HOTCHKIS & WILEY FUNDS, 485APOS, 1996-10-18

HOTCHKIS & WILEY FUNDS
485APOS, 1996-10-18

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<PAGE> 1

As filed with the Securities and Registration No. 2-96219
Exchange Commission on October 18, 1996. 811-4182

================================================================================
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 22 [x]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY

ACT OF 1940 [ ]

Amendment No. 24 [x]

(Check appropriate box or boxes)

------------------------
HOTCHKIS AND WILEY FUNDS

(Exact name of registrant as specified in charter)

800 West 6th Street, Fifth Floor
Los Angeles, California 90017
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code (213) 362-8900

PAUL H. DYKSTRA, ESQ.
Gardner, Carton & Douglas
321 North Clark Street
Chicago, IL 60610-4795
(Name and address of Agent for Service)

Approximate date of proposed public offering: As soon as practicable
after the effective date of the registration statement.

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

[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[x] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:

[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.

================================================================================
Registrant has previously elected to register an indefinite number of
its shares of beneficial interest pursuant to Rule 24f-2 under the Investment
Company Act of 1940.

Registrant filed its Rule 24f-2 Notice for the fiscal year ended
June 30, 1996 on or about August 29, 1996.

<PAGE> 2
HOTCHKIS AND WILEY FUNDS
CROSS-REFERENCE SHEET
(REQUIRED BY RULE 495)

<TABLE>
<CAPTION>
Location in the Prospectus of the Equity
Income Fund, Mid-Cap Fund, Small Cap Fund,
International Fund, Global Equity Fund,
Balanced Income Fund, Low Duration
N-1A Fund, Short-Term Investment Fund Location in the Prospectus of the
Item No. and Total Return Bond Fund Equity Fund for Insurance Companies
-------- ------------------------------------------- -----------------------------------
Part A:
<S> <C> <C> <C>
Item 1. Cover Page Cover Page Cover Page
Item 2. Synopsis Fee Table Fee Table
Item 3. Condensed Financial Financial Highlights Financial Highlights
Information
Item 4. General Description of Cover Page; General Information; Investment Cover Page; General
Registrant Objectives and Policies; Securities and Information; Investment Objective and
Techniques Used by the Funds; Investment Policies; Principal Investment
Risks; Principal Investment Restrictions Restrictions
Item 5. Management of the Fund Organization and Management; General Organization and Management; General
Information Information
Item 5A. Management's Discussion Performance Information Performance Information
of Fund Performance
Item 6. Capital Stock and Other General Information; Dividends and Tax General Information; Dividends and Tax
Securities Status; Organization and Management Status; Organization and Management
Item 7. Purchase of Securities How to Purchase Shares How to Purchase Shares
Being Offered
Item 8. Redemption or How to Redeem Shares How to Redeem Shares
Repurchase
Item 9. Pending Legal Not Applicable Not Applicable
Proceedings
</TABLE>

<TABLE>
<CAPTION>
Part B: Location in the Statement of Additional Information
---------------------------------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History General Information about the Trust
Item 13. Investment Objectives and Investment Objective and Policies
Policies
Item 14. Management of the Registrant Management
Item 15. Control Persons and Principal General Information about the Trust
Holders of Securities
Item 16. Investment Advisory and Other Management
Securities
Item 17. Brokerage Allocation and Other Management
Practices
Item 18. Capital Stock and Other General Information about the Trust
Securities
Item 19. Purchase, Redemption and Net Asset Value
Pricing of Securities Being
Offered
Item 20. Tax Status Dividends and Tax Status
Item 21. Underwriters Not Applicable
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
</TABLE>

Part C:
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Post-Effective
Amendment to the Registration Statement.
<PAGE> 3

PROSPECTUS

HOTCHKIS AND WILEY FUNDS [LOGO]

HOTCHKIS AND WILEY FUNDS, (THE "TRUST"), IS AN OPEN-END, MANAGEMENT INVESTMENT
COMPANY HAVING TEN SEPARATE DIVERSIFIED PORTFOLIOS (THE "FUNDS"), EACH OF WHICH
IS A SEPARATE MUTUAL FUND.

EQUITY INCOME FUND

Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests in domestic equity securities.

MID-CAP FUND

Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests primarily in stocks of domestic companies
with market capitalizations between $1 billion and $5 billion.

SMALL CAP FUND

Seeks capital appreciation. The Fund invests primarily in stocks of domestic
companies with market capitalizations of $1 billion or less.

INTERNATIONAL FUND

Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests in international equity securities.

GLOBAL EQUITY FUND

Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests in domestic and international equity
securities.

BALANCED INCOME FUND

Seeks to preserve capital while producing a high total return. It is expected
that the Fund's assets will be allocated among equity securities, fixed-income
securities and money market obligations.

TOTAL RETURN BOND FUND

Seeks to maximize long-term total return. The Fund invests in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of two to eight years. The Fund's dollar-weighted average maturity will
exceed its portfolio duration.

LOW DURATION FUND

Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in a diversified portfolio of fixed-income securities of varying
maturities with a portfolio duration of one to three years. The Fund's
dollar-weighted average maturity will exceed its portfolio duration.

SHORT-TERM INVESTMENT FUND

Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in a diversified portfolio of fixed-income securities of varying
maturities with a portfolio duration of up to one year. The Fund's
dollar-weighted average maturity will exceed its portfolio duration.

THE EQUITY FUND FOR INSURANCE COMPANIES

Offered through a separate prospectus.

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

This Prospectus provides you with the basic information you should know before
investing in any of the Funds. You should read it and keep it for future
reference. A Statement of Additional Information dated January 1, 1997,
containing additional information about the Trust and each Fund has been filed
with the Securities and Exchange Commission and is incorporated by reference in
its entirety into this Prospectus. You may obtain a copy of the Statement of
Additional Information without charge by calling the Trust at 800-236-4479 or
writing the Trust at 800 West Sixth Street, Fifth Floor, Los Angeles, California
90017.

Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank, nor are they federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency. Investment
in a Fund's shares involves risk, including the possible loss of principal.

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

There can be no assurance that the investment objective of any Fund will be
achieved.

HOTCHKIS AND WILEY FUNDS

800 West 6th Street, Fifth Floor, Los Angeles, California 90017
800-236-4479
Investment Advisor: Hotchkis and Wiley

JANUARY 1, 1997

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<S> <C>

FEE TABLE .................................... 3

FINANCIAL HIGHLIGHTS ......................... 4

INVESTMENT OBJECTIVES AND POLICIES ........... 11

SECURITIES AND TECHNIQUES USED BY THE FUNDS .. 19

INVESTMENT RISKS ............................. 24

PRINCIPAL INVESTMENT RESTRICTIONS ............ 26

ORGANIZATION AND MANAGEMENT .................. 27

HOW TO PURCHASE SHARES ....................... 30

HOW TO REDEEM SHARES ......................... 31

HOW TO EXCHANGE SHARES ....................... 33

DIVIDENDS AND TAX STATUS ..................... 34

NET ASSET VALUE .............................. 35

PERFORMANCE INFORMATION ...................... 35

GENERAL INFORMATION .......................... 35

APPENDIX -- DESCRIPTION OF RATINGS ........... 36
</TABLE>

The application for investing in the HOTCHKIS AND WILEY FUNDS
is included in this prospectus.

[LOGO]
IMPORTANT TELEPHONE NUMBER

CLIENT SERVICES 800-236-4479

<PAGE> 5
FEE TABLE
- --------------------------------------------------------------------------------
The following information is provided in order to assist you in understanding
the various costs and expenses that, as an investor in the Funds, you will bear
directly or indirectly:

SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
<TABLE>

<S> <C>
Maximum Sales Load Imposed on Purchases ............. None
Maximum Deferred Sales Load ......................... None
Maximum Sales Load Imposed on Reinvested Dividends... None
Redemption and Exchange Fees ........................ None
</TABLE>

Investment dealers and other firms may independently charge additional fees for
shareholder transactions or for advisory services. Please see their materials
for details.

<TABLE>
ANNUAL FUND Equity Mid- Small Inter- Global Balanced Total Low Short-Term
OPERATING EXPENSES Income Cap Cap national Equity Income Return Duration Investment
(as a percentage of average net assets) Fund Fund Fund Fund Fund Fund Bond Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees......................... .75% .75% .75% .75% .75% .75% .55% .46% .40%
Other expenses after expense
reimbursement........................... .23% .25% .25% .25% .25% .25% .10% .12% .08%
--- --- --- --- --- --- --- --- ---
Total Fund operating expenses
after expense reimbursement............. .98% 1.00% 1.00% 1.00% 1.00% 1.00% .65% .58% .48%
=== ==== ==== ==== ==== ==== === === ===
</TABLE>

Although not required to do so, Hotchkis and Wiley (the "Advisor"), has agreed
to limit the annual operating expenses of the Equity Income Fund, Mid-Cap Fund,
Small Cap Fund, International Fund, Global Equity Fund and Balanced Income Fund
to 1% of each Fund's average net assets. Additionally, the Advisor has agreed to
limit the annual expenses of the Total Return Bond Fund to .65%, the Low
Duration Fund to .58% and the Short-Term Investment Fund to .48% of each Fund's
average net assets. If the Advisor had not limited the Funds' expenses, other
expenses of the Small Cap Fund, International Fund, Balanced Income Fund, Total
Return Bond Fund, Low Duration Fund and Short-Term Investment Fund would have
been .46%, .36%, .31%, .43%, .14% and .48%, respectively, and the total
operating expenses of the Small Cap Fund, International Fund, Balanced Income
Fund, Total Return Bond Fund, Low Duration Fund and Short-Term Investment Fund
would have been 1.21%, 1.11%, 1.06%, .98%, .60%, and .88%, respectively, for the
year ended June 30, 1996. With respect to the Mid-Cap Fund and the Global Equity
Fund, other expenses before reimbursement are estimated to be .85% and 1.75%,
respectively, and total operating expenses are estimated to be 1.60% and 2.50%,
respectively, for the current fiscal year.

EXAMPLE

You would pay the following expenses
on a $1,000 investment, assuming:
(1) 5% annual return, and Equity Mid- Small Inter- Global Balanced Total Low Short-Term
(2) redemption at the end Income Cap Cap national Equity Income Return Duration Investment
of each time period: Fund Fund Fund Fund Fund Fund Bond Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year.................................. $ 10 $ 10 $ 10 $ 10 $ 10 $ 10 $ 7 $ 6 $ 5
Three Years............................... $ 31 $ 32 $ 32 $ 32 $ 32 $ 32 $21 $19 $15
Five Years................................ $ 54 $ 55 $ 55 $ 55 $ 55 $ 55 $36 $32 $27
Ten Years................................. $120 $122 $122 $122 $122 $122 $81 $73 $60
</TABLE>

THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL FUND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The
assumption in the Example of a 5% annual return is required by regulations of
the Securities and Exchange Commission applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of any Fund.

3
<PAGE> 6
FINANCIAL HIGHLIGHTS (for a share outstanding throughout each period)
- --------------------------------------------------------------------------------

The financial highlights relating to the Equity Income Fund, Small Cap Fund,
International Fund, Balanced Income Fund, Total Return Bond Fund, Low Duration
Fund and Short-Term Investment Fund for each of the periods ended June 30 have
been audited by Price Waterhouse LLP, independent accountants, whose unqualified
report covering each of the most recent five years is incorporated by reference
herein and is included in the Statement of Additional Information, which is
available from the Trust. This information should be read in conjunction with
the financial statements and accompanying notes, which appear in the Statement
of Additional Information. Further performance information is contained in the
Funds' annual report to shareholders, which may be obtained without cost.

June 24,
1987*
Year Ended June 30, through
-------------------------------------------------------------------------------- June 30,
EQUITY INCOME FUND 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 17.24 $ 15.07 $15.50 $14.51 $12.53 $12.59 $13.43 $11.60 $12.48 $12.50
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................ 0.45(1) 0.49 0.46 0.44 0.40 0.48 0.59 0.57 0.53 --
Net realized and unrealized gain
(loss) on investments.............. 2.89 2.48 0.10 1.21 1.99 0.24 (0.62) 1.90 (0.92) (0.02)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations..... 3.34 2.97 0.56 1.65 2.39 0.72 (0.03) 2.47 (0.39) (0.02)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net
investment income)................. (0.57) (0.44) (0.46) (0.43) (0.41) (0.48) (0.60) (0.58) (0.49) --
Distributions (from realized gains).. (1.10) (0.36) (0.53) (0.23) -- (0.30) (0.21) (0.06) -- --
------- ------- ------ ------ ----- ----- ----- ------ ----- -----
Total Distributions.................. (1.67) (0.80) (0.99) (0.66) (0.41) (0.78) (0.81) (0.64) (0.49) --
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of Period.......... $ 18.91 $ 17.24 $15.07 $15.50 $14.51 $12.53 $12.59 $13.43 $11.60 12.48
======= ======= ====== ====== ====== ====== ====== ====== ====== =====

RATIOS/SUPPLEMENTAL DATA:
Total Return............................ 20.04% 20.49% 3.40% 11.67% 19.28% 6.92% -0.44% 21.96% -2.69% -9.28%+
Net assets, end of period (millions).... $182.5 $127.1 $87.2 $86.7 $71.6 $63.0 $64.9 $47.2 $29.3 $0.3
Ratio of expenses to average net assets:
Before expense reimbursement.......... 0.98% 1.02% 1.05% 1.02% 1.02% 1.07% 1.05% 1.27% 1.41% 0.00%
After expense reimbursement........... 0.98% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.00%
Ratio of net investment income
to average net assets:
Before expense reimbursement......... 2.56% 3.11% 2.85% 2.97% 2.93% 4.16% 4.37% 4.42% 4.71% 0.00%
After expense reimbursement.......... 2.56% 3.14% 2.90% 2.99% 2.95% 4.23% 4.42% 4.68% 5.11% 0.00%
Portfolio turnover rate................. 24% 50% 36% 25% 32% 39% 39% 9% 20% 0%
</TABLE>

* Commencement of operations.
+ Annualized.
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.

4
<PAGE> 7
<TABLE>
<CAPTION>

Year Ended June 30,
------------------------------------------------------------------------
SMALL CAP FUND 1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .. $ 21.53 $ 19.53 $ 19.88 $ 18.10 $ 17.30 $ 20.39
---------- --------- --------- --------- --------- ---------
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income (loss) ..... 0.05(1) (0.06) (0.01) 0.27 0.09 0.13
Net realized and unrealized
gain (loss) on investments ..... 2.80 2.84 0.78 3.18 3.09 0.10
---------- --------- --------- --------- --------- ---------
Total from investment
operations ..................... 2.85 2.78 0.77 3.45 3.18 0.23
---------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) ............... -- -- (0.20) (0.04) (0.13) (0.09)
Distributions (from
realized gains) .................. (3.05) (0.78) (0.92) (1.63) (2.25) (3.23)
---------- --------- --------- --------- --------- ---------
Total Distributions ............... (3.05) (0.78) (1.12) (1.67) (2.38) (3.32)
---------- --------- --------- --------- --------- ---------
Net Asset Value, End of Year ........ $ 21.33 $ 21.53 $ 19.53 $ 19.88 $ 18.10 $ 17.30
========== ========= ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Total Return ........................ 14.24% 14.79% 3.77% 19.80% 19.04% 5.60%
Net assets, end of
year (millions) ................... $ 16.5 $ 20.5 $ 13.1 $ 10.8 $ 8.8 $ 7.2
Ratio of expenses to average
net assets:
Before expense reimbursement ...... 1.21% 1.49% 1.65% 1.40% 1.45% 1.60%
After expense reimbursement ....... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement ...... 0.03% (0.82)% (0.71)% 1.03% (0.06)% 0.11%
After expense reimbursement ....... 0.24% (0.34)% (0.06)% 1.42% 0.40% 0.71%
Portfolio turnover rate ............. 119% 81% 44% 20% 26% 32%
</TABLE>

Year Ended June 30,
--------------------------------------------
SMALL CAP FUND 1990 1989 1988 1987
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .. $ 17.88 $ 18.05 $ 19.28 $ 18.14
--------- --------- --------- ---------
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income (loss) ..... 0.03 0.17 -- (0.04)
Net realized and unrealized
gain (loss) on investments ..... 3.51 (0.32) (1.17) 1.23
--------- --------- --------- ---------
Total from investment
operations ..................... 3.54 (0.15) (1.17) 1.19
--------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) ............... (0.18) (0.02) -- (0.05)
Distributions (from
realized gains) .................. (0.85) -- (0.06) --
--------- --------- --------- ---------
Total Distributions ............... (1.03) (0.02) (0.06) (0.05)
--------- --------- --------- ---------
Net Asset Value, End of Year ........ $ 20.39 $ 17.88 $ 18.05 $ 19.28
========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Total Return ........................ 20.49% -0.82% -5.97% 6.59%
Net assets, end of
year (millions) ................... $ 7.7 $ 7.9 $ 8.2 $ 8.5
Ratio of expenses to average
net assets:
Before expense reimbursement ...... 1.60% 1.82% 1.82% 2.55%
After expense reimbursement ....... 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement ...... (0.42)% 0.16% (0.81)% (1.89)%
After expense reimbursement ....... 0.18% 0.98% 0.01% (0.34)%
Portfolio turnover rate ............. 37% 38% 35% 30%
</TABLE>

(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.

5
<PAGE> 8
<TABLE>
<CAPTION>

October 1,
1990*
Year Ended June 30, through
------------------------------------------------------------- June 30,
INTERNATIONAL FUND 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .... $ 17.70 $ 16.79 $ 14.63 $ 13.97 $ 12.56 $ 12.50
---------- --------- --------- --------- --------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................ 0.56(1) 0.28 0.26 0.23 0.22 0.42
Net realized and unrealized
gain (loss) on investments ......... 2.51 1.52 2.19 0.74 3.09 (0.21)
---------- --------- --------- --------- --------- ----------
Total from investment operations ..... 3.07 1.80 2.45 0.97 3.31 0.21
---------- --------- --------- --------- --------- ----------
LESS DISTRIBUTIONS:

Dividends (from net investment
income) (0.14) (0.44) (0.14) -- (0.61) (0.15)
Distributions (from realized gains) .. (0.19) (0.45) (0.15) (0.31) (1.29) --
---------- --------- --------- --------- --------- ----------
Total Distributions .................. (0.33) (0.89) (0.29) (0.31) (1.90) (0.15)
---------- --------- --------- --------- --------- ----------
Net Asset Value, End of Period .......... $ 20.44 $ 17.70 $ 16.79 $ 14.63 $ 13.97 $ 12.56
========== ========= ========= ========= ========= ==========

RATIOS/SUPPLEMENTAL DATA:

Total Return ............................ 18.61% 11.08% 16.71% 7.36% 27.48% 2.22%+
Net assets, end of period (millions) .... $ 331.0 $ 51.5 $ 26.0 $ 6.6 $ 4.0 $ 1.3
Ratio of expenses to average net assets:

Before expense reimbursement .......... 1.11% 1.39% 1.61% 2.44% 4.19% 5.50%+
After expense reimbursement ........... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%+
Ratio of net investment income to
average net assets:

Before expense reimbursement .......... 2.67% 2.45% 2.01% 1.14% 0.42% (0.53)%
After expense reimbursement ........... 2.78% 2.83% 2.62% 2.58% 3.61% 3.96%+
Portfolio turnover rate ................. 12% 24% 23% 24% 88% 224%
</TABLE>

* Commencement of operations
+ Annualized.

(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.

