RUSSELL FRANK INVESTMENT CO, 497, 2000-11-14

RUSSELL FRANK INVESTMENT CO
497, 2000-11-14

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<PAGE>

FRANK RUSSELL INVESTMENT COMPANY

Russell Funds

PROSPECTUS

CLASS E SHARES:

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

TAX-MANAGED SMALL CAP FUND

OCTOBER 31, 2000

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

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
Risk/Return Summary........................................................ 1
Investment Objective, Principal Investment Strategies and Principal
Risks................................................................... 1
Performance.............................................................. 3
Fees and Expenses........................................................ 4
Summary Comparison of the Funds............................................ 5
Investment Objective and Principal Investment Strategies................... 6
Risks...................................................................... 10
Management of the Funds.................................................... 12
The Money Managers......................................................... 13
Dividends and Distributions................................................ 14
Taxes...................................................................... 14
How Net Asset Value is Determined.......................................... 15
Distribution and Shareholder Servicing Arrangements........................ 16
How to Purchase Shares..................................................... 16
Exchange Privilege......................................................... 18
How to Redeem Shares....................................................... 19
Payment of Redemption Proceeds............................................. 19
Written Instructions....................................................... 20
Account Policies........................................................... 21
Financial Highlights....................................................... 22
Money Manager Information.................................................. 23
</TABLE>
<PAGE>

RISK/RETURN SUMMARY

INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND PRINCIPAL RISKS

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

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

Principal The Tax-Managed Large Cap Fund invests primarily in equity
Investment securities of large capitalization US companies, as
Strategies represented by the S & P 500(R) index, although the Fund may
invest a limited amount in non-US firms from time to time. The
Fund generally invests in companies with a market
capitalization of at least $4 billion. The Fund generally
pursues a market-oriented style of security selection.
Managers select securities from the broad equity market rather
than focusing on the growth or value segments of the market.
As a result, the Fund holds securities representing a broad
cross section of companies and industries.

The Fund seeks to realize capital growth while minimizing
shareholder tax consequences arising from the Fund's portfolio
management activities. The Fund attempts to do this through
the realization of returns as capital gains and not as
investment income under US tax laws. The Fund also attempts to
minimize its realization of capital gains and offset any such
realization of capital gains with capital losses. The Fund
intends to be fully invested at all times.

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

TAX-MANAGED SMALL CAP FUND

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

Principal The Tax-Managed Small Cap Fund invests primarily in equity
Investment securities of US companies, although the Fund may invest a
Strategies limited amount in non-US firms from time to time. The Fund
invests primarily in companies with market capitalizations of
between $4 billion and $78 million. The Fund generally pursues
a market-oriented style of security selection. Managers select
securities from the broad equity market rather than focusing
on the growth or value segments of the market. As a result,
the Fund holds securities representing a broad cross section
of companies and industries.

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<PAGE>

US tax laws. The Fund also attempts to minimize its
realization of capital gains and offset any such realization
of capital gains with capital losses. The Fund intends to be
fully invested at all times.

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

2
<PAGE>

PERFORMANCE

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

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

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

Past performance is no indication of future results.

Tax-Managed Large Cap Fund

Annual Total Returns*
(for the years ended December 31)
Class S

[GRAPH APPEARS HERE]

YEAR PERCENTAGE
---- ----------
1997 31.73%
1998 32.08%
1999 16.57%

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

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

<TABLE>
<CAPTION>
Average Annual Total Returns Since
For the Periods Ended December 31, 1999 1 Year Inception*
--------------------------------------- ------ ----------
<S> <C> <C>
Tax-Managed Large Cap Fund Class S........................ 16.57% 26.87%
S&P 500 Composite Stock Price Index....................... 21.14 27.70
</TABLE>
---------------------
* The Tax-Managed Large Cap Fund commenced operations on October 7, 1996.

3
<PAGE>

TAX-MANAGED SMALL CAP FUND

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

FEES AND EXPENSES

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

Shareholder Fees
(fees paid directly from your investment)

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

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

<TABLE>
<CAPTION>
Other Expenses
(including Total Net
Administrative Total Gross Annual
Fees and Annual Fund Fund
Advisory Shareholder Operating Fee Waivers and Operating
Fee* Servicing Fees)** Expense# Reimbursements Expenses
-------- ----------------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Class E Shares
Tax-Managed Large
Cap.................. 0.70% 0.40% 1.10% 0.00 % 1.10%
Tax-Managed Small
Cap+................. 0.98% 0.58% 1.56% (0.06)% 1.50%
</TABLE>
---------------------
* Each Fund may also pay, in addition to the fee set forth above, a fee
which compensates the Funds' advisor, Frank Russell Investment Management
Company (FRIMCo) for managing collateral which the Funds have received in
securities lending and certain other portfolio transactions which are not
treated as net assets of that Fund ("additional assets") in determining
the Fund's net asset value per share. The additional fee payable to FRIMCo
will equal an amount of up to 0.07% of each Fund's additional assets on an
annualized basis.

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

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

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

4
<PAGE>

Example

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

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

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

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

SUMMARY COMPARISON OF THE FUNDS

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

5
<PAGE>

INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES

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

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

Principal The Tax-Managed Large Cap Fund invests primarily in equity
Investment securities of large capitalization US companies, as
Strategies represented by the S&P 500 market index, although the Fund may
invest a limited amount in non-US firms from time to time. The
Fund generally invests in companies with a market
capitalization of at least $4 billion.

The Fund generally pursues a market-oriented style of security
selection. Managers select securities from the broad equity
market rather than focusing on the growth or value segments of
the market. As a result, the Fund holds securities
representing a broad cross section of companies and
industries. Security selection is based on quantitative
investment models which are mathematical formulas based on
statistical analyses. This style emphasizes investments in
large capitalization companies that, on a long-term basis,
appear to be undervalued relative to their growth prospects,
and may include both growth and value securities. Although it
is not an index fund, under normal market conditions, the Tax-
Managed Large Cap Fund will invest at least 65 percent of the
value of its total assets in securities that are included in
the S&P 500 market index.

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

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

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

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

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

If large shareholder redemptions occur unexpectedly, the Fund
could be required to sell portfolio securities resulting in
its realization of net capital gains. This could temporarily

6
<PAGE>

reduce the Fund's tax efficiency. Also, as the Fund matures,
it may hold individual securities that have appreciated so
significantly that it would be difficult for the Fund to sell
them without realizing net capital gains.

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

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

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

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

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

TAX-MANAGED SMALL CAP FUND

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

7
<PAGE>

The Fund generally pursues a market-oriented style of security
selection. Managers select securities from the broad equity
market rather than focusing on the growth or value segments of
the market. As a result, the Fund holds securities
representing a broad cross section of companies and
industries. Security selection is based on quantitative
investment models which are mathematical formulas based on
statistical analyses. This style emphasizes investments in
small capitalization companies that, on a long-term basis,
appear to be undervalued relative to their growth prospects,
and may include both growth and value securities. Under normal
market conditions, the Tax-Managed Small Cap Fund will invest
at least 65 percent of its total assets in securities that are
not included in the S&P 500 market index.

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

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

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

8
<PAGE>

Fund are inconsistent with its long-term strategy. For this
reason, the Fund will apply its general right to refuse any
purchases by rejecting purchase orders from investors whose
patterns of purchases and redemptions in the Fund is
inconsistent with the Fund's strategy.

9
<PAGE>

RISKS

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

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

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

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

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

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

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

10
<PAGE>

<TABLE>
<CAPTION>
Risk Associated With: Description Relevant Fund
--------------------- ----------- -------------
<C> <S> <C>
Exposing Liquidity By exposing its liquidity reserves Tax-Managed Large
Reserves to Equity to the equity market, principally Cap Tax-Managed
Markets by use of equity futures, a Fund's Small Cap
performance tends to correlate
more closely to the performance of
the market as a whole. Although
this increases a Fund's
performance if equity markets
rise, it reduces a Fund's
performance if equity markets
decline.

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

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

11
<PAGE>

MANAGEMENT OF THE FUNDS

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

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

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

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

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

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

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

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

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

. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of US Equity
Manager Research Department with Russell. Mr. Trittin has, jointly with
Mr. Ogard, primary responsibility for management of the Tax-Managed Large
Cap and Tax-Managed Small Cap Funds.

The aggregate annual rate of advisory and administrative fees, payable to
FRIMCo monthly on a pro rata basis, are the following percentages of each
Fund's average daily net assets: Tax-Managed Large Cap Fund, 0.75% and Tax-
Managed Small Cap Fund, 1.03%. Of these aggregate amounts 0.05% is
attributable to administrative services. FRIMCo has contractually agreed to
waive, at least until October 31, 2001, a portion of its 1.03% combined
advisory and administrative fees for the Tax-Managed Small Cap Fund, up to the
full amount of those fees for Fund-level expenses that exceed 1.25% of the
average daily net assets of that Fund on an annual basis. Additionally, FRIMCo
has agreed to reimburse the Tax-Managed Small Cap Fund, at least until

12
<PAGE>

October 31, 2001, for all remaining Fund-level expenses that exceed 1.25% of
the average daily net assets of the Tax-Managed Small Cap Fund on an annual
basis.

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

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

THE MONEY MANAGERS

Each Fund allocates its assets among the money managers listed under "Money
Manager Information" at the end of this Prospectus. FRIMCo, as the Funds'
advisor, may change the allocation of a Fund's assets among money managers at
any time. The Funds received an exemptive order from the Securities and
Exchange Commission (SEC) that permits a Fund to engage or terminate a money
manager at any time, subject to the approval by the Fund's Board of Trustees
(Board), without a shareholder vote. A Fund notifies its shareholders within
60 days of when a money manager begins providing services. The Funds select
money managers based primarily upon the research and recommendations of FRIMCo
and Russell. FRIMCo and Russell evaluate quantitatively and qualitatively the
money manager's skills and results in managing assets for specific asset
classes, investment styles and strategies. Short-term investment performance,
by itself, is not a controlling factor in any Fund's selection or termination
of a money manager.

