Diversified Equity Fund.

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

Westpeak Investment Advisors, L.P. See: Diversified Equity Fund.

QUANTITATIVE EQUITY FUND

Barclays Global Fund Advisors. See: Diversified Equity Fund.

Franklin Portfolio Associates LLC is a Massachusetts limited liability
company owned by Mellon Financial Corporation.

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

Jacobs Levy Equity Management, Inc. See: Diversified Equity Fund.

INTERNATIONAL SECURITIES FUND

Delaware International Advisers Limited is an indirect, wholly-owned
subsidiary of Lincoln National Corporation, a publicly traded company.

Driehaus Capital Management, Inc. is controlled and wholly-owned by
Richard H. Driehaus.

Fidelity Management Trust Company is a wholly-owned subsidiary of FMR
Corp. Members of the Edward C. Johnson 3rd family are predominant owners of a
class of shares of common stock representing approximately 49% of the voting
power of FMR Corp.

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

Marvin A. Palmer Associates, Inc. is controlled and majority owned by
David F. Marvin and Stanley Palmer.

Mastholm Asset Management, LLC is a Washington limited liability company
that is controlled by the following members: Douglas R. Allen, Thomas M. Garr,
Robert L. Gernstetter, Joseph P. Jordan, Arthur M. Tyson and Theordore J. Tyson.

Montgomery Asset Management LLC is a Delaware limited liability company
with majority ownership held by Commerzbank AG, a foreign banking organization.

Oechsle International Advisors is a Delaware limited liability company
that is controlled by its member manager, Oechsle Group, LLC, a Delaware limited
liability company. Oechsle Group, LLC is controlled by the following members: S.
Dewey Keesler, Stephen P. Langer, L. Sean Roche and Warren R. Walker.

Sanford C. Bernstein & Co., Inc. See: Diversified Equity Fund.

The Boston Company Asset Management, LLC is a wholly owned, indirect
subsidiary of Mellon Financial Corporation, a publicly held corporation.

57
<PAGE>

DIVERSIFIED BOND FUND

Lincoln Capital Management Company is over 50% owned by John Cole, Dave
Fowler, Jay Freedman, Parker Hall, Peter Knez, Kenneth Meyer and Alan Sebulsky.

Pacific Investment Management Company ("PIMCO") is a subsidiary of PIMCO
Advisors L.P. ("PIMCO Advisors"). The general partners of PIMCO Advisors are
PIMCO Partners, G.P. and PIMCO Advisors Holdings L.P. ("PAH"). PIMCO Partners,
G.P. is a general partnership between PIMCO Holding LLC, a Delaware limited
liability company and indirect wholly-owned subsidiary of Pacific Life Insurance
Company, and PIMCO Partners LLC, a California limited liability company
controlled by the current PIMCO Managing Directors and two former Managing
Directors of PIMCO. PIMCO Partners, G.P. is the sole general partner of PAH. It
is expected that on or about May 5, 2000, Allianz of America, Inc., ("A of A")
will acquire (the "Acquisition") majority ownership of PIMCO Advisors and its
subsidiaries, including PIMCO. After the closing of the Acquisition, A of A will
own approximately 70% of the outstanding partnership interests in PIMCO
Advisors. Pacific Life Insurance Company will retain its approximately 30%
interest in an indirect general partner of PIMCO Advisors. In connection with
the Acquisition, A of A will enter into a put/call arrangement for the possible
disposition of Pacific Life Insurance Company's indirect interest in PIMCO
Advisors.

Standish, Ayer & Wood, Inc. is organized as a Sub-chapter S Corporation
and is 100% owned by its twenty-five directors, with no director having more
than 25% ownership.

MULTISTRATEGY BOND FUND

Lazard Asset Management is a division of Lazard Freres & Co. LLC (LF&Co) a
broker/dealer which is a New York limited liability company.

Miller, Anderson & Sherrerd, LLP ("MAS") is a Pennsylvania limited
liability partnership. MAS is wholly-owned by indirect subsidiaries of Morgan
Stanley Dean Witter & Co., and is a division of Morgan Stanley Dean Witter
Investment Management.

Pacific Investment Management Company. See: Diversified Bond Fund.

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

REAL ESTATE SECURITIES FUND

AEW Capital Management, L.P. is a wholly-owned affiliate of Nvest
Companies, L.P. ("Nvest"). Nvest is a publicly held limited partnership.
Metropolitan Life Insurance Company owns approximately 48% of Nvest. AEW Capital
Management, Inc., a wholly-owned subsidiary of Nvest Holdings, Inc., is the
general partner, and Nvest is the sole limited partner of AEW Capital
Management, L.P.