6
<PAGE> 9
<TABLE>
<CAPTION>
Year Ended June 30,
BALANCED --------------------------------------------------------------------------------------------
INCOME FUND 1996 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.74 $ 15.71 $ 16.69 $ 16.35 $ 15.23 $ 15.13 $ 15.95
-------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 0.94 0.89 0.89 0.77 0.79 0.82 0.88
Net realized and unrealized
gain (loss) on
investments ............... 1.53 1.53 (0.27) 0.82 1.45 0.49 0.09
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations ................ 2.47 2.42 0.62 1.59 2.24 1.31 0.97
-------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .......... (0.92) (0.80) (0.94) (0.74) (0.76) (0.81) (0.93)
Distributions (from
realized gains) ............. (0.02) (0.57) (0.66) (0.51) (0.36) (0.40) (0.86)
Return of capital ............. -- (0.02) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions ........... (0.94) (1.39) (1.60) (1.25) (1.12) (1.21) (1.79)
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of Year ..... $ 18.27 $ 16.74 $ 15.71 $ 16.69 $ 16.35 $ 15.23 $ 15.13
======== ======== ======== ======== ======== ======== ========

RATIOS/SUPPLEMENTAL DATA:
Total Return ..................... 15.04% 16.40% 3.60% 10.10% 15.10% 9.35% 6.20%
Net Assets, end of
year (millions) ................ $ 70.6 $ 32.1 $ 36.0 $ 30.3 $ 16.7 $ 11.6 $ 9.6
Ratio of expenses to average
net assets:
Before expense reimbursement ... 1.06% 1.19% 1.20% 1.15% 1.27% 1.44% 1.66%
After expense reimbursement .... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income
to average net assets:
Before expense reimbursement ... 5.20% 5.44% 5.04% 4.62% 4.64% 5.14% 4.93%
After expense reimbursement .... 5.26% 5.63% 5.24% 4.77% 4.90% 5.58% 5.59%
Portfolio turnover rate .......... 92% 51% 97% 155% 36% 75% 78%
</TABLE>

<TABLE>
<CAPTION>
Year Ended June 30,
BALANCED ------------------------------------------
INCOME FUND 1989 1988 1987
- --------------------------------------------------------------------------------

<S> <C> <C> <C>
Net Asset Value, Beginning of
Year ........................... $ 14.40 $ 15.17 $ 14.83
-------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 0.87 0.79 0.71
Net realized and unrealized
gain (loss) on
investments ............... 1.57 (0.08) 0.61
-------- -------- --------
Total from investment
operations ................ 2.44 0.71 1.32
-------- -------- --------
LESS DISTRIBUTIONS:
Dividends (from net
investment income) .......... (0.89) (0.72) (0.73)
Distributions (from
realized gains) ............. -- (0.76) (0.25)
Return of capital ............. -- -- --
-------- -------- --------
Total Distributions ........... (0.89) (1.48) (0.98)
-------- -------- --------
Net Asset Value, End of Year ..... $ 15.95 $ 14.40 $ 15.17
======== ======== ========

RATIOS/SUPPLEMENTAL DATA:
Total Return ..................... 17.48% 5.46% 9.17%
Net Assets, end of
year (millions) ................ $ 7.9 $ 6.7 $ 4.0
Ratio of expenses to average
net assets:
Before expense reimbursement ... 1.92% 2.39% 3.98%
After expense reimbursement .... 1.00% 1.00% 1.00%
Ratio of net investment income
to average net assets:
Before expense reimbursement ... 4.85% 4.11% 1.89%
After expense reimbursement .... 5.77% 5.51% 4.87%
Portfolio turnover rate .......... 97% 112% 81%
</TABLE>

7
<PAGE> 10
<TABLE>
<CAPTION>
December 6,
Year 1994*
Ended through
June 30, June 30,
TOTAL RETURN BOND FUND 1996 1995
- ------------------------------------------------------------------------------------------

<S> <C> <C>
Net Asset Value, Beginning of Period ................ $ 12.94 $ 12.00
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................ 0.84(1) 0.46
Net realized and unrealized gain on investments .. 0.06 0.94
-------- --------
Total from investment operations ................. 0.90 1.40
-------- --------
LESS DISTRIBUTIONS:
Dividends (from net investment income) ........... (0.93) (0.46)
Distributions (from realized gains) .............. (0.13) --
Total Distributions ................................. (1.06) (0.46)
-------- --------
Net Asset Value, End of Period ...................... $ 12.78 $ 12.94
======== ========

RATIOS/SUPPLEMENTAL DATA:
Total Return ........................................ 7.05% 11.88%
Net assets, end of period (millions) ................ $ 43.4 $ 15.3
Ratio of expenses to average net assets:
Before expense reimbursement ...................... 0.98% 2.93%+
After expense reimbursement ....................... 0.68% 0.80%+
Ratio of net investment income to average net assets:
Before expense reimbursement ...................... 6.86% 4.92%+
After expense reimbursement ....................... 7.16% 7.05%+
Portfolio turnover rate ............................. 51% 68%
</TABLE>

* Commencement of operations.

+ Annualized.

(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.

8
<PAGE> 11
<TABLE>
<CAPTION>
May 18,
1993*
Year Ended June 30, through
------------------------------------------ June 30,
LOW DURATION FUND 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 10.15 $ 9.93 $ 10.00 $ 10.00

INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................ 0.68 0.75 0.77 0.05
Net realized and unrealized gain on investments .. 0.06 0.23 0.11 0.00
-------- -------- -------- --------
Total from investment operations ................. 0.74 0.98 0.88 0.05
-------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends (from net investment income) ........... (0.72) (0.75) (0.77) (0.05)
Dividends (from realized gains) .................. (0.05) (0.01) (0.18) --
-------- -------- -------- --------
Total Distributions .............................. (0.77) (0.76) (0.95) (0.05)
-------- -------- -------- --------
Net Asset Value, End of Period ...................... $ 10.12 $ 10.15 $ 9.93 $ 10.00
======== ======== ======== ========

RATIOS/SUPPLEMENTAL DATA:
Total Return ........................................ 7.47% 10.23% 9.02% 4.36%+
Net assets, end of period (millions) ................ $ 189.2 $ 123.3 $ 36.5 $ 7.6
Ratio of expenses to average net assets:
Before expense reimbursement ...................... 0.60% 0.75% 1.10% 4.94%+
After expense reimbursement ....................... 0.58% 0.58% 0.58% 0.58%+
Ratio of net investment income to average net assets:
Before expense reimbursement ...................... 7.07% 7.43% 6.82% 1.93%+
After expense reimbursement ....................... 7.09% 7.61% 7.34% 6.28%+
Portfolio turnover rate ............................. 50% 71% 254% 34%
</TABLE>

* Commencement of operations.

+ Annualized.

9
<PAGE> 12
<TABLE>
<CAPTION>
May 18,
1993*
Year Ended June 30, through
---------------------------------------- June 30,
SHORT-TERM INVESTMENT FUND 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ....................... $ 10.12 $ 10.21 $ 10.00 $ 10.00
--------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................... 0.66 0.66 0.53 0.03
Net realized and unrealized gain (loss) on investments .. 0.05 (0.09) 0.21 --
--------- --------- --------- ---------
Total from investment operations ........................ 0.71 0.57 0.74 0.03
--------- --------- --------- ---------

LESS DISTRIBUTIONS:
Dividends (from net investment income) .................. (0.66) (0.66) (0.53) (0.03)
Return of capital ....................................... (0.00) -- -- --
--------- --------- --------- ---------
Total Distributions ..................................... (0.66) (0.66) (0.53) (0.03)
--------- --------- --------- ---------
Net Asset Value, End of Period ............................. $ 10.17 $ 10.12 $ 10.21 $ 10.00
========= ========= ========= =========

RATIOS/SUPPLEMENTAL DATA:
Total Return ............................................... 7.23% 5.78% 7.47% 2.30%+
Net assets, end of period (millions) ....................... $ 18.7 $ 19.8 $ 10.5 $ .003
Ratio of expenses to average net assets:
Before expense reimbursement ............................. 0.88% 1.26% 2.06% 57.02%+
After expense reimbursement .............................. 0.48% 0.48% 0.48% 0.48%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement ............................. 6.15% 5.74% 4.16% (56.99)%+
After expense reimbursement .............................. 6.55% 6.52% 5.74% 2.32%+
Portfolio turnover rate .................................... 60% 81% 135% 0%
</TABLE>

* Commencement of operations.
+ Annualized.

10
<PAGE> 13
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

GENERAL

The following descriptions are designed to help you choose the Fund that best
fits your investment objective. You may want to pursue more than one objective
by investing in more than one of the Funds. Each Fund's investment objective is
a fundamental policy, which cannot be changed without the approval of a majority
of the Fund's outstanding voting securities, as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). There can be no assurance that
any objective will be met. For a discussion of certain risks associated with
investment in the Funds, including their use of derivatives, see "Investment
Risks" on page 24.

HOTCHKIS AND WILEY (the "Advisor") acts as investment advisor to each Fund.

THE EQUITY INCOME FUND

The investment objective of the EQUITY INCOME FUND is to provide current income
and long-term growth of income, accompanied by growth of capital.

The EQUITY INCOME FUND will attempt to achieve its objective by investing in
equity securities. In selecting investments for the Fund, the Advisor focuses on
securities that it believes to have superior values. In arriving at this
determination, the Advisor will generally seek securities of companies that
have such characteristics as earnings yield at least 3% greater than the yield
on long-term bonds, dividend yield which exceeds the composite yield on the
securities comprising the Standard & Poor's Index of 500 Common Stocks ("S&P
500"), and overall financial strength.

Under normal market conditions, the EQUITY INCOME FUND will invest at least 80%
of its total assets in income-producing equity securities issued by companies
with a record of earnings and dividends. The remainder of its portfolio may be
invested in securities of companies which pay no dividends or interest but have
unrecognized potential for growth or changes in business or management that
indicate possible growth.

The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities to be invested in by the Fund will be rated investment grade or, if
unrated, be of comparable quality in the opinion of the Advisor, provided,
however, that the Fund may invest up to 5% of its net assets in convertible
securities rated at least B by Moody's Investors Service ("Moody's") or Standard
& Poor's Ratings Group ("S&P") or, if unrated, of comparable quality in the
opinion of the Advisor. For a description of "investment grade" see "The
BALANCED INCOME FUND." See the Appendix for a further description of ratings.

Securities rated Baa are considered by Moody's to have speculative
characteristics. For securities rated Baa by Moody's or BBB by S&P, changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade securities. Securities rated below BBB or Baa are judged to be
predominantly speculative with respect to their capacity to pay interest and
repay principal in accordance with the terms of their obligations and are
commonly known as "junk bonds." See "Investment Risks -- Risks of Investing in
Fixed-Income Securities" on page 25. Investors should carefully consider the
relative risks associated with investments in securities which carry lower
ratings and in comparable non-rated securities.

Subsequent to its purchase by the Fund, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the Advisor will consider such an event in
determining whether the Fund should continue to hold the security in its
portfolio.

11
<PAGE> 14
When market or economic conditions indicate, in the view of the Advisor, that a
temporary defensive investment strategy is appropriate, all or part of the
Fund's assets may be invested in investment grade debt obligations maturing in
one year or less from the date of the Fund's purchase, such as U.S. Treasury
bills, bank certificates of deposit, bankers' acceptances, commercial paper and
repurchase agreements.

The EQUITY INCOME FUND has the right to invest its assets on a "global" basis;
although there is no requirement that it do so. See "Securities and Techniques
Used by the Funds -- Foreign Securities" on page 20.

THE MID-CAP FUND

The investment objective of the MID-CAP FUND is to provide current income and
long-term growth of income, accompanied by growth of capital. The MID-CAP FUND
will attempt to achieve its objective by investing, under normal market
conditions at least 65% of its total assets in equity securities of mid-size
U.S. companies that, in the opinion of the Advisor, are undervalued. A "mid-size
company" is one which has market capitalization of $1 billion to $5 billion at
the time of investment.

There are risks associated with the MID-CAP FUND's investment in the securities
of smaller issuers. See "Investment Risks -- Risks of Investing in Small and
Mid-Size Companies" on page 24.

The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.

Under normal market conditions, the MID-CAP FUND will invest at least 50% of its
total assets in income-producing equity securities issued by companies with a
record of earnings and dividends. The remainder of its portfolio may be invested
in securities of companies which pay no dividends or interest but have potential
for growth unrecognized by the market or changes in business or management that
indicate possible growth.

The MID-CAP FUND has the right to invest its assets on a "global" basis; it may
invest in foreign securities if thereafter not more than 20% of its total assets
would be invested in the securities of foreign issuers, although there is no
requirement that the Fund invest in any foreign securities. See "Securities and
Techniques Used by the Funds -Foreign Securities" on page 20.

THE SMALL CAP FUND

The investment objective of the SMALL CAP FUND is capital appreciation. The
SMALL CAP FUND will attempt to achieve its objective by investing, under normal
circumstances, in the common stock of issuers which, in the opinion of the
Fund's Advisor, are undervalued as determined by a low price/earnings ratio
relative to their expected growth rate. Current income is a secondary
consideration.

12
<PAGE> 15
It has been the experience of the Advisor that investment opportunities are
frequently found in the securities of companies that are "undervalued" because
they are part of an industry that is out of favor with investors generally. Even
in such industries, however, individual companies may have high rates of growth
of earnings and be financially sound. At the same time, the price of their
common stock may be depressed because investors associate the companies with
their industries. The Advisor will attempt to identify such companies and invest
in their securities when, in the Advisor's judgment, opportunities for capital
appreciation exist.

Under normal circumstances, the SMALL CAP FUND invests at least 65% of its total
assets in the stock of small companies. In general, the Advisor will seek to
fully invest its assets in the stock of small companies. A "small company" is
one which has market capitalization of $1 billion or less at the time of
investment.

In selecting investments for the Fund, the Advisor focuses on securities that it
believes to have superior value. In arriving at this determination, the Advisor
will generally seek securities of companies that have such characteristics as
earning yield at least 3% greater than the yield on long-term bonds, dividend
yield which exceeds the composite yield on the securities comprising the Russell
2000 Index ("Russell 2000"), and overall financial strength. In addition, the
Advisor will seek equity securities of companies that are undervalued as
determined by a price/earnings ratio relative to their expected growth rate. To
the extent that the SMALL CAP FUND does invest in small issuers, there is the
risk that such securities will be less marketable or may be subject to greater
fluctuations in price than securities of larger issuers. See "Investment Risks
- -- Risks of Investing in Small and Mid-Size Companies" on page 24.

Common stock of companies described above includes rights or warrants for their
purchase and securities convertible into common stocks. See "THE EQUITY INCOME
FUND" for a description of the ratings of the convertible securities to be
invested in by the SMALL CAP FUND.

For temporary defensive purposes, all or a part of the SMALL CAP FUND's assets
may be invested in investment grade debt obligations maturing in one year or
less from the date of the Fund's purchase. See "The BALANCED INCOME FUND" for a
description of "investment grade."

The SMALL CAP FUND has the right to invest its assets on a "global" basis; as a
fundamental policy it may invest in foreign securities if thereafter not more
than 20% of its total assets would be invested in the securities of foreign
issuers, although there is no requirement that the Fund invest in any foreign
securities. See "Securities and Techniques Used by the Funds -- Foreign
Securities" on page 20.

THE INTERNATIONAL FUND

The investment objective of the INTERNATIONAL FUND is to provide current income
and long-term growth of income, accompanied by growth of capital. The Fund will
attempt to achieve its objective through a policy of investing in equity
securities in at least three non-U.S. markets. Ordinarily, the Fund will invest
in equity securities issued by companies located in some or all of the developed
foreign equity markets. These markets generally include 14 markets in Europe as
well as Australia, New Zealand, Japan, Hong Kong, Singapore, Malaysia, Canada
and South Korea. There are risks associated with investment in foreign
securities, as described under "Investment Risks -- Risks of Investing in
Emerging Market and Other Foreign Securities" on page 24.

In selecting investments for the Fund, the Advisor will, in general, use the
same criteria as those used in selecting investments for the EQUITY INCOME FUND;
that is, it will focus on securities that it believes have superior values. The
Advisor will generally seek equity securities of companies in each country that
have such characteristics as dividend yield greater than the local market
average; earnings yield at least three percentage points greater than the
country's 10-year government bond yield (or low price-to-earnings ratios
relative to the local market), and financial strength.

13
<PAGE> 16

Under normal market conditions, the INTERNATIONAL FUND will invest at least 80%
of its total assets in income-producing equity securities issued by companies
with a record of earnings and dividends. The remainder of its portfolio may be
invested in securities of companies which pay no dividends or interest, but have
potential for growth unrecognized by the market or changes in business or
management that indicate possible growth. The Fund will not invest in foreign
fixed-income securities with a maturity in excess of one year.

The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.

THE GLOBAL EQUITY FUND

The investment objective of the GLOBAL EQUITY FUND is to provide current income
and long-term growth of income, accompanied by growth of capital. The GLOBAL
EQUITY FUND will attempt to achieve its objective by investing in equity
securities in at least three different countries, which may include the U.S.,
but no country, other than the U.S., may represent more than 30% of it assets.

Ordinarily, the Fund will invest in equity securities issued by companies
located in the U.S. and developed foreign equity markets. These markets
generally include 14 markets in Europe as well as Australia, New Zealand, Japan,
Hong Kong, Singapore, Malaysia, Canada and South Korea. There are risks
associated with investment in foreign securities, as described under "Investment
Risks -- Risks of Investing in Emerging Market and Other Foreign Securities" on
page 24.

In selecting investments for the Fund, the Advisor will generally use the same
criteria as those used in selecting investments for the INTERNATIONAL FUND; that
is, it will focus on securities that it believes have superior values. The
Advisor will generally seek equity securities of companies in each country that
have such characteristics as dividend yield greater than the local market
average; earnings yield at least three percentage points greater than the
country's 10-year government bond yield (or low price-to-earnings ratios
relative to the local market), and financial strength.

Under normal market conditions, the GLOBAL EQUITY FUND will invest at least 80%
of its total assets in income-producing equity securities issued by companies
with a record of earnings and dividends. The remainder of its portfolio may be
invested in securities of companies which pay no dividends or interest, but have
potential for growth unrecognized by the market or changes in business or
management that indicate possible growth. The Fund will not invest in foreign
fixed-income securities with a maturity in excess of one year.

The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.

The Advisor intends that the Fund normally be fully invested, if sufficient
value can be found in international markets. Investments will be made based
primarily on the evaluation of each company, rather than characteristics of the
country or market in which the company is located.

The GLOBAL EQUITY FUND may purchase foreign currency options or enter into
forward foreign currency exchange contracts for the purpose of hedging against
the effect that currency fluctuations will have on the value of Fund assets or
liabilities. See "Securities and

14
<PAGE> 17

Techniques Used by the Funds -- Other Derivative Instruments" on page 23.

THE BALANCED INCOME FUND

The investment objective of the BALANCED INCOME FUND is to preserve capital
while producing a high total return. The BALANCED INCOME FUND will attempt to
achieve this high total return through a combination of income and capital
growth. The BALANCED INCOME FUND will attempt to achieve preservation of capital
through the investment policies discussed below and through careful selection
and supervision of the securities purchased. While not an objective of the Fund,
the Advisor's current goal is a return at least 4% greater than the rate of
inflation as measured by the Consumer Price Index.

While it is not a fundamental policy, it is expected that the BALANCED INCOME
FUND's assets will be allocated among equity securities, fixed-income
securities, and money market obligations. The amount of the BALANCED INCOME
FUND's assets invested in each category of securities is derived from a
proprietary model employed by the Advisor as to what relative portions of the
Fund's assets in each category will contribute to the achievement of the Fund's
objective; however, it is expected that investments in equity securities will
comprise at least 20% of the Fund's total assets and fixed-income senior
securities will comprise at least 25% of the Fund's total assets, except due to
changes in the market value of securities held. In the event that, due to such
market value changes, the percentage of the Fund's assets in either such
category comprises less than the requisite percentage of the Fund's total
assets, the Fund may, but is not required to, purchase additional securities of
that category. From inception to the date of this Prospectus, the Fund's
allocation to equity securities has ranged from 27% to 59%, and to fixed-income
securities has ranged from 41% to 73%.

The BALANCED INCOME FUND attempts to achieve growth of capital through its
investment in equity securities. The equity securities that the BALANCED INCOME
FUND may purchase consist of common stocks or securities having characteristics
of common stocks (such as convertible preferred stocks, convertible debt
securities or warrants) of domestic or foreign issuers. In selecting equity
securities, the Advisor will generally seek securities of companies that have
such characteristics as earnings yield at least 3% greater than the yield on
long-term bonds, dividend yield which exceeds the composite yield on the
securities comprising the S&P 500, and overall financial strength.

The BALANCED INCOME FUND attempts to earn current income and at the same time
reduce the fluctuation in the net asset value of the Fund's shares by investing
a portion of its assets in fixed-income securities. The fixed-income securities
that the BALANCED INCOME FUND may purchase must be investment grade and will
consist of: (i) debt securities maturing in more than one year from the date of
purchase that are issued by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities"); (ii) debt securities (such as
bonds and debentures) of other domestic or foreign issuers, maturing in more
than one year from the date of purchase; (iii) preferred stocks of domestic or
foreign issuers having an outstanding issue of investment grade debt securities;
(iv) mortgage- and other asset-backed securities, including collateralized
mortgage obligations ("CMOs") and Real Estate Mortgage Investment Conduits
("REMICs"); (v) variable and floating rate debt securities (including inverse
floaters); (vi) debt securities that are convertible into or exchangeable for
equity securities; (vii) structured debentures, bonds and notes; and (vii)
repurchase agreements and reverse repurchase agreements. See "Securities and
Techniques Used by the Funds" on page 19.

"Investment grade" means the debt securities have been rated at least (i) Baa by
Moody's or BBB by S&P, Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps
Credit Rating Co. ("Duff & Phelps"); (ii) A-2 by S&P, P-2 by Moody's, F-2 by
Fitch or D-2 by Duff & Phelps for short-term obligations; or (iii) of comparable
quality as determined by the Advisor in the case of unrated

15
<PAGE> 18
securities. All ratings are determined at the time of investment. See the
Appendix for a description of ratings.

The BALANCED INCOME FUND also attempts to earn current income and reduce the
fluctuation in the net asset value of its shares by investing a portion of its
assets in money market obligations. The money market obligations that the
BALANCED INCOME FUND may purchase consist of short-term (i.e., maturing in one
year or less from the date of purchase), dollar-denominated debt obligations
which are (i) U.S. Government securities; (ii) issued by domestic banks; or
(iii) issued by domestic corporations, if such corporate debt obligations are of
investment grade as described above. Money market obligations also include
investment grade debt securities that are subject to repurchase agreements.

Because the BALANCED INCOME FUND intends to allocate its assets among equities,
fixed-income securities and money market obligations, it may not be able to
achieve, at times, a total return as high as that of a portfolio with complete
freedom to invest its assets in any one type of security. Likewise, because at
least 25% of the BALANCED INCOME FUND'S portfolio will normally consist of debt
obligations, the Fund may not achieve the degree of capital appreciation that a
portfolio investing solely in equity securities might achieve. Although the
BALANCED INCOME FUND intends to invest in fixed-income securities to reduce the
price volatility of the Fund's shares, intermediate and long-term debt
securities do fluctuate in value more than money market obligations.