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

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

Geewax, Terker & Company manages the Tax-Managed Small Cap Fund. John Julius
Geewax is the portfolio manager responsible for the management of the Fund.
Mr. Geewax is a graduate of the University of

13
<PAGE>

Pennsylvania and has earned a J.D. from the University of Pennsylvania as well
as an MBA and a PhD from the Wharton School of the University of Pennsylvania.
Mr. Geewax co-founded the firm in 1982. He is currently a general partner and
portfolio manager responsible for research and development and trading
oversight for all of the firm's investment services.

DIVIDENDS AND DISTRIBUTIONS

Income Dividends

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

<TABLE>
<CAPTION>
Declared Payable Funds
-------- ------- -----
<S> <C> <C>
Annually............................... Mid-December Tax Managed Large Cap and
Tax-Managed Small Cap Funds
</TABLE>

Capital Gains Distributions

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

Buying a Dividend

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

Automatic Reinvestment

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

TAXES

In general, distributions from a Fund are taxable to you as either ordinary
income or capital gains. This is true whether you reinvest your distributions
in additional shares of the Fund or receive them in cash. Any long-

14
<PAGE>

term capital gains distributed by a Fund are taxable to you as long-term
capital gains no matter how long you have owned your shares. Every January,
you will receive a statement that shows the tax status of distributions you
received for the previous year. Distributions declared in December but paid in
January are taxable as if they were paid in December.

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

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

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

If you are a corporate investor, a portion of the dividends from net
investment income paid by the Tax-Managed Large Cap Fund or Tax-Managed Small
Cap Fund will generally qualify, in part, for the corporate dividends-received
deduction. However, the portion of the dividends so qualified depends on the
aggregate qualifying dividend income received by each Fund from domestic (US)
sources. Certain holding period and debt financing restrictions may apply to
corporate investors seeking to claim the deduction. You should consult your
tax professional with respect to the applicability of these rules.

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

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

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

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

HOW NET ASSET VALUE IS DETERMINED

Net Asset Value Per Share

The net asset value per share is calculated for Shares of each class of each
Fund on each business day on which Shares are offered or redemption orders are
tendered. For all Funds, a business day is one on which the New York Stock
Exchange (NYSE) is open for trading. The NYSE is not open on national holidays
or Good

15
<PAGE>

Friday. All Funds determine net asset value at 4:00 p.m. Eastern Time or the
close of the NYSE, whichever is earlier.

Valuation of Portfolio Securities

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

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

DISTRIBUTION AND SHAREHOLDER
SERVICING ARRANGEMENTS

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

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

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

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

HOW TO PURCHASE SHARES

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

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

16
<PAGE>

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

Paying for Shares

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

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

Offering Dates and Times

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

Order and Payment Procedures

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

By Mail

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

By Federal Funds Wire

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

By Automated Clearing House ("ACH")

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

17
<PAGE>

Automated Investment Program

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

Three-Day Settlement Program

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

EXCHANGE PRIVILEGE

By Mail or Telephone

Through your Financial Intermediary, you may exchange Shares of any Fund you
own for shares of any other Fund on the basis of the current net asset value
per share at the time of the exchange. Shares of a Fund offered by this
Prospectus may only be exchanged for Shares of a Fund offered by FRIC through
another Prospectus under certain conditions and only in states where the
exchange may be legally made. For additional information, including
Prospectuses for other Funds, contact your Financial Intermediary.

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

An exchange involves the redemption of Shares, which is treated as a sale
for income tax purposes. Thus, capital gain or loss may be realized. Please
consult your tax adviser for more information. Shares to be acquired will be
purchased when the proceeds from the redemption become available (up to seven
days from the receipt of the request) at the next net asset value per share
calculated after the Funds received the exchange request in good order.

In-Kind Exchange of Securities

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

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

18
<PAGE>

The price at which the exchange will take place will depend upon the
relative net asset value of the Shares purchased and securities exchanged.
Securities accepted by a Fund will be valued in the same way the Fund values
its assets. Any interest earned on the securities following their delivery to
the Funds and prior to the exchange will be considered in valuing the
securities. All interest, dividends, subscription or other rights attached to
the securities becomes the property of the Fund, along with the securities.
Please contact your Financial Intermediary for further information.

HOW TO REDEEM SHARES

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

Redemption Dates and Times

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

By Mail or Telephone

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

Omnibus Accounts

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

PAYMENT OF REDEMPTION PROCEEDS

By Check

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

19
<PAGE>

By Wire

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

WRITTEN INSTRUCTIONS

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

A description of the request
The name of the Fund(s)
The class of shares, if applicable
The account number(s)
The amount of money or number of shares being purchased, exchanged,
transferred or redeemed
The name(s) on the account(s)
The signature(s) of all registered account owners
For exchanges, the name of the Fund you are exchanging into
Your daytime telephone number

Signature Requirements Based on Account Type

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

Signature Guarantee

The Funds reserve the right to require a signature guarantee under certain
circumstances. A signature guarantee verifies the authenticity of your
signature. You should be able to obtain a signature guarantee from a

20
<PAGE>

bank, broker, credit union, savings association, clearing agency, or
securities exchange or association, but not a notary public. Call your
financial institution to see if it has the ability to guarantee a signature.

ACCOUNT POLICIES

Third Party Transactions

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

Redemption In-Kind

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

Stale Checks

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

21
<PAGE>

FINANCIAL HIGHLIGHTS

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

Tax-Managed Large Cap Fund-Class S Shares

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
2000* 1999 1998 1997 1996**
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 21.17 $ 18.26 $ 13.90 $ 10.61 $ 10.00
--------- -------- -------- -------- --------
Income From Operations
Net investment income
(a)...................... .04 .14 .10 .08 .03
Net realized and
unrealized gain (loss)... (.44) 2.88 4.35 3.28 .61
--------- -------- -------- -------- --------
Total income from
operations............. (.40) 3.02 4.45 3.36 .64
--------- -------- -------- -------- --------
Distributions
From net investment
income................... (.01) (.11) (.08) (.07) (.03)
From net realized gain.... -- -- (.01) -- --
--------- -------- -------- -------- --------
Total distributions..... (.01) (.11) (.09) (.07) (.03)
--------- -------- -------- -------- --------
Net Asset Value, End of
Period..................... $ 20.76 $ 21.17 $ 18.26 $ 13.90 $ 10.61
========= ======== ======== ======== ========
Total Return (%)(b)......... (1.91) 16.57 32.08 31.73 6.10
Ratios/Supplemental Data:
Net Assets, end of period
(in thousands)........... 625,720 566,001 305,452 109,735 19,931
Ratios to average net assets
(%)(c):
Operating expenses, net... .86 .85 .99 1.00 1.00
Operating expenses,
gross.................... .86 .85 .99 1.08 2.83
Net investment income..... .54 .71 .61 .92 1.62
Portfolio turnover rate
(%)...................... 9.14 48.35 50.59 39.23 8.86
</TABLE>
---------------------
* For the four months ended April 30, 2000 (Unaudited).
** For the period October 7, 1996 (commencement of operations) to December
31, 1996.
(a) For the periods subsequent to December 31, 1997, average month-end shares
outstanding were used for this calculation.
(b) Periods less than one year are not annualized.
(c) The ratios for periods less than one year are annualized.

22
<PAGE>

MONEY MANAGER INFORMATION

The money managers have no affiliations with the Funds or the Funds' service
providers other than their management of Fund assets. Each money manager has
been in business for at least three years, and is principally engaged in
managing institutional investment accounts. These managers may also serve as
managers or advisers to other Funds in FRIC, or to other clients of FRIMCo or
of Frank Russell Company, including Frank Russell Company's wholly owned
subsidiary, Frank Russell Trust Company.

TAX-MANAGED LARGE CAP FUND

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

TAX-MANAGED SMALL CAP FUND

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

WHEN CONSIDERING AN INVESTMENT IN THE FUNDS, DO NOT RELY ON ANY INFORMATION
UNLESS IT IS CONTAINED IN THIS PROSPECTUS OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION. THE FUNDS HAVE NOT AUTHORIZED ANYONE TO ADD ANY
INFORMATION OR TO MAKE ANY ADDITIONAL STATEMENTS ABOUT THE FUNDS. THE FUNDS
MAY NOT BE AVAILABLE IN SOME JURISDICTIONS OR TO SOME PERSONS. THE FACT THAT
YOU HAVE RECEIVED THIS PROSPECTUS SHOULD NOT, IN ITSELF, BE TREATED AS AN
OFFER TO SELL FUND SHARES TO YOU. CHANGES IN THE AFFAIRS OF THE FUNDS OR IN
THE FUNDS' MONEY MANAGERS MAY OCCUR AFTER THE DATE ON THE COVER PAGE OF THIS
PROSPECTUS. THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED TO REFLECT ANY
MATERIAL CHANGES TO THE INFORMATION IT CONTAINS.

23
<PAGE>

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

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

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

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

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

You can review and copy information about the Funds (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
You can obtain information on the operation of the Public Reference Room by
calling the Commission at 1-202-942-8090. Reports and other information about
the Funds are available on the EDGAR Database on the Commission's Internet
website http://www.sec.gov. Copies of this information may be obtained, after
paying a duplication fee, by electronic request at the following E-mail address:
[email protected], or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.

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

Distributor: Russell Fund Distributors, Inc.
SEC File No. 811-3153
36-08-095 (10/00)
<PAGE>

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

STATEMENT OF ADDITIONAL INFORMATION
October 31, 2000

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

This Statement of Additional Information ("Statement") is not a prospectus;
this Statement should be read in conjunction with the Funds' Prospectuses.
Prospectuses may be obtained without charge by telephoning or writing FRIC at
the number or address shown above.