Cohen & Steers Capital Management is a corporation whose two principals,
Robert H. Steers and Martin Cohen, control the corporation within the meaning of
the 1940 Act.

Security Capital Global Capital Management Group Incorporated is an
indirect, wholly-owned subsidiary of Security Capital, a publicly traded
corporation.

EMERGING MARKETS FUND

Foreign & Colonial Emerging Markets Limited is a wholly-owned subsidiary
of Hypo Foreign & Colonial Management (Holding) Limited ("HFCM"), the holding
company of the Foreign & Colonial Group of Fund managers. HFCM is controlled by
Bayerische Hypo-und Vereinsbank AG, the second largest commercial bank in
Germany.

58
<PAGE>

Limited, is controlled 55% by management and associated interests, and the
balance held by outside shareholders, with the largest single holding being 15%.

Sanford C. Bernstein & Co. Inc. See: Diversified Equity Fund.

Schroders Investment Management North America Limited is 100% owned by
Schroders plc, which is publicly traded on the London Stock Exchange.

TAX-MANAGED LARGE CAP FUND

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

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.

TAX EXEMPT BOND FUND

MFS Institutional Advisors, Inc. is an indirect subsidiary of and is
controlled by Sun Life Assurance Company of Canada (US), a mutual insurance
company.

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

SHORT TERM BOND FUND

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

STW Fixed Income Management Ltd. is a Bermuda exempted company. William H.
Williams III is the sole shareholder.

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.

59
<PAGE>

EQUITY I FUND

Alliance Capital Management L.P. See: Diversified Equity Fund.

Barclays Global Fund Advisors. See: Diversified Equity Fund.

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

Jacobs Levy Equity Management Inc. See: Diversified Equity Fund.

Marsico Capital Management, LLC. See: Diversified Equity Fund

Peachtree Asset Management. See: Diversified Equity Fund.

Sanford C. Bernstein & Co., Inc. See: Diversified Equity Fund.

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

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

Turner Investment Partners Inc. See: Diversified Equity Fund.

Westpeak Investment Advisors, L.P. See: Diversified Equity Fund.

EQUITY II FUND

CapitalWorks Investment Partners, LLC. See: Special Growth Fund.

Delphi Management, Inc. See: Special Growth Fund.

Fiduciary International, Inc. See: Special Growth Fund.

GlobeFlex Capital, L.P. See: Special Growth Fund.

Jacobs Levy Equity Management Inc. See: Diversified Equity Fund.

Sirach Capital Management, Inc. See: Special Growth Fund.

Westpeak Investment Advisors, L.P. See: Diversified Equity Fund.

EQUITY III FUND

Barclays Global Fund Advisors. See: Diversified Equity Fund.

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

Westpeak Investment Advisors, L.P. See: Diversified Equity Fund.

EQUITY Q FUND

Barclays Global Fund Advisors. See: Diversified Equity Fund.

Franklin Portfolio Associates LLC. See: Quantitative Equity Fund.

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

60
<PAGE>

Jacobs Levy Equity Management Inc. See: Diversified Equity Fund.

INTERNATIONAL FUND

Delaware International Advisers Limited. See: International Securities
Fund.

Driehaus Capital Management Inc. See: International Securities Fund.

Fidelity Management Trust Company. See: International Securities Fund.

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

Marvin & Palmer Associates, Inc. See: International Securities Fund.

Mastholm Asset Management, LLC. See: International Securities Fund.

Montgomery Asset Management, LLC. See: International Securities Fund.

Oechsle International Advisors, LLC. See: International Securities Fund.

Sanford C. Bernstein & Co., Inc. See: Diversified Equity Fund

The Boston Company Asset Management, Inc. See: International Securities
Fund.

FIXED INCOME I FUND

Lincoln Capital Management Company. See: Diversified Bond Fund.

Pacific Investment Management Company. See: Diversified Bond Fund.

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

FIXED INCOME III FUND

Lazard Asset Management. See: Multistrategy Bond Fund.

Miller, Anderson & Sherrerd, LLP. See: Multistrategy Bond Fund.

Pacific Investment Management Company. See: Diversified Bond Fund.

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

61
<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.

62
<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.

STATE, MUNICIPAL NOTES AND TAX EXEMPT DEMAND NOTES.

MOODY'S:

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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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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.

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.

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

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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.

B2 -- Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial
conditions.

C1 -- Obligations for which there is an inadequate capacity to ensure
timely repayment.

D1 -- Obligations which have a high risk of default or which are currently
in default.

FITCH INVESTORS SERVICE, INC. ("FITCH"):

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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-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.

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.

Board -- The Board of Trustees of FRIC.

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.

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

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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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.

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.

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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

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

NYSE -- New York Stock Exchange

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

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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.