The BALANCED INCOME FUND has the right to invest its assets on a "global" basis;
as a fundamental policy it may invest in foreign securities if thereafter not
more than 20% of its total assets would be invested in the securities of foreign
issuers, although there is no requirement that the Fund invest in any foreign
securities. See "Securities and Techniques Used by the Funds -- Foreign
Securities" on page 20.

THE FIXED-INCOME FUNDS:

THE TOTAL RETURN BOND FUND

The investment objective of the TOTAL RETURN BOND FUND is to maximize long-term
total return. The Fund invests in a diversified portfolio of fixed-income
securities of varying maturities with a portfolio duration of from two to eight
years. The dollar-weighted average maturity of the portfolio of the Fund is
expected to range from two to fifteen years. Portfolio holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which the Advisor believes to be relatively undervalued. The Advisor
views bonds to mean any interest-bearing security that obligates the issuer to
pay the bondholder specified sums of money on specified dates and generally
requires the issuer to repay the principal amount of the loan at maturity.

THE LOW DURATION FUND

The investment objective of the LOW DURATION FUND is to maximize total return,
consistent with preservation of capital. The Fund invests in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of from one to three years. The dollar-weighted average maturity of the
portfolio of the Fund is expected to range from one to five years. The total
rate of return for this Fund is expected to exhibit less volatility than that of
a longer duration fixed-income fund such as the TOTAL RETURN BOND FUND.

16
<PAGE> 19
THE SHORT-TERM INVESTMENT FUND

The investment objective of the SHORT-TERM INVESTMENT FUND is to maximize total
return, consistent with preservation of capital. The Fund invests in a
diversified portfolio of fixed-income securities of varying maturities with a
portfolio duration of up to one year. The dollar-weighted average maturity of
the portfolio of the Fund will not exceed two years. The total rate of return
for this Fund is expected to exhibit the least volatility among the
income-oriented Funds within the Trust because it has the shortest duration.

INVESTMENT POLICIES OF THE FIXED-INCOME FUNDS

THE TOTAL RETURN BOND FUND, the LOW DURATION FUND and the SHORT-TERM INVESTMENT
FUND (the "FIXED INCOME FUNDS") will attempt to achieve their objectives by
investing in the following types of securities which may be issued by domestic
or foreign entities: (i) U.S. Government securities; (ii) corporate debt
securities, including bonds, notes and debentures; (iii) corporate commercial
paper; (iv) mortgage- and other asset-backed securities, including CMOs and
REMICs; (v) variable and floating rate debt securities (including inverse
floaters); (vi) structured debentures, bonds and notes; (vii) bank certificates
of deposit; (viii) fixed time deposits and bankers' acceptances; (ix) repurchase
agreements and reverse repurchase agreements; (x) debt securities that are
convertible into or exchangeable for equity securities ("convertible
securities"); (xi) obligations of foreign governments or their subdivisions,
agencies and instrumentalities; and (xii) obligations of international agencies
(such as the Agency for International Development) or supranational entities.
There is no limitation on the percentage of a Fund's assets that may be
committed to any of these types of securities, except to the extent that a
security may be deemed to be illiquid. See "Securities and Techniques Used by
the Funds" on page 19.

Under normal circumstances, the TOTAL RETURN BOND FUND will invest at least 70%
of its net assets in debt instruments rated at least investment grade, i.e., (i)
Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps, (ii) A-2 by S&P, P-2 by
Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term debt obligations,
or (iii) of comparable quality as determined by the Advisor in the case of
unrated securities. Up to 15% of the TOTAL RETURN BOND FUND's net assets may be
invested in securities rated below investment grade but rated B or higher by one
of the nationally recognized rating agencies or, if unrated, of comparable
quality in the opinion of the Advisor.

Under normal circumstances, the LOW DURATION FUND and the SHORT-TERM INVESTMENT
FUND will invest at least 70% of their net assets in securities rated at least:
(i) A by Moody's, S&P, Fitch or Duff & Phelps, (ii) A-2 by S&P, P-2 by Moody's,
F-2 by Fitch or D-2 by Duff & Phelps for short-term debt obligations, or (iii)
of comparable quality as determined by the Advisor in the case of unrated
securities. Up to 10% of the LOW DURATION FUND's and the SHORT-TERM INVESTMENT
FUND's net assets may be invested in securities rated below investment grade but
rated B or higher by one of the nationally recognized rating agencies or, if
unrated, of comparable quality in the opinion of the Advisor. The remainder of
the LOW DURATION FUND's and the SHORT-TERM INVESTMENT FUND's investments will be
rated Baa or BBB by at least one of these rating agencies or, if unrated, of
comparable quality in the opinion of the Advisor.

Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
Securities rated below BBB or Baa are judged to be predominantly speculative
with respect to their capacity to pay interest and repay principal in accordance
with the terms of their obligations and are commonly known as "junk bonds." See
"Investment Risks -- Risks of Investing in Fixed-Income Securities" on page 25.

Subsequent to its purchase by one of the Funds, a security may be assigned a
lower rating or cease to be rated.

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Such an event would not require the elimination of the issue from the portfolio,
but the Advisor will consider such an event in determining whether the Fund
should continue to hold the security in the portfolio.

Each of the FIXED-INCOME FUNDS may invest up to 15% of its net assets in
emerging market foreign securities, which are generally considered to be of a
credit quality below investment grade.

Each of the FIXED-INCOME FUNDS may invest up to 25% of its total assets in
securities of foreign issuers that are denominated in U.S. dollars. Investment
in securities of foreign issuers that are not denominated in U.S. dollars by
these Funds will be limited to a maximum of 15% of each FIXED-INCOME FUND's
total assets. See "Securities and Techniques Used by the Funds -- Foreign
Securities" on page 20.

The FIXED-INCOME FUNDS each invest in a diversified portfolio of fixed-income
securities of varying maturities with a different portfolio "duration." Duration
is a measure of the expected life of a fixed-income security that was developed
as a more precise alternative to the concept of "term to maturity." Duration
incorporates a bond's yield, coupon interest payments, final maturity, call and
put features and prepayment exposure into one measure. Traditionally, a
fixed-income security's "term to maturity" has been used as a proxy for the
sensitivity of the security's price to changes in interest rates (which is the
"interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until a fixed-income security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity.

Duration is a measure of the expected life of a fixed-income security on a
present value basis. Duration takes the length of time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a mortgage-backed, asset-backed, or callable bond, expected
to be received, and weights them by the present values of the cash to be
received at each future point in time. For any fixed-income security with
interest payments occurring prior to the payment of principal, duration is
ordinarily less than maturity. In general, all other things being equal, the
lower the stated or coupon rate of interest of a fixed-income security, the
longer the duration of the security; conversely, the higher the stated or coupon
rate of interest of a fixed-income security, the shorter the duration of the
security. There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. In these and
other similar situations, the Advisor will use more sophisticated analytical
techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. A Fund's computation of duration is
based on estimated rather than known factors. Thus, there can be no assurance
that a particular portfolio duration will at all times be achieved by a Fund.

Duration is used in the management of the Funds as a tool to measure interest
rate risk. For example, a Fund with a 2-year duration would be expected to
change in value 2% for every 1% move in interest rates. Assuming an expected
average duration of 2 years for the LOW DURATION FUND, a 1% decline in interest
rates would cause the Fund to gain 2% in price; likewise, a 1% rise in interest
rates would produce a decline of 2% in the Fund's price. Assuming an expected
average duration of .75 years for the SHORT-TERM INVESTMENT FUND, a 1% decline
in interest rates would cause the Fund to gain .75% in price; likewise, a 1%
rise in interest rates would produce a decline of .75% in the Fund's price.
Assuming an expected average duration of 4.5 years for the TOTAL RETURN BOND
FUND, a 1% decline in interest rates would cause the Fund to gain 4.5% in price;
likewise, a 1% rise in interest rates would produce a decline of 4.5% in the
Fund's price. Other factors such as changes in credit quality, prepayments, the
shape of the yield curve and liquidity affect the net asset value of the Funds
and may be correlated with changes in interest rates. These factors can
exacerbate swings in the Fund's share prices during periods of volatile interest
rate changes.

For a more detailed discussion of duration, see "Investment Objectives and
Policies -- Duration" in the Statement of Additional Information.

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SECURITIES AND TECHNIQUES USED BY THE FUNDS
- --------------------------------------------------------------------------------

The following provides a summary of the securities and techniques used by the
Funds. The Statement of Additional Information contains more detailed
information about these investments and the risks associated with them.

U.S. GOVERNMENT SECURITIES

The Funds may invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, such as
Treasury bills, certificates of indebtedness, notes, bonds and component parts
of notes or bonds (including the principal of such obligations or the interest
payments scheduled to be paid on such obligations). U.S. Government agencies and
instrumentalities that issue or guarantee securities include, but are not
limited to, the Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), Federal Home Loan Banks, Federal
Financing Bank, and Student Loan Marketing Association.

All Treasury securities are backed by the full faith and credit of the United
States. Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some, such
as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by FNMA, are supported only by the credit of the instrumentality and not by the
Treasury. If the securities are not backed by the full faith and credit of the
United States, the owner of the securities must look principally to the agency
issuing the obligation for repayment and may not be able to assert a claim
against the United States in the event that the agency or instrumentality does
not meet its commitment.

Among the U.S. Government securities that may be purchased by the Funds are
certain "mortgage-backed securities" of GNMA, the Federal Home Loan Mortgage
Corporation ("FHLMC") and FNMA. See the discussion of Mortgage-Related
Securities on page 22.

CORPORATE AND OTHER OBLIGATIONS

The BALANCED INCOME FUND and FIXED-INCOME FUNDs may invest in corporate debt
securities, variable and floating rate debt securities and corporate commercial
paper in the rating categories described above. Floating rate securities
normally have a rate of interest which is set as a specific percentage of a
designated base rate, such as the rate on Treasury bonds or bills or the prime
rate at a major commercial bank. The interest rate on floating rate securities
changes periodically when there is a change in the designated base rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates.

Structured debentures and structured notes are hybrid instruments with
characteristics of both bonds and swap agreements. Like a bond, these securities
make regular coupon payments and generally have fixed principal amounts.
However, the coupon payments are typically tied to a swap agreement which can be
affected by changes in a variety of factors such as exchange rates, the shape of
the yield curve and foreign interest rates. Because of these factors, structured
debentures and structured notes can display price behavior that is more volatile
than and often not correlated to other fixed-income securities.

The BALANCED INCOME FUND and FIXED-INCOME FUNDs may also invest in inverse
floaters and tiered index bonds. An inverse floater is a type of derivative that
bears a floating or variable interest rate that moves in the opposite direction
to the interest rate on another security or index level. Changes in the interest
rate of the other security or index inversely affect the residual interest rate
paid on the inverse floater, with the result that the inverse floater's price
will be considerably more volatile than that of a fixed-rate bond. Tiered index
bonds are also a type of derivative instrument. The

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<PAGE> 22
interest rate on a tiered index bond is tied to a specified index or market
rate. So long as this index or market rate is below a predetermined "strike"
rate, the interest rate on the tiered index bond remains fixed. If, however, the
specified index or market rate rises above the "strike" rate, the interest rate
on the tiered index bond will decrease. In general, the interest rates on tiered
index bonds and inverse floaters move in the opposite direction of prevailing
interest rates. The market for inverse floaters and tiered index bonds is
relatively new. These corporate debt obligations may have characteristics
similar to those of mortgage-related securities, but corporate debt obligations,
unlike mortgage-related securities, are not subject to prepayment risk other
than through contractual call provisions which generally impose a penalty for
prepayment.

ASSET-BACKED SECURITIES

The BALANCED INCOME FUND and FIXED-INCOME FUNDS may invest in securities whose
principal and interest payouts are backed by, or supported by, any of various
types of assets. These assets most typically include receivables related to the
purchase of automobiles, credit card loans, and home equity loans. These
securities generally take the form of a structured type of security, including
pass-through, pay-through, and stripped interest payout structures.

FOREIGN SECURITIES

Each Fund has the right to invest in foreign securities. Foreign economies may
differ from the U.S. economy; individual foreign companies may differ from
domestic companies in the same industry; and foreign currencies may be stronger
or weaker than the U.S. dollar. The Advisor believes that the ability to invest
abroad will enable the Funds to take advantage of these differences when they
are favorable.

Fixed-income securities that may be purchased by the INTERNATIONAL, GLOBAL
EQUITY, BALANCED INCOME and FIXED-INCOME FUNDS include debt obligations issued
or guaranteed by foreign governments, their subdivisions, agencies or
instrumentalities, or by supranational entities that have been constituted by
the governments of several countries to promote economic development, such as
The World Bank and The Asian Development Bank. Foreign investment in certain
foreign government debt is restricted or controlled to varying degrees.

The FIXED-INCOME FUNDS may invest in fixed-income securities of issuers located
in emerging foreign markets. Such markets generally include every country in the
world other than the U.S., Canada, Japan, Australia, Malaysia, New Zealand, Hong
Kong, Singapore, South Korea and most Western European countries. From time to
time, emerging markets have offered the opportunity for higher returns but
involve a higher level of risk. Accordingly, the Advisor believes that the
FIXED-INCOME FUNDS' limited ability to invest in emerging markets throughout the
world may enable the Funds to obtain a wider range of attractive investment
opportunities. Emerging market securities include securities issued or
guaranteed by governments, their agencies, instrumentalities or central banks
("sovereign debt"); securities of issuers organized and operated to restructure
the investment characteristics of sovereign debt; securities of banks and other
business entities; and securities denominated in or indexed to currencies of
emerging markets. These securities include "Brady Bonds," which afford emerging
market countries a means to restructure their outstanding commercial bank debt.
Foreign governmental issuers of debt or the governmental authorities that
control repayment of the debt may be unable or unwilling to repay principal or
pay interest when due and all or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.

Emerging market securities are generally considered to be of a credit quality
below investment grade, even though they often are not rated by any nationally
recognized rating agency. The Advisor seeks to reduce the risk associated with
emerging market securities by limiting the amount of such securities held by the
Funds, by the depth of its own credit analysis, and evaluation of political,
economic, currency and other factors that may be pertinent.

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<PAGE> 23
There are risks in investing in emerging market and other foreign securities.
See "Investment Risks -- Risks of Investing in Emerging Market and Other Foreign
Securities" on page 24.

REPURCHASE AGREEMENTS

Each Fund may enter into repurchase agreements involving U.S. Government
securities with commercial banks or broker-dealers, whereby the seller of a
security agrees to repurchase the security on an agreed-upon date in the future.
While each Fund intends to be fully "collateralized" as to such agreements, and
the collateral will be marked to market daily, if the person obligated to
repurchase from the Fund defaults, there may be possible delays and expenses in
liquidating the securities subject to the repurchase agreement, a decline in
their value and loss of interest.

REVERSE REPURCHASE AGREEMENTS

The BALANCED INCOME FUND and FIXED-INCOME FUNDS may enter into reverse
repurchase agreements, whereby a Fund sells securities concurrently with
entering into an agreement to repurchase those securities at a later date at a
fixed price. During the reverse repurchase agreement period, the Fund continues
to receive principal and interest payments on those securities. Reverse
repurchase agreements are speculative techniques involving leverage and are
considered borrowings by the Fund for purposes of the percentage limitations
applicable to borrowings.

BORROWING

As a fundamental policy, the EQUITY INCOME, MID-CAP, BALANCED INCOME, SMALL CAP,
INTERNATIONAL and GLOBAL EQUITY FUNDS may borrow money, but only from banks for
temporary or emergency purposes in amounts not exceeding 10% of the Fund's total
assets. The FIXED-INCOME FUNDS may borrow for temporary, emergency or investment
purposes. This borrowing may be unsecured. The 1940 Act requires a Fund to
maintain continuous asset coverage (that is, total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed.
Borrowing subjects a Fund to interest costs which may or may not be recovered by
appreciation of the securities purchased, and can exaggerate the effect on net
asset value of any increase or decrease in the market value of a Fund's
portfolio. This is the speculative factor known as leverage.

LOANS OF PORTFOLIO SECURITIES

For the purpose of achieving income, the FIXED-INCOME FUNDS may lend their
portfolio securities, provided: (i) the loan is secured continuously by
collateral consisting of short-term, high quality debt securities, including
U.S. Government securities, negotiable certificates of deposit, bankers'
acceptances or letters of credit, maintained on a daily marked-to-market basis
in an amount at least equal to the current market value of the securities
loaned; (ii) the Fund may at any time call the loan and obtain the return of the
securities loaned; (iii) the Fund will receive any interest or dividends paid on
the loaned securities; and (iv) the aggregate market value of securities loaned
will not at any time exceed one-third of the total assets of the Fund.

WHEN-ISSUED SECURITIES

The BALANCED INCOME FUND, INTERNATIONAL FUND, GLOBAL EQUITY FUND and
FIXED-INCOME FUNDS may purchase securities on a when-issued or delayed-delivery
basis, generally in connection with an underwriting or other offering.
When-issued and delayed-delivery transactions occur when securities are bought
with payment for and delivery of the securities scheduled to take place at a
future time, beyond normal settlement dates, generally from 15 to 45 days after
the transaction. The price that the Fund is obligated to pay on the settlement
date may be different from the market value on that date. While securities may
be sold prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them, unless a sale would be
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security each day in

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<PAGE> 24

determining the Fund's net asset value. The Fund will also establish a
segregated account with its custodian in which it will hold cash, U.S.
Government securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its obligations for when-issued
securities.

SHORT SALES

A Fund may make short sales of securities (i.e., sales
of securities the Fund does not own) or maintain a short position only if (i) at
all times when the short position is open, the Fund owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short (a short sale "against-the-box") and (ii)
not more than 25% of the Fund's net assets (taken at current value) is held as
collateral for such sales at any one time.

MORTGAGE-RELATED SECURITIES

The BALANCED INCOME FUND and the FIXED-INCOME FUNDS may invest in
mortgage-related securities, including mortgage pass-through securities and
collateralized mortgage obligations. 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, in
effect "passing through" monthly payments made by the individual borrowers on
the residential mortgage loans which underlie the securities (net of fees paid
to the issuer or guarantor of the securities). For a discussion of certain risks
associated with investment in mortgage-related securities, including their
volatility, see "Investment Risks -- Risks of Investing in Fixed-Income
Securities" on page 25.

Payment of principal and interest on some mortgage-related securities (but not
the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
GNMA) or by agencies or instrumentalities of the U.S. Government (in the case of
securities guaranteed by FNMA or the FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.

Collateralized mortgage obligations ("CMOs"), including CMOs that have elected
to be treated as Real Estate Mortgage Investment Conduits ("REMICs"), are hybrid
instruments with characteristics of both bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of securities guaranteed by
GNMA, FHLMC or FNMA or of mortgage pass-through securities created by
non-governmental issuers. CMOs are structured into multiple classes, with each
class bearing a different stated maturity. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes receive principal
only after the first class has been retired.

Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals, stripped mortgage-backed securities,
variable rate securities (including inverse floaters), or tiered index bonds and
may be structured in classes with rights to receive varying proportions of
principal and interest. Stripped mortgage-backed securities are derivative,
multi-class mortgage securities. The BALANCED INCOME FUND and the FIXED-INCOME
FUNDS may invest in stripped mortgage-backed securities issued by the U.S.

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Government, its agencies and instrumentalities. Stripped mortgage-backed
securities are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. In certain cases, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yields to maturity on IOs and
POs are sensitive to the rate of principal repayments (including prepayments) on
the related underlying mortgage assets, and principal payments may have a
material effect on yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a Fund may not
fully recoup its initial investment in IOs. Conversely, if the underlying
mortgage assets experience less than expected prepayments of principal, the
yield on POs could be materially adversely affected. Such securities will be
considered liquid only if so determined in accordance with guidelines
established by the Trustees. The BALANCED INCOME FUND and the FIXED-INCOME FUNDS
also may invest in stripped mortgage-backed securities that are privately
issued. These securities will be considered illiquid for purposes of each Fund's
limit on illiquid securities.

CMOs and other mortgage-related securities that are issued or guaranteed by the
U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities for purposes of applying a Fund's
diversification tests. Generally, the entity that has the ultimate
responsibility for the payment of interest and principal on a security is deemed
to be the issuer of an obligation.

OTHER DERIVATIVE INSTRUMENTS

In addition to the asset-backed securities and mortgage-related securities
(including tiered index bonds and inverse floaters) which may be purchased only
by the BALANCED INCOME FUND and the FIXED-INCOME FUNDS, all Funds may utilize
certain other financial instruments whose performance is derived from the
performance of an underlying asset ("derivatives"). The Funds may purchase and
write call and put options on securities, securities indexes and on foreign
currencies, and enter into futures contracts and use options on futures
contracts. The Funds also may enter into swap agreements with other
institutional investors with respect to foreign currencies, interest rates, and
securities indexes. The Funds may use these techniques to hedge against changes
in interest rates, foreign currency exchange rates or securities prices or as
part of their overall investment strategies. Each Fund will maintain segregated
accounts consisting of cash, U.S. Government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily (or, as permitted by
applicable regulation, enter into certain offsetting positions), to cover its
obligations under options, futures contracts and swap agreements to avoid
leveraging of the Fund. See "Investment Risks -- Risks of Using Certain
Derivatives" on page 26.