Capitalized terms not otherwise defined in this Statement shall have the
meanings assigned to them in the Prospectuses.

This Statement incorporates by reference FRIC's Annual Reports to
Shareholders for the year ended December 31,1998 and FRIC's Semi-Annual Reports
Reports to Shareholders for the four months ended April 30, 2000. Copies of the
Funds' Annual Report and Semi-Annual Reports and Semi-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 (Classes C and S)
Equity T Fund) November 15, 2000 (Class E)
Tax-Managed Small Cap Fund December 1, 1999 May 1, 2000 (Classes C and S)
November 15, 2000 (Class E)
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>
<PAGE>

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 IFund 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.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Fund Class C Class E Class S Class I Class Y
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------
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 X
------------------------------------------------------------------------------------------------------------------------------------
Tax-Managed Small Cap X 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
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
Page
<S> <C>
STRUCTURE AND GOVERNANCE..................................................................................... 1
Organization and Business History......................................................................... 1
Shareholder Meetings...................................................................................... 1
Controlling Shareholders.................................................................................. 1
Trustees and Officers..................................................................................... 10

OPERATION OF FRIC............................................................................................ 16
Service Providers......................................................................................... 16
Consultant................................................................................................ 16
Advisor and Administrator................................................................................. 16
Money Managers............................................................................................ 18
Distributor............................................................................................... 19
Custodian and Portfolio Accountant........................................................................ 19
Transfer and Dividend Disbursing Agent.................................................................... 20
Order Placement Designees................................................................................. 20
Independent Accountants................................................................................... 20
Code of Ethics............................................................................................ 20
Plan Pursuant to Rule 18f-3............................................................................... 22
Distribution Plan......................................................................................... 23
Shareholder Services Plan................................................................................. 24
Fund Expenses............................................................................................. 25
Purchase and Redemption of Fund Shares.................................................................... 26
Valuation of Fund Shares.................................................................................. 26
Valuation of Portfolio Securities......................................................................... 27
Portfolio Transaction Policies............................................................................ 27
Portfolio Turnover Rate................................................................................... 28
Brokerage Allocations..................................................................................... 28
Brokerage Commissions..................................................................................... 29
Yield and Total Return Quotations......................................................................... 31

INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS.................................................... 32
Investment Restrictions................................................................................... 32
Investment Policies....................................................................................... 35
Certain Investments....................................................................................... 39

TAXES........................................................................................................ 55

MONEY MANAGER INFORMATION.................................................................................... 59

RATINGS OF DEBT INSTRUMENTS.................................................................................. 65
</TABLE>
<PAGE>

STRUCTURE AND GOVERNANCE

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

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

FRIC is authorized to issue Shares of beneficial interest, and may divide the
Shares into two or more series, each of which evidences a pro rata ownership
interest in a different investment portfolio -- a "Fund." Each Fund is a
separate trust under Massachusetts law. The Trustees may, without seeking
shareholder approval, create additional Funds at any time. The amended Master
Trust Agreement provides that shareholders may be required to redeem their
Shares at any time (1) if the Trustees determine in their sole discretion that
failure to so redeem may have material adverse consequenses to the Shareholders
of FRIC or of any Fund or (2) upon such other conditions as may from time to
time be determined by the Trustees and set forth in the Prospectus with respect
to the maintenance of shareholder accounts of a minimum amount.

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.

Under certain unlikely circumstances, as is the case with any Massachusetts
business trust, a shareholder of a Fund may be held personally liable for the
obligations of the Fund. The Master Trust Agreement provides that shareholders
shall not be subject to any personal liability for the acts or obligations of a
Fund and that every written agreement, obligation or other undertaking of the
Funds shall contain a provision to the effect that the shareholders are not
personally liable thereunder. The amended Master Trust Agreement also provides
that FRIC shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of a Fund and satisfy any judgment
thereon. Thus, the risk of any shareholder incurring financial loss beyond his
investment on account of shareholder liability is limited to circumstances in
which a Fund itself would be unable to meet its obligations.

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

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

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

At September 29, 2000, the following shareholders owned 5% or more of any Class
of any Fund's Shares:

Diversified Bond Fund Class C - National Financial Services Co. CU, One
Financial Center, Attn: Mutual Funds Dept. 5/th/ Floor, 200 Liberty Street,
New York, NY 10281, 59.70%, 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,
17.44%, record; Maltrust & Co., c/o Eastern Bank & Trust/Gibraltar, Attn:
Retirement Plan Services 3/rd/ Floor, 217 Essex Street, Salem, MA 01970-
3728, 9.25%, record; Metropolitan National Bank, Trustee for William Gary
Darwin MD, PA PS, P.O. Box 8010, Little Rock, AR 72203-8010, 6.73%, record;
Metropolitan National Bank, Trustee for Bowie Cass Electric Co-op
Retirement Plan, P.O. Box 8010, Little Rock, AR 72203-8010, 6.73%, record.

Diversified Bond Fund Class S - Balanced Strategy Fund, c/o Frank Russell
Investment Company, P.O. Box 1591, Tacoma, WA 98401-1591, 14.78%, record;
Citizens Bank, Saginaw, Attn: Trust/Investment Department, 101 North
Washington, Saginaw, MI 48607-1206, 14.48%, record.

Diversified Equity Fund Class C - National Financial Services Co. CU, For
the Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
25.76%, 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, 26.05%, record; Citizens First Savings Bank
Trust Department, Attn. Anne Rancilio, 525 Water Street, Port Huron, MI
48060-5434, 9.22%, record.

Diversified Equity Fund Class S - Equity Balanced Strategy Fund, c/o Frank
Russell Investment Co., P.O. Box 1591, Tacoma, WA 98401-1591, 5.23%,
record.

Emerging Markets Fund Class C - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
37.23%, record.

Emerging Markets Fund Class E - Junior Achievement, Inc. Retirement Plan,
1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 14.59%, record;
Security Trust Co., Trustee, Karr Tuttle Campbell Retirement Savings Plan,
2390 East Camelback Road, Suite 240, Phoenix,
<PAGE>

AZ 85016-3434, 11.46%, record; Citizens First Savings Bank Trust
Department, Attn. Anne Rancilio, 525 Water Street, Port Huron, MI 48060-
5434, 5.73%, record.

Emerging Markets Fund Class S - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
9.06%, 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, 6.87%, record; Var & Co., First Trust, N.A.,
Funds Accounting, P.O. Box 64482, St. Paul, MN 55164-0482, 5.06%, record.

Equity I Fund Class E - FM Co., Huntington National Bank, 7 Easton Oval
EA4E70, Columbus, OH 43219-0610, 22.67%, record; Northern Colorado Water
Conservancy Defined Benefit Plan, 1441 Wazee Street, Apt. 104, Denver, CO
80202-5952, 8.94%, record; Security Trust Co., Trustee, Karr Tuttle
Campbell Retirement Savings Plan, 2390 East Camelback Road, Suite 240,
Phoenix, AZ 85016-3434, 6.32%, record; Idaho Trust Co., A Division of
Wealthbank NA-R,, 608 Northwest Blvd., Ste. 240, Phoenix, AZ 85016-3434,
5.66%, record; Junior Achievement Inc., Retirement Plan, 1441 Wazee Street,
Apt. 104, Denver, CO 80202-5952, 5.33%, record.

Equity I Fund Class I - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn.
Mutual Funds Dept., 5th Floor, 200 Liberty Street, New York, NY 10281,
11.00%, record; Var & Co., First Trust, N.A., Funds Accounting, P.O. Box
64482, St. Paul, MN 55164-0482, 9.42%, 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, 6.53%,
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, 40.28%, record; US Bank NA Cust. for Daily
Valued Retirement Program, First Trust Center (SPEN 0402), 180 East 5th
Street, St. Paul, MN 55101-2667, 7.88%, record; Junior Achievement, Inc.
Retirement Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 6.76%,
record.

Equity II Fund Class I - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5th Floor, 200 Liberty Street, New York, NY 10281,
12.99%, 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, 8.98%,
<PAGE>

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 E - Junior Achievement, Inc. Retirement Plan, 1441
Wazee Street, Apt. 104, Denver, CO 80202-5952, 21.38%, record; Security
Trust Co., Trustee, Karr Tuttle Campbell Retirement Savings Plan, 2390 East
Camelback Road, Suite 240, Phoenix, AZ 85016-3434, 20.85%, record; FM Co.,
Huntington National Bank, 7 Easton Oval EA4E70, Columbus, OH 43219-6010,
10.18%, record; Advisors Trust Company Master IRA, 1441 Wazee Street, Apt.
104, Denver, CO 80202-5952, 6.25%, record.