The Funds may buy or sell interest rate futures contracts, options on interest
rate futures contracts and options on debt securities for the purpose of hedging
against changes in the value of securities which a Fund owns or anticipates
purchasing due to anticipated changes in interest rates. The Funds also may
engage in currency exchange transactions by means of buying or selling foreign
currency on a spot basis, entering into forward foreign currency exchange
contracts, and buying and selling foreign currency options, futures and options
on futures. Foreign currency exchange transactions may be entered into for the
purpose of hedging against foreign currency exchange risk arising from the
Funds' investment or anticipated investment in securities denominated in foreign
currencies. A Fund will not enter into futures contracts or options thereon for
non-hedging purposes if, immediately thereafter, the aggregate initial margin
deposits on the Fund's futures positions and premiums paid for options thereon
would exceed 5% of the liquidation value of the Fund's total assets. There is no
other percentage limitation on a Fund's use of options, futures and options
thereon, except for the limitation on foreign currency option contracts
described below.

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<PAGE> 26
Also, the Funds may enter into interest rate, index and currency exchange rate
swap agreements for the purpose of attempting to obtain a particular desired
return at a lower cost to a Fund than if the Fund had invested directly in an
instrument that yielded that desired return. In a standard swap agreement, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on a particular predetermined investment or investments. Swap
agreements are subject to the Funds' overall limit that no more than 15% of net
assets may be invested in illiquid securities, and a Fund will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.

The Funds may purchase foreign currency options or enter into forward foreign
currency exchange contracts for the purpose of hedging against the effect that
currency fluctuations will have on the value of Fund liabilities, such as known
or expected redemptions or the payment of any declared dividends. During the
coming year, no Fund will enter into foreign currency option contracts if the
premiums on such options exceed 5% of the Fund's total assets. See "Investment
Objectives and Policies -- Derivative Instruments" in the Statement of
Additional Information.

INVESTMENT RISKS
- --------------------------------------------------------------------------------

The investment practices described above involve certain risks. The net asset
value of any of the Funds may increase or decrease for many reasons. These
include changes in the market prices of portfolio securities. This means an
investor's price may be worth more or less at redemption than at the time of
purchase. The following provides a summary of the more significant risks
associated with investing in the Funds. The Statement of Additional Information
contains more detailed information about these investments and the risks that
are associated with them.

RISKS OF INVESTING IN SMALL AND MID-SIZE COMPANIES

The MID-CAP FUND and SMALL CAP FUND invest a significant proportion of their
assets in the securities of small and medium-size companies. Investment in small
and medium-size companies involve greater risk than is customarily associated
with more established companies. These companies often have sales and earnings
growth rates which exceed those of large companies. Such growth rates may in
turn be reflected in more rapid share price appreciation. However, smaller
companies often have limited operating histories, product lines, markets, or
financial resources, and they may be dependent upon one-person management. These
companies may be subject to intense competition from larger entities, and the
securities of such companies may have limited marketability and may be subject
to more abrupt or erratic movements in price than securities of larger companies
or the market averages in general. Therefore, the net asset values of the
MID-CAP and SMALL CAP FUNDS' shares may fluctuate more widely than the popular
market averages.

RISKS OF INVESTING IN EMERGING MARKET AND OTHER FOREIGN SECURITIES

Investments in emerging market and other foreign securities involve certain risk
considerations not typically associated with investing in securities of U.S.
issuers, including: (a) currency devaluations and other currency exchange rate
fluctuations; (b) political uncertainty and instability; (c) more substantial
government involvement in the economy; (d) higher rates of inflation; (e) less
government supervision and regulation of the securities markets and participants
in those markets; (f) controls on foreign investment and limitations on

24
<PAGE> 27
repatriation of invested capital and on a Fund's ability to exchange local
currencies for U.S. dollars; (g) greater price volatility, substantially less
liquidity and significantly smaller capitalization of securities markets; (h)
absence of uniform accounting and auditing standards; (i) generally higher
commission expenses; (j) delay in settlement of securities transactions; and (k)
greater difficulty in enforcing shareholder rights and remedies.

RISKS OF INVESTING IN FIXED-INCOME SECURITIES

The Funds which invest in fixed-income securities are subject primarily to
interest rate and credit risk. Interest rate risk is the potential for a decline
in bond prices due to rising interest rates. In general, bond prices vary
inversely with interest rates. The change in bond price depends on several
factors, including the bond's maturity date. In general, bonds with longer
maturities are more sensitive to changes in interest rates than bonds with
shorter maturities. Credit risk is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a Fund.

The BALANCED INCOME FUND and FIXED-INCOME FUNDS may invest in mortgage- and
asset-backed securities. The yield characteristics of mortgage-backed and
asset-backed securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if a Fund purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if a Fund purchases these securities at a
discount, faster than expected prepayments will increase yield to maturity,
while slower than expected prepayments will reduce yield to maturity. Although
the extent of prepayments on a pool of mortgage loans depends on various
economic and other factors, as a general rule, prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Asset-backed securities,
although less likely to experience the same prepayment rates as mortgage-backed
securities, may respond to certain of the same factors influencing prepayments,
while at other times different factors will predominate. Mortgage-backed
securities and asset-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment.

The BALANCED INCOME FUND and FIXED-INCOME FUNDs may invest in stripped mortgage-
or asset-backed securities, which receive differing proportions of the interest
and principal payments from the underlying assets. The market value of such
securities generally is more sensitive to changes in prepayment and interest
rates than is the case with traditional mortgage- and asset-backed securities,
and in some cases the market value may be extremely volatile. With respect to
certain stripped securities, such as interest only ("IO") and principal only
("PO") classes, a rate of prepayment that is faster or slower than anticipated
may result in a Fund failing to recover all or a portion of its investment, even
though the securities are rated investment grade. Certain of the stripped
mortgage- and asset-backed securities held by the Funds are considered to be
illiquid under guidelines established by the Trustees.

The FIXED-INCOME FUNDS and, to a limited extent, the EQUITY INCOME FUND may
invest a portion of their assets in non-investment grade debt securities,
commonly referred to as "junk bonds." Low-rated and comparable unrated
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as speculative with
respect to the issuer's capacity to pay interest and to repay principal. The
market values of certain of these securities tend to be more sensitive to
individual corporate development and changes in economic conditions than higher
quality bonds. In

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addition, low-rated and comparable unrated securities tend to be less marketable
than higher-quality debt securities because the market for them is not as broad
or active. The lack of a liquid secondary market may have an adverse effect on
market price and a Fund's ability to sell particular securities.

RISKS OF USING CERTAIN DERIVATIVES

Participation in the options or futures markets involves investment risks and
transaction costs to which a Fund would not be subject absent the use of these
strategies. If the Advisor's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategies were not
used. Risks inherent in the use of options, futures contracts and options on
futures contracts include: (i) dependence on the Advisor's ability to predict
correctly movements in the direction of interest rates and securities prices;
(ii) imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities being hedged;
(iii) the fact that skills needed to use these strategies are different from
those needed to select portfolio securities; (iv) the absence of a liquid
secondary market for any particular instrument at any time; (v) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (vi) the possible inability of a Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to sell the security at a disadvantageous
time, due to the requirement that the Fund maintain "cover" or segregate
securities in connection with hedging transactions. The loss from investing in
futures transactions is potentially unlimited. There also is no assurance that a
liquid secondary market will exist for futures contracts and options thereon in
which a Fund may invest. See "Investment Objectives and Policies -- Derivative
Instruments" in the Statement of Additional Information.

PRINCIPAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

Each Fund is subject to certain investment restrictions which are fundamental
policies. Fundamental policies are those that cannot be changed without the
approval of a majority (as defined in the 1940 Act) of that Fund's outstanding
voting securities. Each Fund's investment objective is a fundamental policy.
Among its restrictions, a Fund may not (i) with respect to 75% of its total
assets, invest more than 5% of its total assets (determined at the time of
investment) in securities of any one issuer (other than U.S. Government
securities), (ii) with respect to 75% of its total assets, purchase more than
10% of the outstanding voting securities of any one issuer or (iii) invest more
than 25% of its total assets (determined at the time of investment) in one or
more issuers having their principal business activities in a single industry.
Additional information about each Fund's investment restrictions is contained in
the Statement of Additional Information. It is the position of the Securities
and Exchange Commission that open-end investment companies such as the Funds
should not make certain investments if thereafter more than 15% of the value of
their net assets would be invested in these securities. As a matter of operating
policy (though not a fundamental policy), the Funds limit such investments to no
more than 15% of the value of their net assets. The investments in this 15%
limit include: (i) those which are restricted, i.e., those which cannot freely
be sold for legal or contractual reasons; (ii) fixed time deposits subject to
withdrawal penalties (other than overnight deposits); and (iii) repurchase
agreements having a maturity of more than seven days. The 15% limitation does
not include obligations which are payable at principal amount plus accrued
interest within seven days after purchase.

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<PAGE> 29
ORGANIZATION AND MANAGEMENT
- --------------------------------------------------------------------------------

ORGANIZATION AND VOTING RIGHTS

The Trust was organized on August 22, 1984 as a Massachusetts business trust. It
is a diversified, open-end, management investment company currently consisting
of ten separate series. The Trust's Board of Trustees decides on matters of
general policy and reviews the activities of the Advisor, and the Trust's
officers conduct and supervise the daily business operations of the Trust. Each
Fund is a series of shares, each having separate assets and liabilities, of the
Trust. The Board of Trustees may, at its own discretion, create additional
series of shares and classes within series.

Generally, the Funds will not hold an annual meeting of shareholders unless
required by the 1940 Act. Shareholders have one vote per share owned. Matters
submitted to shareholders must be approved by a majority of the outstanding
securities of each Fund, unless it is clear that the interests of each Fund in
the matter are identical or the matter does not affect a Fund. At the request of
the holders of at least 10% of the shares, the Trust will hold a meeting to vote
on the removal of a Trustee, which can occur by a vote of a majority of the
outstanding shares. Ten shareholders holding the lesser of $25,000 worth or one
percent of a Fund's shares may advise the Trustees in writing that they wish to
communicate with other shareholders for the purpose of requesting a meeting to
remove a Trustee. The Trustees will then, if requested by the applicants, mail
at the applicants' expense the applicants' communications to all other
shareholders.

THE INVESTMENT ADVISOR

HOTCHKIS AND WILEY is located at 800 West 6th Street, Los Angeles, California
90017, acts as investment advisor to the Funds and generally administers the
affairs of the Trust. Subject to the direction and control of the Board of
Trustees, the Advisor supervises and arranges the purchase and sale of
securities held in the portfolios of the Funds.

The Advisor, which is a partnership established in 1980, has entered into a
purchase agreement with Merrill Lynch and Co., Inc., a Delaware corporation
("ML"). The purchase by ML of the partnership interests in the Advisor is
subject to a number of contingencies, including approval by the Trust's Board of
Trustees and shareholders of new investment advisory agreements. The approvals
have already been received. The transaction is expected to close in the fourth
quarter of 1996. If the transaction occurs, it is anticipated that the Funds
will be operated in the same manner as they are currently.

For the services of the Advisor to the Funds other than the Fixed-Income Funds,
the Trust, under separate Investment Advisory Agreements between the Trust and
the Advisor, pays the Advisor a fee, computed daily and payable monthly, at an
annual rate of 0.75% of each Fund's average daily net assets. This fee is higher
than that paid by most mutual funds, but does not reflect the reimbursement of
certain of the Funds' expenses as described below.

Under the Investment Advisory Agreement relating to the TOTAL RETURN BOND FUND,
the Trust pays the Advisor a fee, computed daily and payable monthly, at an
annual rate of 0.55% of the Fund's average daily net assets.

Under the Investment Advisory Agreement relating to the LOW DURATION FUND, the
Trust pays the Advisor a fee, computed daily and payable monthly, at an annual
rate of 0.46% of the Fund's average daily net assets.

Under the Investment Advisory Agreement relating to the SHORT-TERM INVESTMENT
FUND, the Trust pays the Advisor a fee, computed daily and payable monthly, at
an annual rate of 0.40% of the Fund's average daily net assets under
$100,000,000, 0.35% of the Fund's average daily net assets from $100,000,000 up
to $250,000,000, 0.30% of the Fund's average daily net assets from $250,000,000
up to $500,000,000, and 0.25% of the Fund's average daily net assets over
$500,000,000.

In addition to the fee payable to the Advisor, each Fund is responsible for its
operating expenses

27
<PAGE> 30
including: (i) interest and taxes; (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses of the Trust's Trustees other than
those affiliated with the Advisor; (v) legal and audit expenses; (vi) fees and
expenses of the Fund's custodian and any subcustodian, shareholder servicing or
transfer agent and accounting services agent; (vii) expenses incident to the
issuance of its shares, including issuance on the payment of, or reinvestment
of, dividends; (viii) fees and expenses incident to the registration under
federal or state securities laws of the Trust or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy material to
shareholders of the Trust; (x) all other expenses incident to holding meetings
of the Trust's shareholders; (xi) dues or assessments of or contributions to the
Investment Company Institute or any successor; and (xii) such non-recurring
expenses as may arise, including litigation affecting the Trust and the legal
obligations which the Trust may have to indemnify its officers and Trustees with
respect thereto.

Although not required to do so, the Advisor has agreed to reimburse each Fund to
the extent necessary so that the expenses of a Fund (other than the FIXED-INCOME
FUNDs) will not exceed 1% of the Fund's average net assets. The Advisor has
agreed to limit the expenses of the TOTAL RETURN BOND FUND to 0.65%, the LOW
DURATION FUND to 0.58% and the SHORT-TERM INVESTMENT FUND to 0.48% of each
Fund's average net assets. The Advisor will give shareholders at least 30 days'
notice of any decision to change this reimbursement policy.

The Advisor also manages individual investment advisory accounts. The Advisor
credits the fees charged to individual advisory accounts by the amount of the
investment advisory fee and expenses charged to that portion of the client's
assets that are invested in any Fund.

The Investment Advisory Agreements permit the Advisor to allocate brokerage
based on sales of shares of funds managed by the Advisor. No such allocation has
been made to date.

THE ADMINISTRATOR

Firstar Trust Company, 615 East Michigan Street, Milwaukee, Wisconsin 53202,
serves as administrator to the Trust pursuant to a Fund Administration Servicing
Agreement.

PORTFOLIO MANAGERS

EQUITY INCOME FUND

The current portfolio manager of the Equity Income Fund is Gail Bardin. Ms.
Bardin has responsibility for the day-to-day management of the Fund's portfolio.
Ms. Bardin is a managing director of the Advisor. She began co-managing the Fund
in April 1994, and assumed full responsibility for managing the Fund in October
1996. Ms. Bardin has been a portfolio manager of the Advisor since 1988.

MID-CAP FUND

The current portfolio managers of the MID-CAP FUND are Michael Baxter and Jim
Miles. Mr. Baxter and Mr. Miles have responsibility for the day-to-day
management of the Fund's portfolio. They have served as portfolio managers of
the Fund since its inception in January 1997. Mr. Baxter is a managing director
and has been a portfolio manager of the Advisor since 1990. Mr. Miles is a
portfolio manager and joined the Advisor in May 1995. Prior to joining the
Advisor, Mr. Miles was with BT Securities Corporation (an affiliate of Bankers
Trust New York Corporation) as vice president in the BT Securities Finance Group
from 1988 to 1995.

SMALL CAP FUND

The current portfolio managers of the SMALL CAP FUND are John Hitchman and Jim
Miles. Mr. Hitchman and Mr. Miles have responsibility for the day-to-day
management of the Fund's portfolio. Mr. Hitchman has served as a portfolio
manager of the Advisor and the Fund since 1988. Mr. Miles began co-managing the
Fund in May 1995 when he joined the Advisor. Mr. Miles' background is described
under "MID-CAP FUND" above.

28
<PAGE> 31

INTERNATIONAL FUND

The current portfolio managers of the INTERNATIONAL FUND are Sarah Ketterer,
Harry Hartford and David Chambers, portfolio managers of the Advisor. Ms.
Ketterer, Mr. Hartford and Mr. Chambers have responsibility for the day-to-day
management of the Fund's portfolio. Ms. Ketterer has served as portfolio manager
for the Fund since its inception in October 1990. Prior to joining the Advisor,
Ms. Ketterer was with Bankers Trust Company as an Associate from 1987 to 1990
and a Financial Analyst with Dean Witter Reynolds from 1983 to 1985. Mr.
Hartford has served as a portfolio manager of the Fund since May 1994. Prior to
joining the Advisor, Mr. Hartford was with the Investment Bank of Ireland as a
Senior Manager, International and Global Equities, from 1985 to 1994. Mr.
Chambers has served as a portfolio manager of the Fund since October 1996. Prior
to joining the Advisor, Mr. Chambers was with Baring Asset Management, Inc. as
Senior Vice President, Global Equities from 1992 to 1995 and Baring Brothers,
London, England as Assistant Director, Corporate Finance from 1990 to 1991.

GLOBAL EQUITY FUND

The current portfolio managers of the GLOBAL EQUITY FUND are Sarah Ketterer and
Patricia McKenna, portfolio managers of the Advisor. Ms. Ketterer and Ms.
McKenna have responsibility for the day-to-day management of the Fund's
portfolio. They have served as portfolio managers to the Fund since its
inception in January 1997. Ms. Ketterer's background is described under
"INTERNATIONAL FUND" above. Prior to joining the Advisor in October, 1996, Ms.
McKenna was with Trust Company of the West as an Equity Research Analyst from
1992 to 1995 and Fieldstone Private Capital Group where she was responsible for
structuring private placements and tax leases from 1990 to 1992.

BALANCED INCOME FUND

The current portfolio managers of the BALANCED INCOME FUND are Roger DeBard and
Michael Sanchez. Mr. DeBard has responsibility for the day-to-day management of
the equity portion of the Fund's portfolio. Mr. DeBard is a managing director of
the Advisor and has served as portfolio manager for the Fund since its inception
in August 1985. Mr. DeBard and Mr. Sanchez have responsibility for the
day-to-day management of the fixed-income portion of the Fund's portfolio. Mr.
Sanchez has served as a portfolio manager for the Fund since joining the Advisor
in August 1996. Prior to joining the Advisor, Mr. Sanchez was with Provident
Investment Counsel as a Senior Vice President and portfolio manager from 1991 to
1995 and with ARCO Investment Management Company as Director of Fixed Income
Investments from 1988 to 1991.

FIXED-INCOME FUNDS

The current portfolio managers of the FIXED-INCOME FUNDS are Roger DeBard and
Michael Sanchez, portfolio managers of the Advisor. Mr. DeBard and Mr. Sanchez
have responsibility for the day-to-day management of the Funds' portfolios. They
have served as portfolio managers for the Funds since August 1996 and their
backgrounds are described under "BALANCED INCOME FUND" above.

29
<PAGE> 32
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------

The minimum initial investment in each Fund is $10,000. There is no minimum
subsequent investment. The Trust reserves the right to waive its minimum
investment requirements.

INVESTING BY WIRE

Investors may invest in any Fund by wiring the amount to be invested to HOTCHKIS
AND WILEY FUNDS in care of Firstar Trust Company ("Transfer Agent"), at the
following address:

Firstar Trust Company MFS
ABA #0750-00022
For credit to Firstar Trust Company
Account #112-952-137
For further credit to HOTCHKIS AND WILEY FUNDS
[Name of Fund]
Account # [Shareholder account number]

Prior to wiring any funds, the shareholder should call
1-800-236-4479 to notify us of the wire to insure proper credit when the wire is
received. If the wire represents an initial investment, the investor should mail
an application form to the Transfer Agent by regular mail to:

Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701

or by express, registered or certified mail to:

Firstar Trust Company
615 East Michigan Avenue, 3rd Floor
Milwaukee, Wisconsin 53202

Wired funds are considered received on the day they are deposited in HOTCHKIS
AND WILEY'S account if your telephone call is received before the close of the
New York Stock Exchange (currently 4:00 p.m., Eastern time), and the funds are
deposited that day.

INVESTING BY MAIL

Investors may also purchase shares by sending a check or money order payable to
HOTCHKIS AND WILEY FUNDS, together with the application form to the address
above.

Checks should be drawn on a U.S. bank and must be payable in U.S. dollars.
Shares of a Fund will be purchased for the account of the investor at the net
asset value next determined after receipt by the Transfer Agent, or an
authorized sub-agent, of the investor's check or money order. The Trust will not
accept cash, drafts or third party checks. In the event a check is not honored
by the investor's bank, the investor will be liable for any loss sustained by
the Fund, as well as a service charge imposed by the Transfer Agent in the
amount of $20. Forms for additional contributions by check or change of address
are provided on account statements.

AUTOMATIC INVESTMENT PLAN (AIP)

The Trust offers an AIP whereby a shareholder may purchase shares on a regular
scheduled basis ($50 minimum per transaction up to four times per month.) Under
the AIP, the shareholder's designated bank account is debited a preauthorized
amount and applied to purchase shares. The financial institution must be a
member of the ACH network. There is no charge for this service. A $20 fee will
be charged by the transfer agent if there are insufficient funds in the account
at the time of the scheduled transaction. The program will automatically
terminate upon redemption of all shares in an account.

ADDITIONAL INFORMATION ABOUT INVESTMENT PURCHASES

The Trust may also accept orders from certain qualified institutions, with
payment made to the Fund at a later time. The Advisor is responsible for
insuring that such payment is made on a timely basis. A broker-dealer which
effects such a purchase for an investor may charge the investor a reasonable
service fee, no part of which will be paid to the Fund or the Advisor.

The Advisor may make payments out of its own resources to dealers and other
persons who distribute shares of the Funds.

The Trust does not consider the U.S. Postal Service or other independent
delivery services to be its agents.

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<PAGE> 33
Therefore, deposit in the mail or with such services does not constitute receipt
by the Transfer Agent.

The Trust resumes the right to suspend the offering of shares for a period of
time, and it reserves the right to reject any specific purchase order.

HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------

REDEEMING BY MAIL

A shareholder wishing to redeem shares may do so at any time by delivering
written instructions by regular mail to the Transfer Agent at P.O. Box 701,
Milwaukee, Wisconsin 53202. If you would like to send your redemption request
via overnight mail to the Transfer Agent, the address is 615 East Michigan,
Third Floor, Milwaukee, Wisconsin 53202. The redemption request should identify
the Fund, the account name, the account number, the number of shares or dollar
amount to be redeemed and be signed by all registered owners exactly as the
account is registered. The redemption request will not be accepted unless it
contains all required documents in proper form, as described below. If the
request is in proper form, the shares will be redeemed at the net asset value
next determined after receipt of the request by the Transfer Agent.

REDEEMING BY TELEPHONE

You may redeem shares (minimum of $1,000 per transaction) by telephone and have
the proceeds wired to the bank account or mailed to the address as stated on the
Transfer Agent's records. IN ORDER TO REDEEM BY TELEPHONE, YOU MUST SELECT THE
APPROPRIATE BOX ON THE ACCOUNT APPLICATION AND SHARES MUST BE HELD IN
NON-CERTIFICATE FORM. In order to arrange for telephone redemptions after an
account has been opened or to change the bank account or address designated to
receive redemption proceeds, a written request must be sent to the Trust. The
request must be signed by each shareholder of the account, with the signatures
guaranteed as described below. Once this feature has been requested, shares may
be redeemed by calling Investor Services at 1-800-236-4479 and giving the
account name, account number, and amount of redemption. Joint accounts require
only one of the shareholders to telephone. A signature guarantee is required for
any redemption or where the account address has been changed within the prior 15
days.

If an investor redeems shares by telephone and requests wire payment, payment of
the redemption proceeds will normally be made in federal funds on the next
business day provided that the redemption order is received by the Transfer
Agent before 3:00 p.m. (Central time).

PROPER FORM

If any shares being redeemed are represented by share certificates, the
certificates must be surrendered. The certificates must either be endorsed or
accompanied by a stock power signed by the registered owners, exactly as the
certificates are registered. If the proceeds of any redemption (a) exceed
$50,000, (b) are paid to a person other than the record owner, (c) are sent to
an address or bank account other than as shown on the Transfer Agent's records
or (d) are paid to a corporation, a partnership, trust or fiduciary, the
signatures on the redemption request and on the certificates, if any, must be
guaranteed. You may obtain a signature guarantee from: (1) a bank which is a
member of the FDIC; (2) a trust company; (3) a member firm of a national
securities exchange; or (4) another eligible guarantor institution. Guarantees
must be signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept signature guarantees from notaries public. Additional documents may be
required from corporations or other organizations, fiduciaries or anyone other
than the shareholder of record. Any questions concerning documents needed should
be directed to 1-800-236-4479.

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<PAGE> 34

PAYMENTS

After the Transfer Agent has received the redemption request and all proper
documents, payment for shares tendered will generally be made within three
business days. Payment may be delayed under unusual circumstances, as specified
in the 1940 Act. Payment will be sent only to shareholders at the address of
record. In addition, if the shares being redeemed were purchased by check, the
Trust reserves the right to delay up to 12 days payment of the redemption
proceeds until it is satisfied that the check has been honored by the investor's
bank.

If the redemption proceeds are to be mailed or wired to the shareholder's bank
account, the bank involved must be a commercial bank located within the United
States.

ADDITIONAL INFORMATION ABOUT INVESTMENT REDEMPTIONS

The Funds reserve the right to reject any redemption request and the redemption
privilege may be modified or terminated at any time on thirty days' notice to
shareholders. In an effort to prevent unauthorized or fraudulent redemption
requests by telephone, the Trust and the Transfer Agent employ reasonable
procedures specified by the Funds to confirm that such instructions are genuine.
Among the procedures used to determine authenticity, investors electing to
redeem or exchange by telephone will be required to provide their account
number. All such telephone transactions will be tape recorded and confirmed in
writing to the shareholder. The Trust may implement other procedures from time
to time. If reasonable procedures are not implemented, the Trust and/or the
Transfer Agent may be liable for any loss due to unauthorized or fraudulent
transactions. IN ALL OTHER CASES, THE SHAREHOLDER IS LIABLE FOR ANY LOSS FOR
UNAUTHORIZED TRANSACTIONS. In periods of severe market or economic conditions,
the telephone redemption of shares may be difficult to implement and
shareholders should redeem shares by writing to the Transfer Agent at the
address listed above. If for any other reason a shareholder is unable to redeem
by telephone, shareholders should redeem shares by writing to the Transfer Agent
on page 31.

REDEMPTION IN KIND

If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of any Fund to make payment wholly in
cash, the Fund may pay the redemption price in part by a distribution in kind of
readily marketable securities from the portfolio of that Fund, in lieu of cash.
The Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which each Fund is obligated to redeem shares solely in cash up to the lesser
of $250,000 or one percent of the net asset value of the Fund during any 90 day
period for any one shareholder. Should redemptions by any shareholder exceed
such limitation the Fund will have the option of redeeming the excess in cash or
in kind. If shares are redeemed in kind, the redeeming shareholder would incur
brokerage costs in converting the assets into cash.

REDEMPTION OF SMALL ACCOUNTS

The Board of Trustees may redeem all of the shares of any shareholder whose
account has declined to a net asset value of less than $1,000, as a result of a
transfer or redemption, at the net asset value determined as of the close of
business on the business day preceding the sending of the proceeds of such
redemption. The Trust would give shareholders whose shares were being redeemed
60 days' prior written warning in which to purchase sufficient shares to avoid
such redemption.

REPURCHASES

The Trust may accept orders for the repurchase of its shares from certain
qualified institutions. Such an institution may charge the shareholder a fee for
its services. The Trust may also waive or modify its requirements as to proper
form for such institutions.

WITHHOLDING

The Fund may be required to withhold federal income tax, at a rate of 31%, from
proceeds of redemptions, if the shareholder is subject to backup withholding.
Failure to provide a certified tax identification number at the time an account
is opened will cause tax to be withheld.

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<PAGE> 35

HOW TO EXCHANGE SHARES
- --------------------------------------------------------------------------------

Shareholders are permitted to exchange their shares in
a Fund for shares of other Funds in the Trust, provided that such shares may
legally be sold in the state of the investor's residence. Shares subject to an
exchange must have a current value of at least $1,000.

BY MAIL

A shareholder wishing to exchange shares may do so at any time by delivering
written instructions by regular mail to the Transfer Agent at P.O. Box 701,
Milwaukee, Wisconsin 53202, or by overnight mail to the Transfer Agent at 615
East Michigan, Third Floor, Milwaukee, Wisconsin 53202. The exchange request
should identify the account name, account number and the number of shares to be
exchanged. The exchange request should be signed by all registered owners
exactly as the account is registered.

BY TELEPHONE

Shareholders are permitted to exchange their shares in a Fund for shares of
other Funds in the Trust by telephone provided that the shareholder has selected
the appropriate box on the Account Application, and shares are held in
non-certificate form. Telephone exchange requests should be directed to Investor
Services 1-800-236-4479. In order to arrange for telephone exchange after an
account has been opened, a written request must be sent to the Transfer Agent at
its address listed above. The request must be signed by each shareholder of the
account, with the signatures guaranteed as described above. In order to request
an exchange by telephone, an investor must give the account name, account number
and the amount or number of shares to be exchanged.

ADDITIONAL INFORMATION ABOUT INVESTMENT EXCHANGES

For purposes of processing exchanges, the value of the shares suspended and the
value of shares acquired, are the net asset values of such shares next computed
after receipt of the exchange order. An exchange of shares is treated for
federal income tax purposes as a redemption (sale) of shares given in exchange
by the shareholder and an exchanging shareholder may, therefore, realize a
taxable gain or loss in connection with the exchange.

The Funds reserve the right to reject any exchange request and the exchange
privilege may be modified or terminated at any time on thirty days' notice to
shareholders. In periods of severe market or economic conditions, the telephone
exchange of shares may be difficult to implement and shareholders should redeem
shares by writing to the Transfer Agent at the address listed above.

In an effort to prevent unauthorized or fraudulent exchange requests by
telephone, the Trust and the Transfer Agent employ reasonable procedures
specified by the Funds to confirm that such instructions are genuine. Among the
procedures used to determine authenticity, investors electing to exchange by
telephone will be required to provide their account number. All such telephone
transactions will be tape recorded and confirmed in writing to the shareholder.
The Trust may implement other procedures from time to time. If reasonable
procedures are not implemented, the Trust and/or the Transfer Agent may be
liable for any loss due to unauthorized or fraudulent transactions. IN ALL OTHER
CASES, THE SHAREHOLDER IS LIABLE FOR ANY LOSS FOR UNAUTHORIZED TRANSACTIONS.

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<PAGE> 36
DIVIDENDS AND TAX STATUS
- --------------------------------------------------------------------------------

The SMALL CAP FUND expects to pay income dividends, if any, annually; the EQUITY
INCOME and BALANCED INCOME FUNDS expect to pay income dividends quarterly; the
MID-CAP, INTERNATIONAL and GLOBAL EQUITY FUNDS expect to pay income dividends
semi-annually; and the FIXED-INCOME FUNDS expect to declare income dividends
daily and pay them monthly to shareholders.

Distributions from net realized short-term gains, if any, and distributions from
any net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) realized through October 31st of each year and not
previously paid out will be paid out after that date; each Fund may also pay
supplemental distributions after the end of the Trust's fiscal year. Dividends
and distributions are paid in full and fractional shares of each Fund based on
the net asset value per share at the close of business on the record date,
unless the shareholder requests, in writing to the Trust, payment in cash. The
Trust will notify each shareholder after the close of its fiscal year of both
the dollar amount and the tax status of that year's distributions.

The MID-CAP FUND and GLOBAL EQUITY FUND intend to elect to qualify and remain
qualified as regulated investment companies under Subchapter M of the Internal
Revenue Code (the "Code"). Each other Fund has qualified as a regulated
investment company during the last taxable year, and each intends to do so in
the future. Each Fund is taxed as a separate entity under Subchapter M and
qualifies on a separate basis. If so qualified, each Fund will not be subject to
federal income taxes on its net investment income and capital gains, if any,
realized during any fiscal year which it distributes to its shareholders
provided that at least 90% of its net investment income earned in the fiscal
year is distributed.

All dividends from net investment income together with distributions of
short-term capital gains (collectively, "income dividends"), will be taxable as
ordinary income to the shareholders even though paid in additional shares. Any
net capital gains ("capital gains distributions") distributed to shareholders
are taxable as long-term capital gains to the shareholders regardless of the
length of time a shareholder has owned his shares.

The Code provides for a dividends-received deduction (the "deduction") by
corporations. Special provisions are contained in the Code as to the eligibility
of dividends for the deduction. The basic test under the Code for determining
the extent to which the dividends paid by each Fund are eligible for the
deduction is the extent to which the Fund's income is derived from qualifying
dividends received from domestic corporations. See "Dividends and Tax Status" in
the Statement of Additional Information for additional information about the
deduction.

Dividends and interest received by a Fund may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate these foreign taxes, and foreign
countries generally do not impose taxes on capital gains on investments by
foreign investors. If more than 50% of the value of the INTERNATIONAL and GLOBAL
EQUITY FUNDs' total assets at the close of their taxable year consists of
securities of foreign corporations, the Funds may elect to enable shareholders
of the Funds to receive the benefit of the foreign tax credit with respect to
any foreign income taxes paid by the Funds.

Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. Any such loss, however, on shares
that are held for six months or less will be treated as long-term capital loss
to the extent of any capital gain distributions received by the shareholder.

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<PAGE> 37

NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of each Fund is determined on each day that the
New York Stock Exchange is open for trading, as of the close of regular trading
on the New York Stock Exchange (currently 4:00 p.m., Eastern time). The net
asset value per share is the value of the Fund's assets, less its liabilities,
divided by the number of shares of the Fund outstanding. The value of a Fund's
portfolio securities is determined on the basis of the market value of such
securities or, if market quotations are not readily available, at fair value
under guidelines established by the Trustees. Short-term investments maturing in
less than 60 days are valued at amortized cost which the Board has determined to
equal fair value. See "Net Asset Value" in the Statement of Additional
Information for further information.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time the Funds may quote average annual total return ("standardized
return") in advertisements or promotional materials. Advertisements and
promotional materials reflecting standardized return ("performance
advertisements") will show percentage rates reflecting the average annual change
in the value of an assumed initial investment in a Fund at the end of one, five
and ten year periods. If such periods have not yet elapsed, data will be given
as of the end of a shorter period corresponding to the duration of the Fund.
Standardized return assumes the reinvestment of all dividends and capital gain
distributions.

The FIXED-INCOME FUNDS also may refer in advertising and promotional materials
to yield. The Funds' yield shows the rate of income that a Fund earns on its
investments, expressed as a percentage of the net asset value of Fund shares. A
Fund calculates yield by determining the interest income it earned from its
portfolio investments for a specified thirty-day period (net of expenses),
dividing such income by the average number of Fund shares outstanding, and
expressing the result as an annualized percentage based on the net asset value
at the end of that thirty-day period. Yield accounting methods differ from the
methods used for other accounting purposes; accordingly, a Fund's yield may not
equal the dividend income actually paid to investors or the income reported in
the Fund's financial statements.

In addition to standardized return, performance advertisements also may include
other total return performance data ("non-standardized return").
Non-standardized return may be quoted for the same
or different periods as those for which standardized return is quoted and may
consist of aggregate or average annual percentage rate of return, actual year by
year rates or any combination thereof. Further performance information is
contained in the Funds' annual reports to shareholders, which may be obtained
without cost.

All data included in performance advertisements will reflect past performance
and is not indicative of future results. The investment return and principal
value of an investment in a Fund will fluctuate, and an investor's proceeds upon
redeeming Fund shares may be more or less than the original cost of the shares.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

The Declaration of Trust contains an express disclaimer of shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or its Trustees. The Declaration of Trust provides for indemnification
and

35
<PAGE> 38
reimbursement of expenses out of the Trust's property for any shareholder
held personally liable for its obligations. While Massachusetts law permits a
shareholder of a trust such as this to be held personally liable as a partner
under certain circumstances, the risk of a shareholder incurring financial loss
on account of shareholder liability is highly unlikely and is limited to the
relatively remote circumstances in which the Trust would be unable to meet its
obligations.

Common expenses incurred by the Trust are allocated among the Funds based upon
(i) relative net assets; (ii) as incurred on a specific identification basis; or
(iii) evenly among the Funds, depending on the nature of the expenditure.

Except for (i) changes which do not adversely affect the rights of Trust
shareholders, (ii) a change in the name of the Trust, or a series or class
thereof, (iii) authorization of a new series or class, (iv) changes to supply
any omission or correct any ambiguous or defective provision or (v) changes
required by any federal or state or similar regulatory authority or required by
the Code to eliminate or reduce any federal, state or local taxes which may be
payable by a Fund or its shareholders, no amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of at least 67%
of the Trust's outstanding shares at a meeting at which more than 50% of its
outstanding shares are present in person or represented by proxy. The holders of
shares have no preemptive or conversion rights. Shares when issued are fully
paid and non-assessable, except as set forth above.

The Trust's custodian is Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 and its subcustodian for foreign securities is The
Chase Manhattan Bank, N.A., Four Chase MetroTech Center, Brooklyn, New York
11245.

As of September 30, 1996, the Retirement Plan for Employees of Texas Utilities
Company System owned 27.90% of the BALANCED INCOME FUND and may be deemed to be
a controlling person of that Fund. As of September 30, 1996, United Airlines,
Inc. Group Administration Trust beneficially owned 46.98% of the outstanding
shares of the SHORT-TERM INVESTMENT FUND and may be deemed to be a controlling
person of that Fund.

APPENDIX -- DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------

MOODY'S INVESTORS SERVICE

BOND RATINGS:

"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-edged." Interest payments are protected by a large or by an 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.

Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa through B. The modifier "1" indicates that the obligation
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the company
ranks in the lower end of that generic rating category.

36
<PAGE> 39
"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 some time 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
length 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 both 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 of maintenance of
other terms of the contract over any long period of time may be small.

SHORT-TERM DEBT RATINGS:

Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.

"P-1" -- Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.

"P-2" -- Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.

STANDARD & POOR'S RATINGS GROUP

BOND RATINGS:

"AAA" -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

"AA" -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

"A" -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

"BBB" -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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 in higher-rated categories.

Debt rated BB and B is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.

COMMERCIAL PAPER RATINGS:

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

"A-1" -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.

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

37
<PAGE> 40
FITCH INVESTORS SERVICE, INC.

BOND RATINGS:

The following summarizes the ratings used by Fitch for corporate bonds:

"AAA" -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

"AA" -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."

"A" -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

"BBB" -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.

"BB" -- Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.

"B" -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.

PLUS (+) MINUS (-) -- Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.

SHORT-TERM DEBT RATINGS:

"F-1+" -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

"F-1" -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."

"F-2" -- Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" or "F-1" ratings.

DUFF & PHELPS CREDIT RATING CO.

BOND RATINGS:

The following summarizes the ratings used by Duff & Phelps for long-term debt:

"AAA" -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

"AA+," "AA," "AA-" -- High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.

"A+," "A," "A-" -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.

38
<PAGE> 41
"BBB+," "BBB," "BBB-" -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.

"BB+," "BB," "BB-" -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.

"B+," "B," "B-" -- Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.

SHORT-TERM DEBT RATINGS:

"D-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 U.S. Treasury short-term
obligations.

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

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

"D-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.

39
<PAGE> 42
ACCOUNT APPLICATION
- --------------------------------------------------------------------------------

Mail to: Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701

For individual, custodial, trust, profit-sharing or pension plan accounts. Do
not use this form for IRA's -- a special form is available from the Fund. For
telephone exchange or telephone redemption, please call 1-800-236-4479.

ACCOUNT REGISTRATION

________________________________________________________________________________
Name of Owner(s) (Individual, Joint, Custodian, Company or Trustee)

________________________________________________________________________________
Mailing Address

________________________________________________________________________________
City State Zip

________________________________________________________________________________
Daytime Telephone Number

________________________________________________________________________________
Social Security Number or Taxpayer Identification Number

Citizen of / / United States / / Other (specify)_____________________________

FUND SELECTION Please indicate the amount you wish to invest in each fund you
check.

/ / EQUITY INCOME FUND $_____________

/ / MID-CAP FUND $_____________

/ / SMALL-CAP FUND $_____________

/ / INTERNATIONAL FUND $_____________

/ / GLOBAL EQUITY FUND $_____________

/ / BALANCED INCOME FUND $_____________

/ / TOTAL RETURN BOND FUND $_____________

/ / LOW DURATION FUND $_____________

/ / SHORT-TERM INVESTMENT FUND $_____________

INVESTMENT Please indicate the amount you wish to invest ($5,000 minimum).

/ / By check made payable to Hotchkis and Wiley Funds $_____________

/ / By wire. (See section on "How to Purchase Shares")

Indicate date and amount of wire: Date _________________ $__________

DISTRIBUTIONS Distributions will be reinvested in additional shares unless one
of the following boxes is checked.

/ / Send me a check for all dividends and distributions.

/ / Send me a check for dividends, but reinvest capital gain distributions.
<PAGE> 43
TELEPHONE PRIVILEGES

/ / TELEPHONE EXCHANGE OPTION -- I/we wish to take advantage of this option
which allows the exchange of shares between funds by telephone (minimum exchange
of $1,000.)

/ / TELEPHONE REDEMPTION -- I/we want to be able to receive proceeds by mail or
federal funds wired to my/our bank account (minimum transfer $1,000.)

The HOTCHKIS AND WILEY FUNDS require the following bank information:

________________________________________________________________________________
Bank Name Bank Routing Transit Number

________________________________________________________________________________
Bank Account Number Name of Account

________________________________________________________________________________
Bank Address City State Zip

Note: Your bank should be a member of the Federal Reserve, or have a
correspondent relationship with a member bank, to use the telephone redemption
service. Please attach a voided check or preprinted deposit slip for your bank
account.

SIGNATURES AND CERTIFICATION

I am (we are) of legal age, have received and read the Prospectus and agree to
the terms therein. I (we) certify (1) that my Social Security or Taxpayer
Identification Number provided above is correct and (2) that I am not subject to
backup withholding either because I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a
failure to report all interest dividends, or the IRS has notified me that I am
no longer subject to backup withholding. The IRS does not require your consent
to any provision of this document other than the certifications requested to
avoid backup withholding. If I (we) have elected telephone privileges, I (we)
acknowledge that neither the Hotchkis and Wiley Funds nor their agents will be
liable for any loss, expense or cost arising out of any telephone request
pursuant to these privileges, and the account holder will bear the risk of loss,
so long as the Funds or their agents reasonably believe, based upon reasonable
verification procedures, that the telephone instructions are genuine.