Equity III Fund Class I - Var & Co., First Trust, N.A., Funds Accounting,
P.O. Box 64482, St. Paul, MN 55164-0482, 8.90%, record; Shaw's
Supermarkets, Inc., Super SVGS & Prot-Max Growth, P.O. Box 600, 140 Laurel
Street, East Bridgewater, MA 02333-0600, 7.83%, record; Var & Co., First
Trust, N.A., Funds Accounting, P.O. Box 64482, St. Paul, MN 55164-0482,
7.59%, 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, 5.98%, record; Carey & Co., c/o Huntington
Trust Co., 7 Easton Oval EA4E70, Columbus, OH 43219-6010, 5.24%, record;
JATO Reinv., National City Bank of Minneapolis, Attn. Trust Dept., P.O. Box
E 1919, Minneapolis, MN 55480, 5.06%, 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 - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
19.47%; 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,
7.89%, 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, 5.66%, 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,
24.71%, record; The Citizens Bank of Batesville Employee 401(k) Profit
Sharing Plan, 3/rd/ & College Street, Batesville, AR 72501, 12.34%, record;
Citizens Bank of Batesville, Trustee, White River Medical Center, Inc.
401(k) Plan, 3/rd/ & College Streets, Batesville, AR 72503, 10.70%, record;
Carey & Co., Huntington National Bank, Attn: Mutual Funds MC1024, P.O. Box
1558, Columbus, OH 43216-1558, 7.93%, record; Bowie Cass Electric Co-op
401(k), 111 Center Street, Little Rock, AR 72201-4402, 7.50%, record;
Micnan, Inc., 401(k) PSP, 1646 S. Arlington Street, Akron, OH 44306-4285,
5.21%, record.
<PAGE>

Equity Income Fund Class S - REINCO, Hawaiian Trust Company, Ltd., Mutual
Funds Dept. 741, P.O. Box 1930, Honolulu, HI 96805-1930, 5.41%, 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, 5.36%, record.

Equity Q Fund Class E - FM Co., Huntington National Bank, 7 Easton Oval
EA4E70, Columbus, OH, 43219-6010, 17.36%, record; Security Trust Co.,
Trustee, Karr Tuttle Campbell Retirement Savings Plan, 2390 East Camelback
Road, Suite 240, Phoenix, AZ 85016-3434, 16.39%, record; Idaho Trust
Company A Division of Wealthbank NA-R, 608 Northwest Blvd., Ste. 300, Coeur
d'Alene, ID 83814-2174, 9.83%, record; Junior Achievement, Inc. Retirement
Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 9.07%, record;
Advisors Trust Company FBO, Building Industry Associates PSP, 1441 Wazee
Street, Apt. 104, Denver, CO 80202-5952, 5.76%, record.

Equity Q Fund Class I - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
14.90%; Var & Co., First Trust, N.A., Funds Accounting, P.O. Box 64482, St.
Paul, MN 55164-0482, 10.39%, 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, 5.43%, 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 - Junior Achievement, Inc., Retirement Plan,
1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 19.03%, record; FM Co.,
Huntington National Bank, 7 Easton Oval EA4E70, Columbus, OH 43219-6010,
14.65%, record; Northern Colorado Water Conservancy, Defined Benefit Plan,
1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 13.59%, record.

Fixed Income I Fund Class I - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
10.71%; Var & Co., First Trust, N.A., Funds Accounting, P.O. Box 64482, St.
Paul, MN 55164-0482, 7.46%, record; Shaw's Supermarkets Inc., Super Sgvs. &
Port-Ret Acct., P.O Box 600 140 Laurel Street, East Bridgewater, MA 02333-
0600, 5.32%, 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, 5.03%, 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 E - Advisors Trust Company FBO Building
Industry Associates Profit Sharing Plan, 1441 Wazee Street, Apt. 104,
Denver, CO 80202-5952, 15.93%, record; Ear, Nose and Throat Physicians of
North Mississippi, PA 401(k) Profit Sharing Plan -- Aggressive, P.O. Box,
2180, Tupelo, MS 38803-2180, 15.09%, record; Fusion Ceramics, Inc. Profit
Sharing Plan, P.O. Box 127, Carrollton, OH 44615-0127, 12.52%, record;
Tupelo Anesthesia Group PA 401(k), PSP & TR, P.O. Box 3294, Tupelo, MS
38803-3294, 12.10%. record; National 4-H Council, 1441 Wazee Street, Apt.
104, Denver, CO 80202-5952, 9.21%, record; Peter Hauber & Thomas Wolfgang
Hauber Trustees, Peter Hauber 1992 CRUT, 1441 Wazee Street, Apt. 104,
Denver, CO 80202-5952, 8.08%, record; Peter Hauber & Thomas Wolfgang Hauber
Trustees, Brigitte A. Hauber 1992 CRUT, 1441 Wazee Street, Apt. 104,
Denver, CO 80202-5952, 7.06%, record; Idaho Trust Company A Division of
Wealthbank NA-R, 608 Northwest Blvd., Ste. 300, Coeur d'alene, ID
83814-2174, 6.02%, record; Ear, Nose and Throat Physicians of North
Mississippi, PA 401(k) Profit Sharing Plan -- Balanced, P.O. Box, 2180,
Tupelo, MS 38803-2180, 5.26%, record.

Fixed Income III Fund Class I - Var & Co., First Trust, N.A., Funds
Accounting, P.O. Box 64482, St. Paul, MN 55164-0482, 13.81%, record;
National Financial Services Co. CU, For the Exclusive Benefit of our
Customers, One World Financial Center, Attn. Mutual Funds Dept., 5/th/
Floor, 200 Liberty Street, New York, NY 10281, 10.74%, record.
<PAGE>

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

International Fund Class E - Junior Achievement, Inc. Retirement Plan, 1441
Wazee Street, Apt. 104, Denver, CO 80202-5952, 13.99%, record; FM Co.,
Huntington National Bank, 7 East Oval EA4E70, Columbus, OH 43219-6010,
7.47%, record; Idaho Trust Company A Division of Wealthbank NA-R, 608
Northwest Blvd., Ste. 300, Coeur d'Alene, ID 83814-2174, 6.90%, record;
Northern Colorado Water Conservancy Defined Benefit Plan, 1441 Wazee
Street, Apt. 104, Denver, CO 80202-5952, 6.82%, record; Advisors Trust
Company FBO Building Industry Associates Profit Sharing Plan, 1441 Wazee
Street, Apt. 104, Denver, CO 80202-5952, 6.03%, record; The Fund for
American Studies, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952,
5.92%, record.

International Fund Class I - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
13.18%, record, Var & Co., First Trust, N.A., Funds Accounting, P.O. Box
64482, St. Paul, MN 55164-0482, 9.74%, 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, 8.16%,
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 C - National Financial Services Co. CU,
For the Exclusive Benefit of our Customers, One World Financial Center,
Attn. Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY
10281, 32.29%, record.

International Securities Fund Class E - Citizens First Savings Bank Trust
Department, Attn. Anne Rancilio, 525 Water Street, Port Huron, MI 48060-
5434, 13.82%, record; Maltrust & Co., c/o Eastern Bank & Trust/Gibraltar,
Attn: Retirement Plan Services 3/rd/ Floor, 217 Essex Street, Salem, MA
01970-3728, 8.39%, record; Zions First National Bank, Trustee, Tucker,
Sadler Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT 84130-0880,
5.86%, record.

International Securities Fund Class S - Balanced Strategy Fund, c/o Frank
Russell Investment Co., P.O. Box 1591, Tacoma, WA 98401-1591, 5.56%,
record; Aggressive Strategy Fund, c/o Frank Russell Investment Co., P.O.
Box 1591, Tacoma, WA 98401-1591, 5.33%, record; Equity Balanced Strategy
Fund, c/o Frank Russell Investment Co., P.O. Box 1591, Tacoma, WA 98401-
1591, 5.02%, record.

Multi-Strategy Bond Fund Class C - National Financial Services Co. CU, For
the Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
44.13%, 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, 12.04%, record; Micnan, Inc. 401(k) PSP, 1946 S. Arlington
Street, Akron, OH 44306-4285, 7.35%, record; Zions First National Bank,
Trustee, Tucker, Sadler Profit Sharing Plan, P.O. Box 30880, Salt Lake
City, UT 84130-0880, 5.38%, record.
<PAGE>

Multi-Strategy Bond Fund Class S - Balanced Strategy Fund, c/o Frank
Russell Investment Company, P.O. Box 1591, Tacoma, WA 98401-1591, 11.62%,
record; Aggressive Strategy Fund, c/o Frank Russell Investment Company,
P.O. Box 1591, Tacoma, WA 98401-1591, 9.38%, record.

Quantative Equity Fund Class C - National Financial Services Co. CU, For
the Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
25.29%, record.

Quantitative Equity Fund Class E - Citizens First Savings Bank Trust
Department, Attn. Anne Rancilio, 525 Water Street, Port Huron, MI 48060-
5434, 12.15%, record; Zions First National Bank, Trustee, Tucker, Sadler
Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT 84130-0880, 5.54%,
record.

Quantitative Equity Fund Class S - Equity Balanced Strategy Fund, c/o Frank
Russell Investment Company, P.O. Box 1591, Tacoma, WA 98401-1591, 5.13%,
record.

Real Estate Securities Fund Class C - National Financial Services Co. CU,
For the Exclusive Benefit of our Customers, One World Financial Center,
Attn: Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY
10281, 39.46%, record.

Real Estate Securities Fund Class E - Junior Achievement, Inc. Retirement
Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 14.13%, record;
FM Co., Huntington National Bank, 7 Easton Oval EA4E70, Columbus, OH 43219-
6010 8.18%%, record; Northern Colorado Water Conservancy Defined Benefit
Plan, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 7.12%, record.

Real Estate Securities Fund Class S - National Financial Services Co. CU,
For the Exclusive Benefit of our Customers, One World Financial Center,
Attn. Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY
10281, 15.28%, 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, 29.08%, record; Executive Mouldings, Inc., c/o Fred Gutnick,
2711 Wilkinson Boulevard, Charlotte, NC 28208-5619, 15.35%, record;
Donaldson, Lufkin, Jenrette Securities Corporation, Inc., FBO Margaret R.
Krystyniak, P.O. Box 2052, Jersey City, NJ 07303-2052, 11.03%, record;
Harris P. Baden and Gina K. Baden, JT TEN WROS, 1118 N. 26th, Tacoma, WA
98403-2942, 6.90%, record; Donaldson, Lufkin, Jenrette Securities
Corporation, Inc., FBO Joan W. Terrill, Trustee, P.O. Box 2052, Jersey
City, NJ 07303-2052, 6.55%, record; National Financial Services Co. CU, For
the Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
5.26%, record.

Short Term Bond Fund Class E - Junior Achievement, Inc. Retirement Plan,
1441 Wazee, Street Apt. 104, Denver, CO 80202-5952, 36.78%, record;
Advisors Trust Company Master IRA, 1441 Wazee Street, Apt. 104, Denver, CO
80202-5952, 6.25%, record; Zions First National Bank, Trustee, Tucker,
Sadler Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT 84130-0880,
5.96%, record.
<PAGE>

Short Term Bond Fund Class S - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn.
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
14.17%, 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, 5.40%, record; Moderate Strategy Fund, c/o
Frank Russell Investment Co., P.O. Box 1591, Tacoma, WA 98401-1591, 5.34%,
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, 5.14%, record.

Special Growth Fund Class C - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/t/h Floor, 200 Liberty Street, New York, NY 10281,
24.61%, record.

Special Growth Fund Class E - Wabanc & Co., 717 Sprague Ave., Spokane, WA
99201-3922, 9.41%, record; Maltrust & Co., c/o Eastern Bank &
Trust/Gibraltar, Attn: Retirement Plan Services 3/rd/ Floor, 217 Essex
Street, Salem, MA 01970-3728, 8.91%, record; Bowie Cass Electric Co-op
401(k), 111 Center Street, Little Rock, AR 72201-4402, 7.65%, record;
Citizens First Savings Bank Trust Department, Attn. Anne Rancilio, 525
Water Street, Port Huron, MI 48060-5434, 6.87%, record; Metropolitan
National Bank, Trustee for Bowie Cass Electric Co-op Retirement Plan, P.O.
Box 8010, Little Rock, AR 72203-8010, 5.38%, 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, 5.54%, record.

Tax Exempt Bond Fund Class C - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
30.42%, record; Margaret M. Link, 520 Skyway Drive, Grand Junction, CO
81503-4401, 17.08%, 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, 14.18%,
record; Kathryn Clarke Thompson, 6123 Del Monte Drive, Houston, TX 77057-
3517, 12.50%, record; Carl Wayne Riggs, 12407 N 54/th/ Ave., Glendale, AZ
85304-1960, 9.09%, 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, 16.47%, record; Birgit Lane Revocable Trust U/D/T DTD May 14,
1993, 1441 Wazee Street, Suite 104, Denver, CO 80202-5952, 10.81%, record;
Arnold W. And Vicki F. Magasinn, Trustees of Magasinn Family Trust 10/5/87,
1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 9.40%, record; James T.
and Jane Anderson, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952,
7.16%, record; Linda F. West, Trustee, Anthony L. West 1993 Charitable
Remainder Unitrust, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952,
6.55%, record; Esther S. Akiyana, Trustee of Survivors Trust of Akiyama
Living Trust, 1441 Wazee Street, Apt. 104, Denver, CO 80202-5952, 6.30%,
record.

Tax Exempt Bond Class S - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
31.85%, record.

Tax Free Money Market Fund - Citizens Bank, Saginaw, Attn: Trust/Investment
Department, 101 North Washington, Saginaw, MI 48607-1206, 28.62%, record;
Niagara Mohawk Power Corporation, Attn. Ronald A. Ungerer, 300 Erie Blvd.,
Syracuse, NY 13202-4250, 14.66%, record; National Financial Services Co.
CU, For the Exclusive Benefit of our Customers, One World Financial Center,
Attn: Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY
10281, 7.79%, record.
<PAGE>

Tax-Managed Large Cap Fund Class C - National Financial Services Co. CU,
For the Exclusive Benefit of our Customers, One World Financial Center,
Attn: Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY
10281, 11.10%, record; Grand Bank Turstee, Wilson Trust U/A DTD 11/4/96,
Attn. Brian Sowns Sr. V.P., 126 Ottawwa Ave. NW., Grand Rapids, MI 49503-
2829, 9.67%, record; Raymond James & Associates Inc. FBO, Wedco Inc., P.O.
Box 1131, Reno, NV 89504-1131, 6.90%, 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, 21.09%, record;
National Financial Services Co. CU, For the Exclusive Benefit of our
Customers, One World Financial Center, Attn: Mutual Funds Dept., 5/th/
Floor, 200 Liberty Street, New York, NY 10281, 17.54%, record; Indiana
Trust 5, Indiana Trust & Investment Management Company, P.O. Box 5149,
Mishawaka, IN 46546-5149, 7.10%, record.

Tax-Managed Small Cap Fund Class C - National Financial Services Co. CU,
For the Exclusive Benefit of our Customers, One World Financial Center,
Attn: Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY
10281, 9.06%, record; Parks Anderson & Ginger E. Anderson TEN COM, 4617
252/nd/ Avenue S.E., Issaquah, WA 98029-7606, 5.32%, record.

Tax-Managed Small Cap Fund Class S - National Financial Services Co. CU,
For the Exclusive Benefit of our Customers, One World Financial Center,
Attn: Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY
10281, 26.42%, 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, 16.55%, record; Indiana Trust 5,
Indiana Trust & Investment Management Company, P.O. Box 5149, Mishawaka, IN
46546-5149, 5.11%, record.

At September 29, 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:

Tax Exempt Bond Fund - National Financial Services Co. CU, For the
Exclusive Benefit of our Customers, One World Financial Center, Attn:
Mutual Funds Dept., 5/th/ Floor, 200 Liberty Street, New York, NY 10281,
30.97%, record.
<PAGE>

Tax Free Money Market Fund - Citizens Bank, Saginaw, Attn: Trust/Investment
Department, 101 North Washington, Saginaw, MI 48607-1206, 28.62%, 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.
<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
July 3, 1932 Chairman and Chief Executive Officer, Russell Building
Emeritus since Management Company, Inc.; Director and Chairman of
909 A Street 1998. the Board, Frank Russell Company; Director and
Tacoma, Chairman of the Board, Frank Russell Investments
Washington (Delaware), Inc.; Chairman Emeritus/Director Emeritus,
98402-1616 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.
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
*Lynn L. Trustee, President Also currently: Trustee, President and Chief Executive
Anderson, and Chief Officer, Russell Insurance Funds; Director, Chief
Born April 22, Executive Officer Executive Officer and Chairman of the Board, Russell
1939 since 1987. Fund Distributors, Inc.; Trustee, Chairman of the Board,
President, The SSgA Funds (investment company);
909 A Street Director and Chairman of the Board, Frank Russell
Tacoma, Investment Management Company; Chairman of the
Washington Board, Frank Russell Trust Company; Director and
98402-1616 Chairman of the Board, Frank Russell Investment
Company PLC; Director, Frank Russell Investments
(Ireland) Limited, Frank Russell Investments (Cayman)
Ltd., and Frank Russell Investments (UK) Ltd.; March
1997 to December 1998, Director, Frank Russell
Company; June 1993 to November 1995, Director, Frank
Russell Company. Until September 1994, Director and
President, The Laurel Funds, Inc. (investment company).
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Paul E. Anderson, Trustee since 1984. Also currently: Trustee, Russell Insurance Funds. 1996 to
Born October 15, 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
Born December 1, emerging international markets for small corporations). 1991-
1919 1994, Adjunct Professor, International Marketing, University
of Washington, Tacoma, Washington.
PO Box 212
Gig Harbor,
Washington 98335
---------------------------------------------------------------------------------------------------------------
</TABLE>
<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.(Accounting Services); Trustee, WM
Group of Funds; Trustee, William H. & Mary M. Gates Charitable
P.O. Box 28338 Remainder 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.

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------

Name, Age, Position(s) Held During the
Address with Fund Past 5 Years
<S> <C> <C>
--------------------------------------------------------------------------------
</TABLE>
<PAGE>

TRUSTEE COMPENSATION TABLE

<TABLE>
<CAPTION>
ESTIMATED
AGGREGATE PENSION OR RETIREMENT 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>

* Received $8,000 for service as trustees on the Board of Trustees for the
Russell Insurance Funds.
<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 Management
Dividend Disbursing Agent 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.

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.

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),
<PAGE>

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:

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
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

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

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

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.

Effective September 29, 2000, FRIMCo has contractually agreed to waive, at least
until September 30, 2001, an amount up to the full amount of its aggregate 0.50%
combined advisory and administrative fees for the Short Term Bond Fund, and to
reimburse the Fund to the extent that Fund-level expenses exceed 0.52% of
average daily net assets of that Fund for the month of October 2000 and
thereafter on an annual basis.

Effective January 1, 2000, FRIMCo has contractually agreed to waive, at least
until September 30, 2001, a portion of its transfer agency fees for Class E
Shares of the Fixed Income III Fund to the extent that such fees exceed 0.05% of
the average daily net assets on an annual basis with respect to Class E of that
Fund.

Effective January 1, 2000, FRIMCo has contractually agreed to waive, at least
until September 30, 2001, a portion of its transfer agency fees for Class Y
Shares of each Institutional Fund to the extent that those fees would affect
"Other Expenses" of Class Y Shares of an Institutional Fund by one basis point
or more.