________________________________________________________________________________
Signature of Owner, Trustee or Custodian Date

________________________________________________________________________________
Signature of Joint Owner (Required if Joint Registration) Date

From MUTUAL FUND SERVICES
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
<PAGE> 44
PROSPECTUS

JANUARY 1, 1997

HOTCHKIS
AND
WILEY
FUNDS

800 WEST SIXTH STREET
FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
800-236-4479

INVESTMENT ADVISOR
Hotchkis and Wiley
800 West Sixth Street
Fifth Floor
Los Angeles, California 90017

LEGAL COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610

INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202

ADMINISTRATOR
CUSTODIAN AND TRANSFER AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202

[Hotchkis and Wiley Logo]

HOTCHKIS
AND
WILEY
FUNDS

Equity Income Fund
- --------------------------------------------------------------------------------
Mid-Cap Fund
- --------------------------------------------------------------------------------
Small Cap Fund
- --------------------------------------------------------------------------------
International Fund
- --------------------------------------------------------------------------------
Global Equity Fund
- --------------------------------------------------------------------------------
Balanced Income Fund
- --------------------------------------------------------------------------------
Total Return Bond Fund
- --------------------------------------------------------------------------------
Low Duration Fund
- --------------------------------------------------------------------------------
Short-Term Investment Fund
- --------------------------------------------------------------------------------

Hotchkis and Wiley: Investment Advisor

<PAGE> 45
----------------------------------------
HOTCHKIS AND
WILEY FUNDS
----------------------------------------

Equity Fund For Insurance Companies

Prospectus
----------------------------------------
January 1, 1997

800 West 6th Street, Fifth Floor
Los Angeles, CA 90017
(213) 362-8900

Investment Advisor: HOTCHKIS AND WILEY
<PAGE> 46
HOTCHKIS AND WILEY
FUNDS
Equity Fund for Insurance Companies

Hotchkis and Wiley Funds (the "Trust") is an open-end, management investment
company having eight separate diversified portfolios (the "Funds"), each of
which is a separate mutual fund having its own objective, assets, liabilities
and net asset value. This Prospectus describes the Equity Series for Insurance
Companies (the "Equity Fund for Insurance Companies" or the "Fund"), the
investment objective of which is to provide current income and long-term growth
of income, accompanied by growth of capital. There is no assurance that the
investment objective of the Fund will be achieved. The minimum initial
investment in the Fund is $1 million; there is no subsequent minimum investment
requirement.

This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated January 1, 1997, containing
additional information about the Trust and each Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. You may obtain a copy of the Statement of
Additional Information without charge by calling the Trust at (213) 362-8900 or
writing the Trust at 800 West Sixth Street, Fifth Floor, Los Angeles, CA 90017.

Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, nor are they federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Bank, or any other Agency.
Investment in the Fund's shares involves risk, including the possible loss of
principal.

The date of this Prospectus is January 1, 1997.

<PAGE> 47
TABLE OF CONTENTS

<TABLE>
<S> <C> <C> <C>
Fee Table . . . . . . . . . . . . . . . . . . 2 How to Purchase Shares . . . . . . . . . . . . . 7

Financial Highlights . . . . . . . . . . . . 3 How to Redeem Shares . . . . . . . . . . . . . . 8

Investment Objective and Policies . . . . . . 4 Dividends and Tax Status . . . . . . . . . . . . 9

Principal Investment Restrictions . . . . . . 5 Performance Information . . . . . . . . . . . . . 9

Organization and Management . . . . . . . . 6 General Information . . . . . . . . . . . . . . . 10

</TABLE>
FEE TABLE

Hotchkis and Wiley Funds impose no sales load, exchange fee or redemption fee
on the purchase or redemption of shares of the Fund.

<TABLE>
<CAPTION>
EQUITY FUND
ANNUAL FUND OPERATING EXPENSES FOR INSURANCE
(as a percentage of average net assets) COMPANIES

<S> <C>
Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.54%
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-%*
-------

Total Fund operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 0.54%
=====

</TABLE>
*The Advisor pays all of the Fund's operating expenses other than the
management fee; see "Organization and Management."

<TABLE>
EXAMPLE 1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
in the Fund, assuming (1) 5% annual return and
(2) redemption at the end of each time period . . . . . . . . . . . . . $6 $17 $30 $68

</TABLE>
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. For a more complete description of the various costs and
expenses, see "Organization and Management." The Example should not be
considered a representation of past or future expenses and actual expenses may
be greater or less than those shown. The assumption in the example of a 5%
annual return is required by regulations of the Securities and Exchange
Commission applicable to all mutual funds. The assumed 5% annual return is not
a prediction of, and does not represent, the projected or actual performance of
the Fund.

2
<PAGE> 48
FINANCIAL HIGHLIGHTS

The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose unqualified report thereon is included in the
Statement of Additional Information, which is available from the Fund. This
information should be read in conjunction with the financial statements and
accompanying notes which appear in the Statement of Additional Information.
Further performance information is contained in the Fund's annual report to
shareholders, which may be obtained without cost.

Year Ended June 3 January 29, 1993*
through
1996 1995 1994 June 30, 1993
- ------------------------------------------------- ---- ---- ---- -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period . . . . . . . . $11.53 $9.89 $10.31 $10.00
----- ---- ----- -----

INCOME FROM INVESTMENT OPERATIONS:
Net investment income . . . . . . . . . . . . . . 0.34 0.41 0.40 0.16
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . . . . . 2.26 1.59 (0.24) 0.30
---- ---- ------ ------
Total from investment operations . . . . . . . . $2.60 2.00 0.16 0.46
----- ---- ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income) . . . . . (0.40) (0.34) (0.38) (0.15)
Distributions (from realized gains) . . . . . . . (0.22) (0.02) (0.20) (0.00)
------ ------ ------ ------
Total Distributions . . . . . . . . . . . . . . . (0.62) (0.36) (0.58) (0.15)
------ ------ ------ -------
Net Asset Value, End of Period . . . . . . . . . . . $13.51 $11.53 $ 9.89 $10.31
===== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Total Return . . . . . . . . . . . . . . . . . . . . 22.93% 20.62% 1.38% 11.45%+
Net assets, end of period (millions) . . . . . . . . $24.6 $17.4 $10.5 $7.1
Ratio of expenses to average net assets:
Before expense reimbursement . . . . . . . . . . 0.76% 1.05% 1.20% 1.45%+
After expense reimbursement . . . . . . . . . . . 0.54% 0.58% 0.60% 0.60%+
Ratio of net income to average net assets:
Before expense reimbursement . . . . . . . . . . 2.78% 3.58% 3.32% 2.81%+
After expense reimbursement . . . . . . . . . . . 3.00% 4.03% 3.91% 3.66%+
Portfolio turnover rate . . . . . . . . . . . . . . . 21% 29% 26% 2%

</TABLE>

* Commencement of operations.
+ Annualized.

3
<PAGE> 49
INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide current income and
long-term growth of income, accompanied by growth of capital. There is no
assurance that the Fund will achieve its objective. Hotchkis and Wiley (the
"Advisor") acts as investment advisor to the Fund.

The Fund will attempt to achieve its objective by investing in equity
securities. The equity securities that the Fund may purchase consist of common
stocks or securities having characteristics of common stocks, such as
convertible preferred stocks, convertible debt securities or warrants. In
selecting investments for the Fund, the Advisor focuses on securities that it
believes to have superior values. In arriving at this determination, the
Advisor will generally seek securities of companies that have such
characteristics as earnings yield at least 3% greater than the yield on
long-term bonds, dividend yield which exceeds the composite yield on the
securities comprising the Standard & Poor's Index of 500 Common Stocks ("S&P
500"), and overall financial strength.

Under normal market conditions, the Fund will invest at least 80% of
its total assets in income-producing equity securities issued by companies with
a record of earnings and dividends. The remainder of its portfolio may be
invested in securities of companies which pay no dividends or interest but have
unrecognized potential for growth or changes in business or management that
indicate possible growth.

When market or economic conditions indicate, in the view of the
Advisor, that a temporary defensive investment strategy is appropriate, all or
part of the Fund's assets may be invested temporarily in high quality debt
obligations maturing in one year or less from the date of the Fund's purchase,
such as U.S. Treasury bills, bank certificates of deposit, bankers'
acceptances, commercial paper and repurchase agreements. High quality means
the obligations have been rated at least Prime-1 by Moody's Investors Service
("Moody's") or A-1 by Standard & Poor's Ratings Group ("S&P"), or have an
outstanding issue of debt securities rated at least A by Moody's or S&P, or are
of comparable quality in the opinion of the Advisor. In addition, the Fund may
invest part of its assets temporarily in such debt obligations, pending the
investment of the proceeds of sales of shares of the Fund or portfolio
securities.

Because the Fund invests in equity-type securities such as common and
preferred stock, the Fund is subject to market risk, for example, the
possibility that common stock prices will decline over a short or even extended
periods. The stock markets tend to be cyclical, with periods when stock prices
generally rise and periods when prices generally decline.

GENERAL

FOREIGN SECURITIES. The Fund has the right to invest in foreign
securities although there is no requirement that it do so. Foreign economies
may differ from the U.S. economy; individual foreign companies may differ from
domestic companies in the same industry; and foreign currencies may be stronger
or weaker than the U.S. dollar. The Advisor believes that the ability to invest
abroad will enable the Fund to take advantage of these differences when they
are favorable.

4
<PAGE> 50
There are risks in investing in foreign securities. An investment may
be affected by changes in currency rates and in exchange control regulations,
and the Fund may incur transaction charges in exchanging currencies. Foreign
companies are frequently not subject to the accounting and financial reporting
standards applicable to domestic companies, and there may be less information
available about foreign issuers. Foreign stock markets have substantially less
volume than the New York Stock Exchange, and securities of foreign issuers are
generally less liquid and more volatile than those of comparable domestic
issuers. There is frequently less government regulation of exchanges, broker-
dealers and issuers than in the United States. In addition, investments in
foreign countries are subject to the possibility of expropriation or
confiscatory taxation, political or social instability or diplomatic
developments that could adversely affect the value of those investments.

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
involving U.S. Government securities with commercial banks or broker-dealers.
While the Fund intends to be fully "collateralized" as to such agreements, and
the collateral will be marked to market daily, if the person obligated to
repurchase from the Fund defaults, there may be possible delays and expenses in
liquidating the securities subject to the repurchase agreement, a decline in
their value and loss of interest. See the Statement of Additional Information
for further details about repurchase agreements.

BORROWING. As a fundamental policy, the Fund may borrow money, but
only from banks for temporary or emergency purposes in amounts not exceeding
10% of the Fund's total assets. See the Statement of Additional Information for
details.

PRINCIPAL INVESTMENT RESTRICTIONS

The Fund is subject to certain investment restrictions which are
fundamental policies that cannot be changed without the approval of a majority
of the Fund's outstanding voting securities (as defined in the Investment
Company Act of 1940, referred to as the "1940 Act"). The Fund's investment
objective is such a fundamental policy. Among its restrictions, the Fund may
not (i) with respect to 75% of its total assets, invest more than 5% of its
total assets in securities of any one issuer (other than U.S. Government
securities) ; (ii) with respect to 75% of its total assets, purchase more than
10% of the outstanding voting securities of any one issuer; or (iii) invest
more than 25% of its total assets (determined at the time of investment) in one
or more issuers having their principal business activities in a single
industry. Additional information about the Fund's investment restrictions is
contained in the Statement of Additional Information.

As discussed in the Statement of Additional Information, the Fund may,
as a fundamental policy and within limits, engage in short sales but only those
which are "against the box." Such short sales are a method of locking in
unrealized capital gains without current recognition of such gains.

It is the position of the Securities and Exchange Commission (and an
operating although not a fundamental policy of the Fund) that open-end
investment companies such as the Fund should not make certain investments if
thereafter more than 15% of the value of their net assets would be so invested.
The investments included in this 15% limit include (i) those which are
restricted,

5
<PAGE> 51
i.e., those which cannot freely be sold for legal or contractual reasons (which
the Fund does not expect to own); (ii) fixed time deposits subject to
withdrawal penalties (other than overnight deposits); and (iii) repurchase
agreements having a maturity of more than seven days. The 15% limitation does
not include obligations which are payable at principal amount plus accrued
interest within seven days after purchase.

It is an operating policy, although not a fundamental policy, of the
Fund that no more than 55% of the value of the total assets of the Fund can be
invested in cash and cash items (including receivables), U.S. Government
securities and securities of other regulated investment companies, as required
by Section 817(h)(2)(B) of the Internal Revenue Code of 1986, as amended.

ORGANIZATION AND MANAGEMENT

ORGANIZATION AND VOTING RIGHTS

The Trust was organized on August 22, 1984 as a Massachusetts business
trust. It is a diversified, open-end, management investment company currently
consisting of eight separate series. The Trust's name was changed to Hotchkis
and Wiley Funds effective October 7, 1994. The Trust's Board of Trustees
decides on matters of general policy and reviews the activities of the Advisor.
The Trust's officers conduct and supervise the daily business operations of the
Trust. The Fund is one of eight series of shares, each having separate assets
and liabilities, of the Trust. The Board of Trustees may, at its own
discretion, create additional series of shares.

Generally, the Fund will not hold an annual meeting of shareholders
unless required by the 1940 Act. Shareholders have one vote per share owned.
Matters submitted to shareholders must be approved by a majority of the
outstanding securities of the Fund. At the request of the holders of at least
10% of the shares, the Trust will hold a meeting to vote on the removal of a
Trustee, which can occur by a vote of more than two-thirds of the outstanding
shares.

INVESTMENT ADVISOR

Hotchkis and Wiley, located at 800 West 6th Street, Los Angeles,
California 90017, acts as investment advisor to the Fund and generally
administers the affairs of the Trust. Subject to the direction and control of
the Board of Trustees, the Advisor supervises and arranges the purchase and
sale of securities held in the portfolio of the Fund.

Hotchkis and Wiley, a limited partnership established in 1980 that is
the advisor to the Funds, entered into a Purchase Agreement with Merrill Lynch
& Co., Inc., a Delaware corporation ("ML"), pursuant to which ML will acquire
the partnership interests in Hotchkis and Wiley. The purchase is subject to a
number of contingencies, including approval by the Trust's Board of Trustees
and shareholders of new investment advisory agreements. The approvals have
already been received. The transaction is expected to close in the fourth
quarter of 1996. If the transaction occurs, it is anticipated that the Fund
will be operated in the same manner as it is currently.

6
<PAGE> 52
For its services, the Trust, under an Investment Advisory Agreement
(the "Agreement") between the Trust and the Advisor, pays the Advisor a fee,
computed daily and payable monthly, at an annual rate of 0.60% of the first $10
million of the Fund's average net assets, and 0.50% of average net assets in
excess of $10 million. The Advisor pays all of the operating expenses relating
to the Fund, including: (i) interest and taxes; (ii) brokerage commissions;
(iii) insurance premiums; (iv) compensation and expenses of the Trustees other
than those affiliated with the Advisor; (v) legal and audit expenses; (vi) fees
and expenses of the Fund's custodian, shareholder servicing or transfer agent
and accounting services agent; (vii) expenses incident to the issuance of its
shares, including issuance on the payment of, or reinvestment of, dividends;
(viii) fees and expenses incident to the registration under Federal or state
securities laws of the Trust or its shares; (ix) expenses of preparing,
printing and mailing reports and notices and proxy material to shareholders;
(x) all other expenses incident to holding meetings of shareholders; (xi) dues
or assessments of or contributions to the Investment Company Institute or any
successor; and (xii) such non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations which the Trust may
have to indemnify its officers and Trustees with respect thereto.

The Agreement permits the Advisor to allocate brokerage based on sales
of shares of the funds managed by the Advisor. No such allocation has been made
to date.

PORTFOLIO MANAGERS

The current portfolio manager of the Fund is Gail Bardin. Ms. Bardin
has responsibility for the day-to-day management of the Fund's portfolio. Ms.
Bardin began co-managing the Fund in April 1994. Ms. Bardin has been a
portfolio manager of the Advisor since 1988. Ms. Bardin also serves as
portfolio manager of the Equity Income Fund, another series of the Trust that
is managed by the Advisor.

HOW TO PURCHASE SHARES

Shares of the Fund are offered only to insurance companies. The
minimum initial investment in the Fund is $1,000,000. There is no minimum
subsequent investment. The Trust reserves the right to reject any order.

Investors may invest in the Fund by wiring the amount to be invested
to Hotchkis and Wiley Funds in care of the custodian bank, at the following
address:

Firstar Trust Company
ABA #0750-00022
For credit to Firstar Trust Company
Account #112-952-137
For further credit to Hotchkis and Wiley Funds
Equity Fund for Insurance Companies
Account # [Shareholder account number]

The wire should indicate that the investment is being made in the Equity Fund
for Insurance

7
<PAGE> 53
Companies. Shares of the Fund will be purchased for the account of the
investor at the net asset value next determined after receipt of the investor's
wire. Shareholder inquiries should be directed to the Fund.

NET ASSET VALUE

The net asset value per share of the Fund is determined on each day
that the New York Stock Exchange is open for trading, as of the close of
regular trading on that Exchange (currently 4:00 p.m., Eastern time), provided
that the net asset value may not be calculated on a day on which no order to
purchase or redeem shares of the Fund is received. The net asset value per
share is the value of the Fund's assets, less its liabilities, divided by the
number of shares of the Fund outstanding. The value of portfolio securities is
determined on the basis of the market value of such securities. Short-term
investments maturing in less than 60 days are valued at amortized cost. See
the Statement of Additional Information for further information.

HOW TO REDEEM SHARES

A shareholder wishing to redeem shares may do so at any time by
writing or delivering instructions to the Trust at 800 West 6th Street, Fifth
Floor, Los Angeles, California 90017. The redemption request should identify
the Fund, specify the number of shares to be redeemed and be signed by a duly
authorized officer of the insurance company. If the request is in proper form,
the shares specified will be redeemed at the net asset value next determined
after receipt of the request. In addition to written instructions, if any
shares being redeemed are represented by share certificates, the certificates
must be surrendered. The certificates must either be endorsed or accompanied by
a stock power signed by a duly authorized officer of the insurance company. Any
questions concerning documents needed should be directed to (213) 362- 8900.

PAYMENTS. Payment for shares tendered will be made within seven days
after receipt by the Trust of instructions and certificates, if any. However,
payment may be delayed under unusual circumstances, as specified in the 1940
Act or as determined by the Securities and Exchange Commission. Payment will be
sent only to shareholders at the address of record.

REDEMPTION IN KIND. If the Board of Trustees determines that it would
be detrimental to the best interests of the remaining shareholders of the Fund
to make payment wholly in cash, the Fund may pay the redemption price in part
by a distribution in kind of readily marketable securities from the portfolio
of the Fund, in lieu of cash. The Trust has elected to be governed by Rule
18f-1 under the 1940 Act pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or one per cent of the net
asset value of the Fund during any 90 day period for any one shareholder.
Should redemptions by any shareholder exceed such limitation the Fund will have
the option of redeeming the excess in cash or in kind. If shares are redeemed
in kind, the redeeming shareholder would incur brokerage costs in converting
the assets into cash.

REDEMPTION OF SMALL ACCOUNTS. The Board of Trustees may redeem all of
the shares of any shareholder whose account has declined to a net asset value
of less than $500, as a result of a transfer or redemption, at the net asset
value determined as of the close of business on the

8
<PAGE> 54
business day preceding the sending of the proceeds of such redemption. The
Trust would give shareholders whose shares were being redeemed 60 days' prior
written warning in which to purchase sufficient shares to avoid such
redemption.

DIVIDENDS AND TAX STATUS

The Fund expects to pay income dividends quarterly. Distributions from
net realized short-term gains, if any, and distributions from any excess of net
long-term capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be paid out after
that date; the Fund may also pay supplemental distributions after the end of
the Trust's fiscal year. Dividends and distributions are paid in full and
fractional shares of the Fund based on the net asset value per share at the
close of business on the record date, unless the shareholder requests, in
writing to the Trust, payment in cash. The Trust will notify each shareholder
after the close of its fiscal year of both the dollar amount and the tax status
of that year's distributions.

The Fund qualified as a "regulated investment company" under
Subchapter M of the Internal Revenue Code (the "Code") during its last fiscal
year and intends to continue to do so in the future. The Fund is taxed as a
separate entity under Subchapter M and will qualify on a separate basis. If so
qualified, the Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year
which it distributes to its shareholders provided that at least 90% of its net
investment income earned in the fiscal year is distributed. All dividends from
net investment income together with distributions of short-term capital gains
(collectively, "income dividends"), will be taxable as ordinary income to the
shareholders even though paid in additional shares. Any net capital gains
("capital gains distributions") distributed to shareholders are taxable as
long-term capital gains to the shareholders regardless of the length of time a
shareholder has owned his shares.

The Code provides for a dividends-received deduction (the "deduction")
by corporations. Special provisions are contained in the Code as to the
eligibility of payments to shareholders by mutual funds for the deduction. The
basic test for determining whether, and the extent to which, dividends paid by
the Fund are eligible for the deduction is whether the aggregate dividends
received by the Fund from domestic corporations comprise 100% of its gross
income. If that percentage test is not met, there is a proportionate reduction
of the eligibility of those payments. See the Statement of Additional
Information for more information.