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.
<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 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
<PAGE>

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
Money Manager allowed? Fund allowed?
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEW Capital
Management, L.P. Yes No
-------------------------------------------------------------------------------------------------------------------
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 client
Management buy or sell orders
-------------------------------------------------------------------------------------------------------------------
The Boston Company Asset Yes Yes, but not in securities with pending or possible client
Management buy or sell orders, also, certain persons may not purchase
securities issued by financial services organizations
-------------------------------------------------------------------------------------------------------------------
CapitalWorks Investment Yes Yes, but not in securities with pending or possible client
Partners buy or sell orders
-------------------------------------------------------------------------------------------------------------------
Cohen & Steers Yes Yes, but not in securities with pending or possible client
buy or sell orders
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

<TABLE>
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
David J. Greene & Yes Yes
Company, LLC
----------------------------------------------------------------------------------------------------------------------
Delaware International Yes Yes, but not in securities with pending or possible client
Advisors Limited buy or sell orders
----------------------------------------------------------------------------------------------------------------------
Delphi Management, Inc. Yes Yes, but not in securities with pending or possible client
buy or sell orders
----------------------------------------------------------------------------------------------------------------------
Driehaus Capital Yes Yes, but not in securities with pending or possible client
Management, Inc. buy or sell orders unless the order is bunched with the
client's, the client is able to fully complete its own
order, and the order receives the average price for that day
----------------------------------------------------------------------------------------------------------------------
Equinox Capital 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
----------------------------------------------------------------------------------------------------------------------
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 Management Yes Cannot purchase securities on a restricted list
----------------------------------------------------------------------------------------------------------------------
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.
----------------------------------------------------------------------------------------------------------------------
Marvin & Palmer Yes Yes
Associates, Inc.
----------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

<TABLE>
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capital Management buy or sell orders
----------------------------------------------------------------------------------------------------------------------
Oechsle International Yes Yes, but not in securities with pending or possible client
Advisors, LLC buy or sell orders
----------------------------------------------------------------------------------------------------------------------
Pacific Investment Yes Yes, but not in securities with pending or possible client
Management Company buy or sell orders
----------------------------------------------------------------------------------------------------------------------
Peachtree Asset Yes Yes, but not in securities with pending or possible client
Management buy or sell orders
----------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------------
TimesSquare Capital Yes Yes, but not in securities with pending or possible client
Management, Inc. buy or sell orders
----------------------------------------------------------------------------------------------------------------------
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. On November 22, 1999, the Board amended the Rule 18f-3 Plan to
create Class A Shares for all Funds except the Institutional Funds and the money
market funds. On August 7, 2000 the Board amended the Rule 18f-3 Plan (i) to
create Class B Shares of all Funds except the Institutional Funds, (ii) to
create Class A Shares, Class C Shares, Class E Shares and Class S Shares of the
Select Growth Fund and Select Value Fund (neither of which are offered hereby),
(iii) to create Class E Shares of the Tax-Managed Small Cap Fund, Tax-Managed
Large Cap Fund, and Tax-Managed Global Equity Fund; (iv) to redesignate the
existing Class S Shares of the Money Funds as Class I Shares and create new
Class A and Class S Shares of the Money Funds; and (v) to permit holders of
Class B Shares who have paid the applicable contingent deferred sales charge to
exchange those Shares for A Shares of the same Fund without imposition of the
Class A front-end Sales Charge. On October 27, 2000 the Board amended the Rule
18f-3 Plan (i) to revoke the August 7, 2000 redesignation of the Class S Shares
of the Money Funds as Class I Shares, (ii) to revoke the creation of new Class S
Shares of the Money Funds, and (iii) to create Class I Shares and Class Y
Shares of the Select Growth Fund and Select Value Fund (neither of which are
offered hereby).

<PAGE>

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.

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
<PAGE>

of the Independent Trustees, or (b) a vote of the holders of the lesser of (a)
more than fifty percent (50%) of the outstanding Shares of the affected Class of
a Multiple Class Fund or (b) a 1940 Act Vote.

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

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

Class C
-------
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, November 22, 1999 and August 7, 2000.

Under the Service Plan, FRIC may compensate the Distributor or any investment
advisers, banks, broker-dealers, financial planners or other financial
institutions that are dealers of record or holders of record or that have a
servicing relationship with the beneficial owners or record holders of Shares of
the Class A, Class C or Class E, offering such Shares ("Servicing Agents"), for
any activities or expenses primarily intended to assist, support or service
their clients who beneficially own or are primarily intended to assist, support
or service their clients who beneficially own or are record holders of Shares of
FRIC's Class A, Class C or Class E. Such payments by FRIC will be calculated
daily and paid quarterly at a rate or rates set from time to time by the
Trustees, provided that no rate set by the Trustees for any Class A, Class C or
Class E Shares may exceed, on an annual basis, 0.25% of the average daily net
asset value of that Fund's Shares.

Among other things, the Service Plan provides that (1) the Distributor shall
provide to FRIC's officers and Trustees, and the Trustees shall review at least
quarterly, a written report of the amounts expended by it pursuant to the
Service Plan, or by Servicing Agents pursuant to Service Agreements, and the
purposes for which such expenditures were made; (2) the Service Plan shall
continue in effect for so long as its continuance is specifically approved at
least annually by the Trustees, and any material amendment thereto is approved
by a majority of the Trustees, including a majority of the Independent Trustees,
cast in person at a meeting called for that purpose; (3) while the Service Plan
is in effect, the selection and nomination of the Independent Trustees shall be
committed to the discretion of such Independent Trustees; and (4) the Service
Plan is terminable, as to a Multiple Class Fund's Shares, by a vote of a
majority of the Independent Trustees.
<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 of any Fund and no Class E Shares of the Tax-Managed Large Cap
or Tax-Managed Small Cap Funds were issued during the period shown.

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 and
October 31, 2000 with respect to certain other Funds.
<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.

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

VALUATION OF FUND SHARES. The net asset value per share is calculated for each
Fund Class on each business day on which Shares are offered or orders to redeem
are tendered. A business day is one on which the New York Stock Exchange
("NYSE") is open for trading, and for the Money Market, US Government Money
Market, and Tax Free Money Market Funds, any day on which both the NYSE is open
for trading and the Boston Federal Reserve Bank is open for business. Currently,
the NYSE is open for trading every weekday except New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. The Boston Federal Reserve Bank
is open for business Good Friday and every day the NYSE is open, except Columbus
Day and Veterans' Day.

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

The International, Emerging Markets, International Securities, Fixed Income I,
Diversified Bond, Fixed Income III and Multistrategy Bond Funds' portfolio
securities actively trade on foreign exchanges which may trade on Saturdays and
on days that the Funds do not offer or redeem Shares. The trading of portfolio
securities on foreign exchanges on such days may significantly increase or
decrease the net asset value of Fund Shares when the shareholder is not able to
purchase or redeem Fund Shares. Further, because foreign securities markets may
close prior to the time the Funds determine their net asset values, events
affecting the value of the portfolio securities occurring between the time
prices are determined and the time the Funds calculate their net asset values
may not be reflected in the calculations of net asset value unless FRIMCo
determines that a particular event would materially affect the net asset value.
<PAGE>

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.

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.
<PAGE>

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).

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
<PAGE>

transaction which is in excess of the amount of commissions another broker or
dealer would have charged for effecting that transaction. FRIMCo or the money
manager, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided -- viewed in terms of that particular transaction or in terms of all
the accounts over which FRIMCo or the money manager exercises investment
discretion. Any commission, fee or other remuneration paid to an affiliated
broker-dealer is paid in compliance with FRIC's procedures adopted in accordance
with Rule 17e-1 of the 1940 Act.

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

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

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

BROKERAGE COMMISSIONS. The Board reviews, at least annually, the commissions
paid by the Funds to evaluate whether the commissions paid over representative
periods of time were reasonable in relation to commissions being charged by
other brokers and the benefits to the Funds. Frank Russell Company maintains an
extensive database showing commissions paid by institutional investors, which is
the primary basis for making this evaluation. Certain services received by
FRIMCo or money managers attributable to a particular transaction may benefit
one or more other accounts for which investment discretion is exercised by the
money manager, or a Fund other than that for which the particular portfolio
transaction was effected. The fees of the money managers are not reduced by
reason of their receipt of such brokerage and research services.

During the last three years, the brokerage commissions paid by the 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 -- --
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
=========== =========== ===========
</TABLE>
<PAGE>

* 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%.
<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>
===================================================================================================================================
Salmon
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 5,554,262 9,401,493 5,490,050 1,851,452 441,819 883,034
Bond
==================================================================================================================================
</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:

<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.
<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 investors; (ii) the entry
into "repurchase agreements;" or (iii) the lending of portfolio securities in
the manner generally described in the Funds' Prospectuses'.
<PAGE>

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.
<PAGE>

INVESTMENT POLICIES.

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

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

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
US Tax
Tax- Short Government Free
Emerging Tax-Managed Managed Special Tax 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>
<PAGE>

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

________________________
(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
Fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and may
incur disposition costs in liquidating the security.
(2) Each of the International Securities, Diversified Bond and Multistrategy
Bond Funds may not invest more than one-third of its assets in these
contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. A Fund may
invest up to 5% of its net assets, represented by the premium paid, in call
and put options. A Fund may write a call or put option to the extent that
the aggregate value of all securities or other assets used to cover all such
outstanding options does not exceed 25% of the value of its net assets.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
<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 portfolio....... [x] [x] [x] [x] [x] [x]
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

_________________________

(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
Fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and may
incur disposition costs in liquidating the security.
(2) Each of the Emerging Markets and Short Term Bond Funds may not invest more
than one-third of its assets in these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. A Fund may
invest up to 5% of its net assets, represented by the premium paid, in call
and put options. A Fund may write a call or put option to the extent that
the aggregate value of all securities or other assets used to cover all such
outstanding options does not exceed 25% of the value of its net assets.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if, as
a result, more than one-third of its total assets would be so invested.
<PAGE>

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

_________________________

(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
Fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and
may incur disposition costs in liquidating the security.
(2) Each of the International, Fixed Income I and Fixed Income III Funds may
not invest more than one-third of its assets in these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. A Fund may
invest up to 5% of its net assets, represented by the premium paid, in call
and put options. A Fund may write a call or put option to the extent that
the aggregate value of all securities or other assets used to cover all
such outstanding options does not exceed 25% of the value of its net
assets. Only the Fixed Income III Fund currently intends to write or
purchase options on foreign currency.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.