PERFORMANCE INFORMATION

From time to time the Fund may quote average annual total return
("standardized return") in advertisements or promotional materials.
Advertisements and promotional materials reflecting standardized return
("performance advertisements") will show percentage rates reflecting the
average annual change in the value of an assumed initial investment in the Fund
at the end of one, five and ten year periods. If such periods have not yet
elapsed, data will be given as of the end of a shorter period corresponding to
the duration of the Fund. Standardized return assumes the reinvestment of all
dividends and capital gain distributions.

9
<PAGE> 55
In addition to standardized return, performance advertisements also
may include other total return performance data ("non-standardized return").
Non-standardized return may be quoted for the same or different periods as
those for which standardized return is quoted and may consist of aggregate or
average annual percentage rate of return, actual year by year rates or any
combination thereof. Further performance information is contained in the
Fund's annual report to shareholders, which may be obtained without charge.

All data included in performance advertisements will reflect past
performance and is not indicative of future results. The investment return and
principal value of an investment in the Fund will fluctuate, and an investor's
proceeds upon redeeming Fund shares may be more or less than the original cost
of the shares.

GENERAL INFORMATION

The Declaration of Trust contains an express disclaimer of shareholder
liability for its acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. While Massachusetts
law permits a shareholder of a trust such as this to be held personally liable
as a partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations.

Common expenses incurred by the Trust are allocated among the Funds
based upon (i) relative net assets; (ii) as incurred on a specific
identification basis; or (iii) evenly among the Funds, depending on the nature
of the expenditure.

Except for a change in the name of the Trust, no amendment may be made
to the Declaration of Trust without the affirmative vote of the holders of more
than 50% of its outstanding shares. The holders of shares have no preemptive or
conversion rights. Shares when issued are fully paid and non-assessable, except
as set forth above.

As of September 10, 1996, The Prudential Insurance Company of America
owned of record and beneficially 100% of the outstanding shares of the Fund and
may be deemed a controlling person of the Fund.

<PAGE> 56

HOTCHKIS AND WILEY FUNDS
Statement of Additional Information
Dated January 1, 1997

This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the prospectus dated January 1, 1997 of the
Equity Income Series (the "Equity Income Fund"), the Mid-Cap Series (the
"Mid-Cap Fund"), the Small Cap Series (the "Small Cap Fund"), the International
Series (the "International Fund"), the Global Equity Series (the "Global Equity
Fund"), the Balanced Income Series (the "Balanced Income Fund"), the Total
Return Bond Series (the "Total Return Bond Fund"), the Low Duration Series (the
"Low Duration Fund") and the Short-Term Investment Series (the "Short-Term
Investment Fund"), and the prospectus of the Equity Fund for Insurance
Companies Series (the "Equity Fund for Insurance Companies") of Hotchkis and
Wiley Funds dated January 1, 1997. Copies of the prospectuses may be obtained
at no charge from the Trust, 800 West 6th Street, Los Angeles, CA 90017. In
this Statement of Additional Information, the Equity Income Fund, the Mid-Cap
Fund, the Small Cap Fund, the International Fund, the Global Equity Fund, the
Balanced Income Fund, the Total Return Bond Fund, the Low Duration Fund, the
Short-Term Investment Fund and the Equity Fund for Insurance Companies may be
referred to collectively as "the Funds" or individually as "a Fund." The Total
Return Bond Fund, the Low Duration Fund and the Short-Term Investment Fund also
may be referred to as the "Fixed-Income Funds." Hotchkis and Wiley (the
"Advisor") is the investment advisor to the Funds.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS REFERENCE
TO PAGE IN
THE PROSPECTUS OF THE:
EQUITY INCOME,
MID-CAP,
SMALL CAP,
INTERNATIONAL, EQUITY
GLOBAL EQUITY, FUND FOR
BALANCED INCOME AND INSURANCE
FIXED-INCOME FUNDS COMPANIES
------------------ ---------
<S> <C> <C> <C>
Investment Objectives and Policies B-2 11 4
Investment Restrictions B-2 26 5
Repurchase Agreements B-4 21 5
U.S. Government Securities B-4 19
Corporate Debt Securities B-4 19
Convertible Securities B-5 11
Mortgage-Related Securities B-5 22
Asset-Backed Securities B-8 20
Risk Factors Relating to Investing in B-8 25
Mortgage-Related and Asset-Backed
Securities
Duration B-9 18
Derivative Instruments B-9 22
Foreign Securities B-13 20 4
Foreign Currency Options and Related Risks B-14 23
Forward Foreign Currency Exchange Contracts B-15 23
Risk Factors Relating to Investing in High Yield B-17 25
Securities
Risk Factorsof Investing in Small and Mid-Size
Companies B-17 24
Illiquid Securities B-17 26
Management B-18 27 6
The Advisor B-20 27 6
Portfolio Transactions and Brokerage B-21 28 7
Net Asset Value B-22 29 8
Dividends and Tax Status B-23 32 9
Performance Information B-24 33 9
General Information About the Trust B-26 34 10
Financial Statements B-30
</TABLE>

B-1

<PAGE> 57
INVESTMENT OBJECTIVES AND POLICIES

The investment objective of the Equity Income Fund and the Equity Fund
for Insurance Companies is to provide current income and long-term growth of
income, accompanied by growth of capital.

The investment objective of the Mid-Cap Fund is to provide current
income and long-term growth of income, accompanied by growth of capital.

The investment objective of the Small Cap Fund is capital
appreciation.

The investment objective of the International Fund and the Global
Equity Fund is to provide current income and long-term growth of income,
accompanied by growth of capital.

The investment objective of the Balanced Income Fund is to preserve
capital while producing a high total return.

The investment objective of the Total Return Bond Fund is to maximize
long-term total return.

The investment objectives of the Low Duration Fund and of the
Short-Term Investment Fund are to maximize total return, consistent with
preservation of capital.

The portfolio and strategies with respect to the composition of each
Fund are described in the Funds' prospectuses.

INVESTMENT RESTRICTIONS

Each Fund has adopted the following restrictions (in addition to those
indicated in the prospectuses) as fundamental policies, which may not be
changed without the favorable vote of the holders of a "majority" of that
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940 (the "1940 Act"). Under the 1940 Act, the vote of the holders of a
"majority" of a Fund's outstanding voting securities means the vote of the
holders of the lesser of (i) 67% of the shares of the Fund represented at a
meeting at which the holders of more than 50% of its outstanding shares are
represented or (ii) more than 50% of the outstanding shares.

Except as noted, none of the Funds may:

1. Purchase any security, other than obligations of the U.S.
Government, its agencies, or instrumentalities ("U.S.
Government securities"), if as a result: (i) with respect to
75% of its total assets, more than 5% of the Fund's total
assets (determined at the time of investment) would then be
invested in securities of a single issuer, or (ii) more than
25% of the Fund's total assets (determined at the time of
investment) would be invested in one or more issuers having
their principal business activities in a single industry.

2. Purchase securities on margin (but any Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions), provided that the deposit or payment by a Fund
of initial or maintenance margin in connection with futures or
options is not considered the purchase of a security on
margin.

3. Make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into
or exchangeable, without payment of any further consideration,
for securities of the same issue as, and equal in amount to,
the securities sold short (short sale against-the-box), and
unless not more than 25% of the Fund's net assets (taken at
current value) is held as collateral for such sales at any one
time.

4. Issue senior securities, borrow money or pledge its assets
except that any Fund may borrow from a bank for temporary or
emergency purposes in amounts not exceeding 10% (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) and pledge its assets

B-2
<PAGE> 58
to secure such borrowings; none of the Funds (except the
Fixed-Income Funds) will purchase any additional portfolio
securities while such borrowings are outstanding. (The
Fixed-Income Funds may borrow from banks or enter into reverse
repurchase agreements and pledge assets in connection
therewith, but only if immediately after each borrowing there
is asset coverage of 300%.)

5. Purchase any security (other than U.S. Government securities)
if as a result, with respect to 75% of the Fund's total
assets, the Fund would then hold more than 10% of the
outstanding voting securities of an issuer.

6. Buy or sell commodities or commodity contracts or real estate
or interests in real estate, although it may purchase and sell
securities which are secured by real estate and securities of
companies which invest or deal in real estate. (For the
purposes of this restriction, forward foreign currency
exchange contracts are not deemed to be commodities or
commodity contracts. This restriction does not apply to the
Fixed-Income Funds.)

7. Act as underwriter except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed
to be an underwriter under certain federal securities laws.

8. Make investments for the purpose of exercising control or
management.

9. Participate on a joint or joint and several basis in any
trading account in securities.

10. Make loans, except through repurchase agreements. (This
restriction does not apply to the Fixed-Income Funds, which
may lend portfolio securities having an aggregate market value
of up to one-third of the total assets of the Fund.)

11. Purchase or sell foreign currencies. (This restriction does
not apply to the International Fund or the Fixed-Income
Funds.)

The Trust has undertaken to certain state securities administrators as
a matter of operating but not fundamental policy that no Fund will (i) purchase
or sell real property, including limited partnership interests therein; (ii)
invest more than 5% of the value of a Fund's net assets in warrants (included
in that amount, but not to exceed 2% of the value of a Fund's net assets, may
be warrants which are not listed on the New York or American Stock Exchange);
(iii) enter into foreign currency option contracts if the premiums on such
options exceed 5% of a Fund's total assets; and, with respect to the Total
Return Bond Fund only (iv) invest in open-end, no-load mutual funds unless the
Advisor agrees to waive management fees in an amount otherwise payable by the
Fund with respect to the monies so invested; (v) engage in short sales unless
all proceeds of securities borrowed to complete the short sales are deposited
and kept in a segregated account consisting of cash or liquid assets
maintaining a balance equal to the greater of the proceeds and the current
value of the securities sold short; or (vi) trade in over-the-counter options
if: (a) exchange-traded options are available, (b) the transaction is executed
through a broker-dealer that has a minimum net worth of less than $20 million,
and (c) there is no active over-the-counter market in such options. In
addition, the Trust has adopted the following non-fundamental policies so that
no Fund will: (a) purchase any security if as a result the Fund would then have
more than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years old; (b)
invest in securities of any issuer if, to the knowledge of the Trust, any
officer or Trustee of the Trust or managing director of the Advisor owns more
than 1/2 of 1% of the outstanding securities of such issuer, and such Trustees
and managing directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer; (c) invest in interests
in oil, gas, or other mineral leases or exploration of development programs,
although it may invest in the common stocks of companies which invest in or
sponsor such programs; (d) invest more than 5% of its total assets in
restricted securities, excluding restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1993, as amended ("Securities
Act") that have been determined to be liquid pursuant to procedures adopted by
the Board of Trustees, provided that the total amount of Fund assets invested
in restricted securities will not exceed 15% of total assets; and (e) purchase
securities of other investment companies, except in connection with a merger,
consolidation, reorganization or other acquisition of assets, unless
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company would be owned by the Fund, (ii) 5% of the Fund's total
assets would be invested in any one such company, and (iii) 10% of the Fund's
total assets would be invested in such securities.

B-3
<PAGE> 59
REPURCHASE AGREEMENTS

The Small Cap Fund may purchase debt securities maturing in more than
one year from the date of purchase only if they are purchased subject to
repurchase agreements. The Equity Income, Mid-Cap, International, Global
Equity, Balanced Income, and Fixed-Income Funds, as well as the Equity Fund for
Insurance Companies, have no such restriction on maturities of portfolio
securities. A repurchase agreement is an agreement where the seller agrees to
repurchase a security from a Fund at a mutually agreed-upon time and price.
The period of maturity is usually quite short, possibly overnight or a few
days, although it may extend over a number of months. The resale price is more
than the purchase price, reflecting an agreed-upon rate of return effective for
the period of time a Fund's money is invested in the repurchase agreement. A
Fund's repurchase agreements will at all time be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of instruments declines, a Fund will require
additional collateral. In the event of a default, insolvency or bankruptcy by
a seller, the Fund will promptly seek to liquidate the collateral. In such
circumstances, the Fund could experience a delay or be prevented from disposing
of the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.

U.S. GOVERNMENT SECURITIES

U.S. Government agencies or instrumentalities which issue or guarantee
securities include, but are not limited to, the Federal National Mortgage
Association, Government National Mortgage Association, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Banks, Tennessee Valley Authority, Inter-American Development
Bank, Asian Development Bank, Student Loan Marketing Association and the
International Bank for Reconstruction and Development.

Except for U.S. Treasury securities, obligations of U.S. Government
agencies and instrumentalities may or may not be supported by the full faith
and credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others, such as
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
or instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitment.
Each Fund will invest in securities of such instrumentality only when the
Advisor is satisfied that the credit risk with respect to any instrumentality
is acceptable.

The Funds may invest in component parts of the U.S. Treasury notes or
bonds, namely, either the corpus (principal) of such Treasury obligations or
one of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) Treasury obligations from which the
interest coupons have been stripped, (ii) the interest coupons that are
stripped, (iii) book-entries at a Federal Reserve member bank representing
ownership of Treasury obligation components, or (iv) receipts evidencing the
component parts (corpus or coupons) of Treasury obligations that have not
actually been stripped. Such receipts evidence ownership of component parts of
Treasury obligations (corpus or coupons) purchased by a third party (typically
an investment banking firm) and held on behalf of the third party in physical
or book-entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. These custodial receipts are known by
various names, including "Treasury Receipts," "Treasury Investment Growth
Receipts" ("TIGRs") and "Certificates of Accrual on Treasury Securities"
("CATS"), and are not issued by the U.S. Treasury, therefore they are not U.S.
Government securities, although the underlying bonds represented by these
receipts are debt obligations of the U.S. Treasury.

CORPORATE DEBT SECURITIES

A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments) which meet the minimum ratings criteria set forth
for the Fund, or, if unrated, are in the Advisor's opinion comparable in
quality to corporate debt securities in which the Fund may invest. The rate of
return or return of principal on some debt obligations may be linked or indexed
to the level of exchange rates between the U.S. dollar and a foreign currency
or currencies.

B-4
<PAGE> 60
CONVERTIBLE SECURITIES

The Funds may invest in convertible securities of domestic or foreign
issuers, which meet the ratings criteria set forth in the Prospectus. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance
in the convertible security's underlying common stock.

In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed- income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase
in market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.

MORTGAGE-RELATED SECURITIES

The Fixed-Income Funds and the Balanced Income Fund may invest in
residential or commercial mortgage-related securities, including mortgage
pass-through securities, collateralized mortgage obligations (CMOs), adjustable
rate mortgage securities, CMO residuals, stripped mortgage-related securities,
floating and inverse floating rate securities and tiered index bonds.

Mortgage Pass-Through Securities. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers on the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the
issuer or guarantor of the securities). Mortgage pass-through securities
differ from other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal payments at maturity or
specified call dates. Early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to the sale of underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose a Fund to a lower rate of return upon reinvestment of
principal. Also, if a security subject to repayment has been purchased at a
premium, in the event of prepayment, the value of the premium would be lost.

There are currently three types of mortgage pass-through securities,
(i) those issued by the U.S. Government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by private issuers
that represent an interest in or are collateralized by pass-through securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but usually having some form of
private credit enhancement.

GNMA is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by the institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage banks), and backed by pools of FHA- insured or VA-guaranteed
mortgages.

Obligations of FNMA and FHLMC are not backed by the full faith and
credit of the United States Government. In the case of obligations not backed
by the full faith and credit of the United States Government, the Fund must
look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment. FNMA and

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FHLMC may borrow from the U.S. Treasury to meet its obligations, but the U.S.
Treasury is under no obligation to lend to FNMA or FHLMC.

Private mortgage pass-through securities are structured similarly to
GNMA, FNMA, and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.

Pools created by private mortgage pass-through issuers generally offer
a higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. The insurance and guarantees and the credit
worthiness of the issuers thereof will be considered in determining whether a
mortgage- related security meets the Funds' investment quality standards.
There can be no assurance that the private insurers or guarantors can meet
their obligations under the insurance policies or guarantee arrangements.
Private mortgage pass-through securities may be bought without insurance or
guarantees if, through an examination of the loan experience and practices of
the originator/servicers and poolers, the Advisor determines that the
securities meet the Funds' quality standards.

Collateralized Mortgage Obligations. Collateralized mortgage
obligations (CMOs) are debt obligations collateralized by residential or
commercial mortgage loans or residential or commercial mortgage pass-through
securities. Interest and prepaid principal are generally paid monthly. CMOs
may be collateralized by whole mortgage loans or private mortgage pass-through
securities but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. The issuer of a
series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC"). All future references to CMOs shall also be deemed to
include REMICs.

CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral which is ordinarily unrelated to the
stated maturity date. CMOs often provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes usually receive principal only after the first
class has been retired. An investor may be partially protected against a
sooner than desired return of principal because of the sequential payments.

Certain issuers of CMOs are not considered investment companies
pursuant to a rule adopted by the Securities and Exchange Commission ("SEC"),
and the Funds may invest in the securities of such issuers without the
limitations imposed by the 1940 Act on investments by the Fund in other
investment companies. In addition, in reliance on an earlier SEC
interpretation, the Fund's investments in certain other qualifying CMOs, which
cannot or do not rely on the rule, are also not subject to the limitation of
the 1940 Act on acquiring interests in other investment companies. In order to
be able to rely on the SEC's interpretation, these CMOs must be unmanaged,
fixed asset issuers, that (a) invest primarily in mortgage-backed securities,
(b) do not issue redeemable securities, (c) operate under general exemptive
orders exempting them from all provisions of the 1940 Act and (d) are not
registered or regulated under the 1940 Act as investment companies. To the
extent that the Funds select CMOs that cannot rely on the rule or do not meet
the above requirements, the Funds may not invest more than 10% of their assets
in all such entities and may not acquire more than 3% of the voting securities
of any single such entity.

The Fixed-Income Funds and the Balanced Income Fund also may invest
in, among other things, parallel pay CMOs, Planned Amortization Class CMOs
("PAC bonds"), sequential pay CMOs, and floating rate CMOs. Parallel pay CMOs
are structured to provide payments of principal on each payment date to more
than one class. PAC bonds generally require payments of a specified amount of
principal on each payment date. Sequential pay CMOs generally pay principal to
only one class while paying interest to several classes. Floating rate CMOs
are securities whose coupon rate fluctuates according to some formula related
to an existing market index or rate. Typical indices would include the
eleventh district cost-of-funds index ("COFI"), the London Interbank Offered
Rate ("LIBOR"), one-year Treasury yields, and ten-year Treasury yields.

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Adjustable Rate Mortgage Securities. Adjustable rate mortgage
securities (ARMs) are pass-through securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either
the first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.

The ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the security. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period. In the
event that market rates of interest rise more rapidly to levels above that of
the ARM's maximum rate, the ARM's coupon may represent a below market rate of
interest. In these circumstances, the market value of the ARM security will
likely have fallen.

Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.

CMO Residuals. CMO residuals are derivative mortgage securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
and special purpose entities of the foregoing.

The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on
the CMOs and second to pay the related administrative expenses of the issuer.
The residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making the foregoing payments. Each payment of such
excess cash flow to a holder of the related CMO residual represents income
and/or a return of capital. The amount of residual cash flow resulting from a
CMO will depend on, among other things, the characteristics of the mortgage
assets, the coupon rate of each class of CMO, prevailing interest rates, the
amount of administrative expenses and the prepayment experience on the mortgage
assets. In part, the yield to maturity on the CMO residuals is extremely
sensitive to prepayments on the related underlying mortgage assets, in the same
manner as an interest-only ("IO") class of stripped mortgage-related
securities. See "Stripped Mortgage-Related Securities" below. In addition, if
a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped
mortgage-related securities, in certain circumstances a Fund may fail to recoup
fully its initial investment in a CMO residual.

CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or
dealers. The CMO residual market has recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally
completed only after careful review of the characteristics of the securities in
question. In addition, CMO residuals may or, pursuant to an exemption
therefrom, may not have been registered under the Securities Act. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
Fund's limitations on investment in illiquid securities.

Stripped Mortgage-Related Securities. Stripped mortgage-related
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may
be issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks, and
special purpose entities of the foregoing.

SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the IO
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class

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is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on a Fund's yield to
maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in
one of the highest rating categories.

Although SMBS are purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers, these
securities were only recently introduced. As a result, established trading
markets have not yet been fully developed and accordingly, these securities may
be deemed "illiquid" and subject to a Fund's limitations on investment in
illiquid securities. See "Securities and Techniques Used by the
Funds-Mortgage-Related Securities" in the Prospectus.

Inverse Floaters. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction to the
interest rate on another security or index level. Changes in the interest rate
on the other security or index inversely affect the residual interest rate paid
on the inverse floater, with the result that the inverse floater's price will
be considerably more volatile than that of a fixed rate bond. Inverse floaters
may experience gains when interest rates fall and may suffer losses in periods
of rising interest rates. The market for inverse floaters is relatively new.

Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied
to a specified index or market rate. So long as this index or market rate is
below a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed rate bond.

ASSET-BACKED SECURITIES

The Fixed-Income Funds and the Balanced Income Fund may invest in
various types of asset-backed securities. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through or in a
pay-through structure similar to the CMO structure. Investments in these and
other types of asset-backed securities must be consistent with the investment
objectives and policies of the Funds.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Funds purchase such a security at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Alternatively, if the Funds purchase these
securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce, yield to maturity. The Funds may
invest a portion of their assets in derivative mortgage-related securities
which are highly sensitive to changes in prepayment and interest rates. The
Advisor will seek to manage these risks (and potential benefits) by
diversifying its investments in such securities and through hedging techniques.