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

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.
<PAGE>

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 by purchasing index options and index futures contracts in
amounts that expose the Liquidity Portfolio to the performance of the relevant
index. This will enable the Funds to hold cash while receiving a return on the
cash which is similar to that of equity securities.

Money Market Instruments. The Money Market, US Government Money Market and
------------------------
Tax Free Money Market Funds expect to maintain, but do not guarantee, a net
asset value of $1.00 per share for purposes of purchases and redemptions by
valuing their Fund Shares at "amortized cost." The Money Market Funds will
maintain a dollar-weighted average maturity of 90 days or less. Each of the
Funds will invest in securities maturing within 397 days or less at the time of
the trade date or such other date upon which a Fund's interest in a security is
subject to market action. Each money market fund will follow procedures
reasonably designed to assure that the prices so determined approximate the
current market value of the Funds' securities. The procedures also address such
matters as diversification and credit quality of the securities the Funds
purchase, and were designed to ensure compliance by the Funds with the
requirements of Rule 2a-7 of the 1940 Act. For additional information concerning
these Funds, refer to the respective Prospectuses.

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

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

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

CERTAIN INVESTMENTS.

Repurchase Agreements. A Fund may enter into repurchase agreements with the
---------------------
seller -- a bank or securities dealer -- who agrees to repurchase the securities
at the Fund's cost plus interest within a specified time (normally one day). The
securities purchased by a Fund have a total value in excess of the value of the
repurchase agreement and are held by the Custodian until repurchased. Repurchase
agreements assist a Fund in being invested fully while retaining "overnight"
flexibility in pursuit of investments of a longer-term nature. The Funds will
limit repurchase transactions to those member banks of the Federal Reserve
System and primary dealers in US government securities whose creditworthiness is
continually monitored and found satisfactory by the Funds' money managers.

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

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
<PAGE>

Term Bond, and Multistrategy Bond Funds, will dispose of, in a prudent and
orderly fashion, securities whose ratings drop below these minimum ratings. The
market value of debt securities generally varies inversely in relation to
interest rates.

The Emerging Markets, Fixed Income III, Short Term Bond, and Multistrategy
Bond Funds will invest in "investment grade" securities and may invest up to 5%
of its total assets (in the case of the Emerging Markets Fund), 10% of its total
assets (in the case of the Short Term Bond Fund), and 25% of its total assets
(in the case of the Fixed Income III and Multistrategy Bond Funds) in debt
securities rated less than BBB by S&P or Baa by Moody's, or in unrated
securities judged by the money managers of the Funds to be of comparable
quality. Lower rated debt securities generally offer a higher yield than that
available from higher grade issues. However, lower rated debt securities involve
higher risks, because they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuation in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial stress
which could adversely affect their ability to make payments of principal and
interest and increase the possibility of default. In addition, the market for
lower rated debt securities has expanded rapidly in recent years, and its growth
has paralleled a long economic expansion. The market for lower rated debt
securities is generally thinner and less active than that for higher quality
securities, which would limit the Funds' ability to sell such securities at fair
value in response to changes in the economy or the financial markets. While such
debt may have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposure to adverse conditions. The money
managers of the Fixed Income III, Multistrategy Bond, Short Term Bond, and
Emerging Markets Funds will seek to reduce the risks associated with investing
in such securities by limiting the Funds' holdings in such securities and by the
depth of their own credit analysis.

Securities rated BBB by S&P or Baa by Moody's may involve greater risks
than securities in higher rating categories. Securities receiving S&P's BBB
rating are regarded as having adequate capacity to pay interest and repay
principal. Such securities typically exhibit adequate investor protections but
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rating categories. For further description of the
various rating categories, see "Ratings of Debt Instruments."

Securities possessing Moody's Baa rating are considered medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security is judged adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact may have speculative characteristics as
well.

Risk Factors. The growth of the market for lower rated debt securities has
paralleled a long period of economic expansion. Lower rated debt securities may
be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities. The prices of low rated
debt securities have been found to be less sensitive to interest rate changes
than investment grade securities, but more sensitive to economic downturns,
individual corporate developments, and price fluctuations in response to
changing interest rates. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low rated debt securities defaults, a Fund
may incur additional expenses to seek financial recovery.

In addition, the markets in which low rated debt securities are traded are
generally thinner, more limited and less active than those for higher rated
securities. The existence of limited markets for particular securities may
diminish a Fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to changes in the economy or in the financial
markets and could adversely affect and cause fluctuations in the daily net asset
value of the Fund's Shares.

Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated securities may be more complex than for
issuers of other investment grade securities, and the ability of a Fund to
achieve its investment objectives may be more dependent on credit analysis than
would be the case if the Fund was investing only in investment grade securities.

The money managers of the Funds may use ratings to assist in investment
decisions. Ratings of debt securities represent a rating agency's opinion
regarding their quality and are not a guarantee of quality. Rating agencies
attempt to evaluate the safety of principal and interest payments and do not
evaluate the risks of fluctuations in market value. Also, rating agencies may
fail to make timely changes in credit ratings in response to subsequent events,
so that an issuer's current financial condition may be better or worse than a
rating indicates.
<PAGE>

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.

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
<PAGE>

in the future, the Funds may also use those instruments, provided that FRIC's
Board determines that their use is consistent with the Funds' investment
objectives, and provided that their use is consistent with restrictions
applicable to options and futures contracts currently eligible for use by the
Funds (i.e., that written call or put options will be "covered" or "secured" and
that futures and options on futures contracts will be used only for hedging
purposes).

Options On Securities And Indexes. Each Fund, except as noted above, may
---------------------------------
purchase and write both call and put options on securities and securities
indexes in standardized contracts traded on foreign or national securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on a
regulated foreign over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of bonds from a dealer.
The Funds intend to treat options in respect of specific securities that are not
traded on a national securities exchange and the securities underlying covered
call options as not readily marketable and therefore subject to the limitations
on the Funds' ability to hold illiquid securities. The Funds intend to purchase
and write call and put options on specific securities.

An option on a security (or securities index) is a contract that gives the
purchaser of the option, in return for a premium, the right (but not the
obligation) to buy from (in the case of a call) or sell to (in the case of a
put) the writer of the option the security underlying the option at a specified
exercise price at any time during the option period. The writer of an option on
a security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier
(established by the exchange upon which the stock index is traded) for the index
option. (An index is designed to reflect specified facets of a particular
financial or securities market, a specified group of financial instruments or
securities, or certain economic indicators.) Options on securities indexes are
similar to options on specific securities except that settlement is in cash and
gains and losses depend on price movements in the stock market generally (or in
a particular industry or segment of the market), rather than price movements in
the specific security.

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

A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, liquid assets in such amount are placed in a
segregated account by the Custodian) upon conversion or exchange of other
securities held by the Fund. For a call option on an index, the option is
covered if the Fund maintains with the Custodian liquid assets equal to the
contract value. A call option is also covered if the Fund holds a call on the
same security or index as the call written where the exercise price of the call
held is (1) equal to or less than the exercise price of the call written, or (2)
greater than the exercise price of the call written, provided the difference is
maintained by the Fund in liquid assets in a segregated account with the
Custodian. A put option on a security or an index is "covered" if the Fund
maintains liquid assets equal to the exercise price in a segregated account with
the Custodian. A put option is also covered if the Fund holds a put on the same
security or index as the put written where the exercise price of the put held is
(1) equal to or greater than the exercise price of the put written, or (2) less
than the exercise price of the put written, provided the difference is
maintained by the Fund in liquid assets in a segregated account with the
Custodian.

If an option written by a Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by a Fund expires unexercised, the Fund realizes a capital loss (long
or short-term depending on whether the Fund's holding period for the option is
greater than one year) equal to the premium paid.

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

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

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, 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
<PAGE>

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.

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
<PAGE>

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).

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
<PAGE>

losses in excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the portfolio securities being hedged. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and options on futures contracts on securities, including technical
influences in futures trading and options on futures contracts, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities and creditworthiness of issuers. An incorrect correlation
could result in a loss on both the hedged securities in a Fund and the hedging
vehicle so that the portfolio return might have been greater had hedging not
been attempted. A decision as to whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected interest
rate trends.

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

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

Additional Risks Of Options On Securities, Futures Contracts, Options On
Futures Contracts, And Forward Currency Exchange Contract And Options Thereon.
Options on securities, futures contracts, options on futures contracts,
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
<PAGE>

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.

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
<PAGE>

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

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

The cost to a Fund of engaging in currency transactions varies with factors
such as the currency involved, the length of the contract period and the market
conditions then prevailing. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved. The
use of forward foreign currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, although forward foreign
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, at the same time, they limit any potential gain that might
result should the value of the currency increase.

If a devaluation is generally anticipated, a Fund may be able to contract
to sell the currency at a price above the devaluation level that it anticipates.
A Fund will not enter into a currency transaction if, as a result, it will fail
to qualify as a regulated investment company under the Code, for a given year.

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

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

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.

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
<PAGE>

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.

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

Variable And Floating Rate Securities. A floating rate security is one
-------------------------------------
whose terms provide for the automatic adjustment of an interest rate whenever a
specified interest rate changes. A variable rate security is one whose terms
provide for the automatic establishment of a new interest rate on set dates. The
interest rate on floating rate securities is ordinarily tied to and is a
percentage of the prime rate of a specified bank or some similar objective
standard, such as 90-day US Treasury Bill rate, and may change as often as twice
daily. Generally, changes in interest rates on floating rate securities will
reduce changes in the securities' market value from the original purchase price
resulting in the potential for capital appreciation or capital depreciation
being less than for fixed-income obligations with a fixed interest rate.

The U.S. Government Money Market Fund may purchase variable rate US government
obligations which are instruments issued or guaranteed by the US government, or
an agency or instrumentality thereof, which have a rate of interest subject to
adjustment at regular intervals but no less frequently than annually. Variable
rate US government obligations whose interest rates are readjusted no less
frequently than annually will be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate.

Variable Amount Master Demand Notes. The Money Market Fund may invest in
-----------------------------------
variable amount master demand notes. Variable amount master demand notes are
unsecured obligations redeemable upon notice that permit investment of
fluctuating amounts at varying rates of interest pursuant to direct arrangements
with the issuer of the instrument. A variable amount master demand note differs
from ordinary commercial paper in that (1) it is issued pursuant to a written
agreement between the issuer and the holders, (2) its amount may, from time to
time, be increased (subject to an agreed maximum) or decreased by the holder of
the issue, (3) it is payable on demand, (4) its rate of interest payable varies
with an agreed upon formula and (5) it is not typically rated by a rating
agency.
<PAGE>

Zero Coupon Securities. Zero coupon securities are notes, bonds and
----------------------
debentures that (1) do not pay current interest and are issued at a substantial
discount from par value, (2) have been stripped of their unmatured interest
coupons and receipts or (3) pay no interest until a stated date one or more
years into the future. These securities also include certificates representing
interests in such stripped coupons and receipts. Zero coupon securities trade at
a discount from their par value and are subject to greater fluctuations of
market value in response to changing interest rates.

Mortgage-Related And Other Asset-Backed Securities. The forms of mortgage-
--------------------------------------------------
related and other asset-backed securities the Funds may invest in include the
securities described below:

Mortgage Pass-Through Securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are generally made monthly. The
securities are "pass-through" securities because they provide investors with
monthly payments of principal and interest which in effect are a "pass-through"
of the monthly payments made by the individual borrowers on the underlying
mortgages, net of any fees paid to the issuer or guarantor. The principal
governmental issuer of such securities is the Government National Mortgage
Association ("GNMA"), which is a wholly owned US government corporation within
the Department of Housing and Urban Development. Government-related issuers
include the Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the United States created pursuant to an Act of Congress, and
which is owned entirely by the Federal Home Loan Banks, and the Federal National
Mortgage Association ("FNMA"), a government sponsored corporation owned entirely
by private stockholders. Commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of conventional residential
mortgage loans. Such issuers may be the originators of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities.

Collateralized Mortgage Obligations. Collateralized mortgage obligations
("CMOs") are hybrid instruments with characteristics of both mortgage-backed
bonds and mortgage pass-through securities. Similar to a bond, interest and pre-
paid principal on a CMO are paid, in most cases, monthly. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage passthrough securities guaranteed by GNMA, FHLMC, or
FNMA. CMOs are structured into multiple classes (or "tranches"), with each class
bearing a different stated maturity.

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

Risk Factors. Prepayment of principal on mortgage or asset-backed
securities may expose a Fund to a lower rate of return upon reinvestment of
principal. Also, if a security subject to prepayment has been purchased at a
premium, in the event of prepayment the value of the premium would be lost. Like
other fixed-income securities, the value of mortgage-related securities is
affected by fluctuations in interest rates.

Loan Participations. The Funds may purchase participations in commercial
-------------------
loans. Such indebtedness may be secured or unsecured. Loan participations
typically represent direct participation in a loan to a corporate borrower, and
generally are offered by banks or other financial institutions or lending
syndicates. In purchasing the loan participations, a Fund assumes the credit
risk associated with the corporate buyer and may assume the credit risk
associated with the interposed bank or other financial intermediary. The
participation may not be rated by a nationally recognized rating service.
Further, loan participations may not be readily marketable and may be subject to
restrictions on resale. Loan participations are generally illiquid investments
and are priced through a nationally recognized pricing service which determines
loan prices by surveying available dealer quotations. If the corporate borrower
defaults on its obligations, a Fund may end up owning the underlying
collateral.

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.
<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.

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
<PAGE>

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 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
<PAGE>

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 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
<PAGE>

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:

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
<PAGE>

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
-----

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
<PAGE>

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 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 Short Term Bond Diversified Bond Multistrategy
Year Securities Fund Markets 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) -- --
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

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

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

MONEY MANAGER INFORMATION

DIVERSIFIED EQUITY FUND

Alliance Capital Management L.P. is a limited partnership owned (i) 35.3%
by Alliance Capital Management Holding L.P., a publicly traded limited
partnership and (ii) approximately 62.5% by AXA Financial, Inc. ("AXA
Financial"). AXA Financial is controlled by AXA, a publicly traded insurance
holding company. AXA Financial's indirect wholly-owned subsidiary, Alliance
Capital Management Corporation is the general partner of Alliance Capital
Management L.P. and Alliance Capital Management Holding L.P.

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.

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

Suffolk Capital Management, Inc. is a wholly owned subsidiary of Old Mutual
PLC, 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.

David J. Greene and Company, LLC, is a limited liability company controlled
by Michael C. Greene and Alan I. Greene.

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

<PAGE>

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.

Sirach Capital Management, Inc. is a wholly-owned subsidiary of Old Mutual
PLC, a publicly traded corporation.

TimesSquare Capital Management, Inc. is a wholly-owned, indirect subsidiary
of CIGNA Corporation, 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

Alliance Capital Management L.P. See: Diversified Equity 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 & 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.
<PAGE>

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.

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.

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.
<PAGE>

EMERGING MARKETS FUND

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

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.

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

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.

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.

<PAGE>

TAX FREE MONEY MARKET FUND

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

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.

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.

David J. Greene and Company, LLC. See: Special Growth Fund.

Delphi Management, 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.

TimesSquare 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.

<PAGE>

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.

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

INTERNATIONAL FUND

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

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.

<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.

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.
<PAGE>

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:

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:
<PAGE>

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.

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:
<PAGE>

Commercial paper rated A by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated
A or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances. Typically, the issuer's industry is well
established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper
is rated A-1, A-2, or A-3.

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

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

DUFF & PHELPS, INC.:

Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations
with maturities of under one year, including commercial paper, the uninsured
portion of certificates of deposit, unsecured bank loans, master notes,
bankers' acceptances, irrevocable letters of credit, and current maturities of
long-term debt. Asset-backed commercial paper is also rated according to this
scale.

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

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

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

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

Duff 2--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.

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.
<PAGE>

IBCA, INC.:

In addition to conducting a careful review of an institution's reports and
published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year
with the management of the companies they cover.

IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.

Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While this confidential data cannot be
disclosed in reports, it is taken into account when assigning ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.

IBCA's Rating Committees meet at regular intervals to review all ratings and
to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.

A1+ -- Obligations supported by the highest capacity for timely repayment.

A1 -- Obligations supported by a very strong capacity for timely repayment.

A2 -- Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.

B1 -- Obligations supported by an adequate capacity for timely repayment. Such
capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.

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

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

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

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

Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal and
investment notes.

The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.

Fitch short-term ratings are as follows:

F-1+ -- Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1 -- Very strong credit quality. Issues assigned this rating, reflect an
assurance of timely payment only slightly less in degree than issues rated F-
I+.

F-2 -- Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned `F- 1 +' and `F- 1' ratings.
<PAGE>

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-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 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.
<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 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.

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.

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
<PAGE>

assets of a Fund of a dollar amount sufficient to make payment for the portfolio
securities to be purchased are segregated on the Fund's records at the trade
date and maintained until the transaction is settled.

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

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

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

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

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

GNMA -- Government National Mortgage Association

Illiquid securities -- The Funds, other than the Money Market Funds, will not
purchase or otherwise acquire any security if, as a result, more than 15% of a
Fund's net assets (taken at current value) would be invested in securities,
including repurchase agreements maturing in more than seven days, that are
illiquid because of the absence of a readily available market or because of
legal or contractual resale restrictions. In the case of the Money Market
Funds, this restriction is 10% of each Fund's net assets. No Fund will invest
more than 10% of its respective net assets (taken at current value) in
securities of issuers that may not be sold to the public without registration
under the Securities Act of 1933, as amended (the "1933 Act"). These policies
do not include (1) commercial paper issued under Section 4(2) of the 1933 Act,
or (2) restricted securities eligible for resale to qualified institutional
purchasers pursuant to Rule 144A under the 1933 Act that are determined to be
liquid by the money managers in accordance with Board-approved guidelines.

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

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

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
<PAGE>

securities fails financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Consequently, loans are made
only to borrowers which are deemed to be of good financial standing.

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

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

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

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

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

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

NYSE -- New York Stock Exchange

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

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

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

Repurchase agreements -- A Fund may enter into repurchase agreements with a
bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day). If
the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at the time of agreement) 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
<PAGE>

the security by paying an agreed upon purchase price plus interest. Liquid
assets of the Fund equal in value to the repurchase price, including any accrued
interest, are segregated on the Fund's records while a reverse repurchase
agreement is in effect.

Russell 1000(R) Index. The Russell 1000 Index consists of the 1,000 largest
US companies by capitalization (i.e., market price per share times the number of
shares outstanding). The smallest company in the Index at the time of selection
has a capitalization of approximately $1 billion. The Index does not include
cross-corporate holdings in a company's capitalization. For example, when IBM
owned approximately 20% of Intel, only 80% of the total shares outstanding of
Intel were used to determine Intel's capitalization. Also not included in the
Index are closed-end investment companies, companies that do not file a Form 10-
K report with the SEC, foreign securities, and American Depository Receipts.
The Index's composition is changed annually to reflect changes in market
capitalization and share balances outstanding. The Russell 1000(R) Index is
used as the basis for Quantitative Equity Fund's performance because FRIMCo
believes it represents the universe of stocks in which most active money
managers invest and is representative of the performance of publicly traded
common stocks most institutional investors purchase.

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

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

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

SEC -- US Securities and Exchange Commission

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

Statement -- FRIC's Statement of Additional Information

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

US -- United States

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

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

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

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.