During periods of declining interest rates, prepayment of mortgages
underlying mortgage-related securities can be expected to accelerate.
Accordingly, a Fund's ability to maintain positions in high-yielding
mortgage-related securities will be affected by reductions in the principal
amount of such securities resulting from such prepayments, and its ability to
reinvest the returns of principal at comparable yields is subject to generally
prevailing interest rates at that time. Conversely, slower than expected
prepayments may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities tend to fluctuate more in response to interest rate changes, leading
to increased net asset value volatility. Prepayments may also result in the
realization of capital losses with respect to higher yielding securities that
had been bought at a premium or the

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loss of opportunity to realize capital gains in the future from possible future
appreciation.

Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest
in the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds from repossessed collateral may not always
be sufficient to support payments on these securities.

DURATION

In selecting securities for the Fixed-Income Funds, the Advisor makes
use of the concept of duration for fixed-income securities. Duration is a
measure of the expected life of a fixed-income security that was developed as a
more precise alternative to the concept of "term to maturity". Duration
incorporates a bond's yield, coupon interest payments, final maturity and call
features into one measure.

Most debt obligations provide interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also have call
provisions. Depending on the relative magnitude of these payments, the market
values of debt obligations may respond differently to changes in the level and
structure of interest rates.

Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity. Duration is a measure of the expected life of a
fixed-income security on a present value basis. Duration takes the length of
the time intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a callable bond, expected
to be received, and weights them by the present values of the cash to be
received at each future point in time. For any fixed-income security with
interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other things being the same, the
lower the stated or coupon rate of interest of a fixed-income security, the
longer the duration of the security; conversely, the higher the stated or
coupon rate of interest of a fixed-income security, the shorter the duration of
the security.

Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen a Fund's duration by
approximately the same amount that holding an equivalent amount of the
underlying securities would.

Short futures or put options positions have durations roughly equal to
the negative duration of the securities that underlie those positions, and have
the effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.

There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For
example, floating and variable rate securities often have final maturities of
ten or more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by duration is the case of mortgage
pass-through securities. The stated final maturity of such securities is
generally 30 years, but current prepayment rates are more critical in
determining the securities' interest rate exposure. In these and other similar
situations, the Advisor will use more sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
interest rate exposure.

DERIVATIVE INSTRUMENTS

As indicated in the Prospectus, to the extent consistent with their
investment objectives and policies, the Funds may purchase and write call and
put options on securities, securities indexes and on foreign currencies and
enter into futures contracts and use options on futures contracts. The
Fixed-Income Funds also may enter into swap agreements with respect to foreign
currencies, interest rates and securities indexes. The Funds may use these

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techniques to hedge against changes in interest rates, foreign currency
exchange rates, or securities prices or as part of their overall investment
strategies. The International and the Fixed-Income Funds may also purchase and
sell options relating to foreign currencies for the purpose of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another. Each Fund will maintain segregated
accounts consisting of cash, U.S. Government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily (or, as permitted by
applicable regulation, enter into certain offsetting positions), to cover its
obligations under options and futures contracts to avoid leveraging of the
Fund.

Options on Securities and on Securities Indexes. A Fund may purchase
put options on securities to protect holdings in an underlying or related
security against a substantial decline in market value. A Fund may purchase
call options on securities to protect against substantial increases in prices
of securities the Fund intends to purchase pending its ability to invest in
such securities in an orderly manner. A Fund may sell put or call options it
has previously purchased, which could result in a net gain or loss depending on
whether the amount realized on the sale is more or less than the premium and
other transaction costs paid on the put or call option which is sold. A Fund
may write a call or put option only if the option is "covered" by the Fund
holding a position in the underlying securities or by other means which would
permit immediate satisfaction of the Fund's obligation as writer of the option.
Prior to exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option of the same series.

The purchase and writing of options involves certain risks. During
the option period, the covered call writer has, in return for the premium on
the option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation
under the option and must deliver the underlying securities at the exercise
price. If a put or call option purchased by the 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 in 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.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Fund may be unable to close out a position.

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

There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If a Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless. If a
Fund were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the
option expired without exercise. As the writer of a covered call option, a
Fund forgoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call option above
the sum of the premium and the exercise price of the call.

If trading were suspended in an option purchased by a Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it had 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.

Futures Contracts and Options on Futures Contracts. A Fund may use
interest rate, foreign currency or index futures contracts, as specified for
that Fund in the Prospectus. An interest rate, foreign currency or index
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a

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financial instrument, foreign currency or the cash value of an index at a
specified price and time. A futures contract on an index is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally written. Although the value of an index might 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, including:
the S & P 500; the S & P 100; the NYSE composite; U.S. Treasury bonds; U.S.
Treasury notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; the Australian dollar; the
Canadian dollar; the British pound; the German mark; the Japanese yen; the
French franc; the Swiss franc; the Mexican peso; and certain multinational
currencies, such as the European Currency Unit ("ECU"). It is expected that
other futures contracts will be developed and traded in the future.

A Fund may purchase and write call and put options on futures. Options
on futures possess many of the same characteristics as options on securities
and indexes (discussed above). An option on a futures contract gives the
holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option,
the opposite is true.

Each Fund will use futures contracts and options on futures contracts
in accordance with the rules of the Commodity Futures Trading Commission
("CFTC"). 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. A Fund's hedging activities may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used
to reduce that Fund's exposure to interest rate fluctuations, the Fund may be
able to hedge its exposure more effectively and perhaps at a lower cost by
using futures contracts and options on futures contracts.

A Fund will only enter into futures contracts and options on futures
contracts which are standardized and traded on a U.S. or foreign exchange,
board of trade, or similar entity, or quoted on an automated quotation system.

When a purchase or sale of a futures contract is made by a Fund, the
Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market".
Variation margin does not represent a borrowing or loan by a Fund but is
instead a settlement between the Fund and the broker of the amount one would
owe the other if the futures contract expired. In computing daily net asset
value, each Fund will mark to market its open futures positions.

A Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.

Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a
capital gain, or if it is more, the Fund realizes a capital loss. Conversely,
if an offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss.
The transaction costs must also be included in these calculations.

Limitations on Use of Futures and Options Thereon. When purchasing a
futures contract, a Fund will maintain with its custodian (and mark-to-market
on a daily basis) cash, U.S. Government securities, equity securities or other

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liquid, unencumbered assets that, when added to the amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract. Alternatively, the Fund may "cover" its position by
purchasing a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by the Fund.

When selling a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Trust's custodian).

When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call
option. Alternatively, the Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike
price of the call option, by owning the instruments underlying the futures
contract, or by holding a separate call option permitting the Fund to purchase
the same futures contract at a price not higher than the strike price of the
call option sold by the Fund.

When selling a put option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered 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 current applicable regulations of the CFTC
pursuant to which the Trust avoids being deemed a "commodity pool operator,"
the Funds are limited in their futures trading activities to positions which
constitute "bona fide hedging" positions within the meaning and intent of
applicable CFTC rules, or to non-hedging positions for which the aggregate
initial margin and premiums will not exceed 5% of the liquidation value of the
Fund's assets.

The requirements for qualification as a regulated investment company
also may limit the extent to which a Fund may enter into futures contracts,
options thereon or forward contracts. See "Dividends and Tax Status."

Risks Associated with Futures and Options on Futures Contracts. There
are several risks associated with the use of futures contracts and options on
futures contracts as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund securities being hedged.
In addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variation in
speculative market demand for futures and options on futures, including
technical influences in futures trading and options on futures, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.

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

B-12
<PAGE> 68
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 contract or an option on futures
position, and that Fund would remain obligated to meet margin requirements
until the position is closed. In addition, many of the contracts discussed
above are relatively new instruments without a significant trading history. As
a result, there can be no assurance that an active secondary market will
develop or continue to exist.

Additional Risks of Options on Securities, Futures Contracts, Options
on Futures Contracts, and Forward Currency Exchange Contracts 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 (i) other complex foreign
political, legal and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Funds' ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, and (iv) lesser trading volume.

FOREIGN SECURITIES

In addition to purchasing securities of foreign issuers in foreign
markets, the International Fund, the Global Equity Fund and the Fixed-Income
Funds may invest in American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") or other securities convertible into securities of issuers
based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts, usually issued by a U.S. bank or trust company,
evidencing ownership of the underlying securities; EDRs are European receipts
evidencing a similar arrangement. Generally, ADRs are issued in registered
form, denominated in U.S. dollars, and are designed for use in the U.S.
securities markets; EDRs are issued in bearer form, denominated in other
currencies, and are designed for use in European securities markets.

The Fixed-Income Funds may also invest in fixed-income securities of
issuers located in emerging foreign markets. Emerging markets generally include
every country in the world other than the United States, Canada, Japan,
Australia, Malaysia, New Zealand, Hong Kong, South Korea, Singapore and most
Western European countries. In determining what countries constitute emerging
markets, the Advisor will consider, among other things, data, analysis and
classification of countries published or disseminated by the International Bank
for Reconstruction and Development (commonly known as the World Bank) and the
International Finance Corporation. Currently, investing in many emerging
markets may not be desirable or feasible, because of the lack of adequate
custody arrangements for a Fund's assets, overly burdensome repatriation and
similar restrictions, the lack of organized and liquid securities markets,
unacceptable political risks or other reasons. As opportunities to invest in
securities in emerging markets develop, the Funds expect to expand and further
broaden the group of emerging markets in which they invest.

From time to time, emerging markets have offered the opportunity for
higher returns in exchange for a higher level of risk. Accordingly, the
Advisor believes that each Fixed-Income Fund's ability to invest in emerging
markets throughout the world may enable the achievement of results superior to
those produced by funds, with similar objectives to those of these Fund, that
invest solely in securities in developed markets. There is no assurance that
any Fixed-Income Funds will achieve these results.

The Fixed-Income Funds may invest in the following types of emerging
market fixed-income securities: (a) fixed-income securities issued or
guaranteed by governments, their agencies, instrumentalities or political
subdivisions, or by government owned, controlled or sponsored entities,
including central banks (collectively, "Sovereign Debt"), including Brady Bonds
(described below); (b) interests in issuers organized and operated for the
purpose of restructuring the investment characteristics of Sovereign Debt; (c)
fixed-income securities issued by banks and other business entities; and (d)
fixed-income securities denominated in or indexed to the currencies of emerging
markets. Fixed-income securities held by the Funds may take the form of bonds,
notes, bills, debentures, bank debt obligations, short-term paper, loan
participations, assignments and interests issued by entities organized and
operated for the

B-13
<PAGE> 69
purpose of restructuring the investment characteristics of any of the
foregoing. There is no requirement with respect to the maturity of
fixed-income securities in which the Funds may invest.

The Fixed-Income Funds may invest in Brady Bonds and other Sovereign
Debt of countries that have restructured or are in the process of restructuring
Sovereign Debt pursuant to the Brady Plan. "Brady Bonds" are debt securities
issued under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
In restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Bank for Reconstruction and Development
(the "World Bank") and the International Monetary Fund ("IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of commercial bank
debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect
of new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.

Emerging market fixed-income securities generally are considered to
be of a credit quality below investment grade, even though they often are not
rated by any nationally recognized statistical rating organizations.
Investment in emerging market fixed-income securities will be allocated among
various countries based upon the Advisor's analysis of credit risk and its
consideration of a number of factors, including: prospects for relative
economic growth among the different countries in which the Fixed-Income Funds
may invest; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
the individual investment opportunities available to international investors.
The Advisor's emerging market sovereign credit analysis includes an evaluation
of the issuing country's total debt levels, currency reserve levels, net
exports/imports, overall economic growth, level of inflation, currency
fluctuation, political and social climate and payment history. Particular
fixed-income securities will be selected based upon credit risk analysis of
potential issuers, the characteristics of the security and interest rate
sensitivity of the various debt issues available with respect to a particular
issuer, analysis of the anticipated volatility and liquidity of the particular
debt instruments, and the tax implications to the Fund. The emerging market
fixed-income securities in which the Fixed-Income Funds may invest are not
subject to any minimum credit quality standards.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

The Funds may take positions in options on foreign currencies to hedge
against the risk of foreign exchange rate fluctuations on foreign securities
the Funds hold in their portfolios or intend to purchase. For example, if a
Fund were to enter into a contract to purchase securities denominated in a
foreign currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if
a Fund held securities denominated in a foreign currency and anticipated a
decline in the value of that currency against the U.S. dollar, it could hedge
against such a decline by purchasing a put option on the currency involved.
The markets in foreign currency options are relatively new, and a Fund's
ability to establish and close out positions in such options is subject to the
maintenance of a liquid secondary market. There can be no assurance that a
liquid secondary market will exist for a particular option at any specific
time. In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.

The quantities of currencies underlying option contracts represent odd
lots in a market dominated by transactions between banks, and as a result extra
transaction costs may be incurred upon exercise of an option.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations be firm or revised on
a timely basis. Quotation information is generally representative of very
large transactions in the interbank market and may not reflect smaller
transactions where rates may be less favorable. Option markets may be closed
while round-the-clock interbank currency markets are open, and this can create
price and rate discrepancies.

Risks of Options Trading. The Funds may effectively terminate their
rights or obligations under options by entering into closing transactions.
Closing transactions permit a Fund to realize profits or limit losses on its
options positions prior to the exercise or expiration of the option. The value
of a foreign currency option depends on the value

B-14
<PAGE> 70
of the underlying currency relative to the U.S. dollar. Other factors
affecting the value of an option are the time remaining until expiration, the
relationship of the exercise price to market price, the historical price
volatility of the underlying currency and general market conditions. As a
result, changes in the value of an option position may have no relationship to
the investment merit of a foreign security. Whether a profit or loss is
realized on a closing transaction depends on the price movement of the
underlying currency and the market value of the option.

Options normally have expiration dates of up to nine months. The
exercise price may be below, equal to or above the current market value of the
underlying currency. Options that expire unexercised have no value, and a Fund
will realize a loss of any premium paid and any transaction costs. Closing
transactions may be effected only by negotiating directly with the other party
to the option contract, unless a secondary market for the options develops.
Although the Funds intend to enter into foreign currency options only with
dealers which agree to enter into, and which are expected to be capable of
entering into, closing transactions with the Funds, there can be no assurance
that a Fund will be able to liquidate an option at a favorable price at any
time prior to expiration. In the event of insolvency of the counter-party, a
Fund may be unable to liquidate a foreign currency option. Accordingly, it may
not be possible to effect closing transactions with respect to certain options,
with the result that a Fund would have to exercise those options that it had
purchased in order to realize any profit.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Funds may use forward contracts to protect against uncertainty in
the level of future exchange rates. The Funds will not speculate with forward
contracts or foreign currency exchange rates.

A Fund may enter into forward contracts with respect to specific
transactions. For example, when a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock in" the U.S. dollar
price of the security or the U.S. dollar equivalent of the payment, by entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars or foreign currency, of the amount of foreign currency involved in the
underlying transaction. A Fund will thereby be able to protect itself against
a possible loss resulting from an adverse change in the relationship between
the currency exchange rates during the period between the date on which the
security is purchased or sold, or on which the payment is declared, and the
date on which such payments are made or received.

A Fund also may use forward contracts in connection with portfolio
positions to lock in the U.S. dollar value of those positions, to increase the
Fund's exposure to foreign currencies that the Advisor believes may rise in
value relative to the U.S. dollar or to shift the Fund's exposure to foreign
currency fluctuations from one country to another. For example, when the
Advisor believes that the currency of a particular foreign country may suffer a
substantial decline relative to the U.S. dollar or another currency, it may
enter into a forward contract to sell the amount of the former foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. This investment practice generally is
referred to as "cross-hedging" when another foreign currency is used.

The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot (i.e.,
cash) market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security
if its market value exceeds the amount of foreign currency the Fund is
obligated to deliver. The projection of short-term currency market movements
is extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Fund to sustain losses on these contracts and transaction costs. A Fund may
enter into forward contracts or maintain a net exposure to such contracts only
if (1) the consummation of the contracts would not obligate the Fund to deliver
an amount of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency or (2) the Fund
maintains in a segregated account cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets,

B-15
<PAGE> 71
marked-to-market daily, in an amount not less than the value of the Fund's
total assets committed to the consummation of the contracts. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Advisor believes it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.

At or before the maturity date of a forward contract that requires a
Fund to sell a currency, the Fund may either sell a portfolio security and use
the sale proceeds to 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 that it is obligated to deliver.
Similarly, a Fund may close out a forward contract requiring it to purchase a
specified currency by entering into a second contract entitling it to sell the
same amount of the same currency on the maturity date of the first contract.
The Fund would realize a gain or loss as a result of entering into such an
offsetting forward contract under either circumstance to the extent the
exchange rate between the currencies involved moved between the execution dates
of the first and second contracts.

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

Although the Funds value their assets daily in terms of U.S. dollars,
they do not intend to convert holdings of foreign currencies into U.S. dollars
on a daily basis. The Funds may convert foreign currency from time to time,
and investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to a Fund at one rate, while offering a lesser rate of exchange should
the Fund desire to resell that currency to the dealer.

Swap Agreements. The Funds may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded the desired return. Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar
amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. The
"notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations which the parties to a swap agreement have agreed to
exchange. A Fund's obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). A Fund's obligations under a swap agreement
will be accrued daily (offset against any amounts owing to the Fund) and any
accrued but unpaid net amounts owed to a swap counter-party will be covered by
the maintenance of a segregated account consisting of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets
marked-to-market daily, to avoid any potential leveraging of the Fund's
portfolio. A Fund will not enter into a swap agreement with any single party
if the net amount owed or to be received under existing contracts with that
party would exceed 5% of the Fund's assets.

Whether a Fund's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Advisor's ability correctly to predict whether certain types of investments are
likely to produce greater returns than other investments. Because they are two
party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, a Fund bears the
risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counter-party. The
Advisor will cause a Fund to enter into swap agreements only with counter-

B-16
<PAGE> 72
parties that would be eligible for consideration as repurchase agreement
counter-parties. Restrictions imposed by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is a relatively
new market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
a Fund's ability to terminate existing swap agreements or to realize amounts to
be received under such agreements.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

Lower-rated or unrated (i.e., high yield) securities are more likely
to react to developments affecting market risk (such as interest rate
sensitivity, market perception of creditworthiness of the issuer and general
market liquidity) and credit risk (such as the issuer's inability to meet its
obligations) than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The Advisor considers both
credit risk and market risk in making investment decisions for the Equity
Income Fund and the Fixed-Income Funds. Investors should carefully consider
the relative risk of investing in high yield securities and understand that
such securities are not generally meant for short-term trading.

The amount of high yield securities outstanding proliferated in the
1980's in conjunction with the increase in merger and acquisition and leveraged
buyout activity. Under adverse economic conditions, there is a risk that
highly leveraged issuers may be unable to service their debt obligations upon
maturity. In addition, the secondary market for high yield securities, which
is concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Advisor could find it more difficult
to sell these securities or may be able to sell the securities only at prices
lower than if such securities were widely traded. Prices realized upon the
sale of such lower-rated or unrated securities, under these circumstances, may
be less than the prices used in calculating the Funds' net asset value.

Lower-rated or unrated debt obligations also present risks based on
payment expectations. If an issuer calls the obligation for redemption, the
Fund may have to replace the security with a lower yielding security, resulting
in a decreased return for investors. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.

RISK FACTORS OF INVESTING IN SMALL AND MID-SIZE COMPANIES

Investors in the Mid-Cap and Small-Cap Funds should be aware that the
securities of companies with small market capitalizations may have more risk
than the securities of more established companies. Because of the
concentration in stocks of smaller and medium-sized companies, which tend to be
more volatile and less liquid than stocks of larger companies, the Mid-Cap and
Small Cap Funds may involve an above average degree of risk. Smaller and
medium-sized companies, as compared to larger companies, may have a shorter
history of operations, may not have as great an ability to raise additional
capital, may have a less diversified product line making them susceptible to
market pressure, and may have a smaller public market for their securities.

ILLIQUID SECURITIES

A Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities include repurchase agreements which have a
maturity of longer than seven days, and securities that are illiquid by virtue
of the absence of a readily available market (either within or outside of the
Unites States) or legal or contractual restrictions of resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act, securities which are otherwise not readily marketable and
repurchase agreements have a maturity of longer than seven days. Securities
which have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly from the
issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainly in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby

B-17
<PAGE> 73

experience difficulty satisfying redemption within seven days. The absence of
a trading market can make it difficult to ascertain a market value for illiquid
investments. Also market quotations are less readily available. The judgment
of the Advisor may at times play a greater role in valuing these securities
than in the case of unrestricted securities. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.

In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may not
be indicative of the liquidity of such investments.

Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A established a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.

Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Advisor will monitor the
liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Advisor will consider, inter
alia, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition,
in order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (i) it much be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations (NRSRO), or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the
investment adviser, and (ii) it must not be "traded flat" (i.e., without
accrued interest) or in default as to principal or interest. Investing in Rule
144A securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.

MANAGEMENT

The Trustees and officers of the Trust are:

<TABLE>
<CAPTION>
Position
Name, address & age with Trust Principal occupations during past five years
- ------------------- ---------- --------------------------------------------

<S> <C> <C>
Robert L. Burch III (63) Trustee Managing Partner, A.W. Jones Co. (investments);
885 Third Avenue Chairman, Jonathan Mfg. Corp. (slide manufacturing)
New York, NY 10022

John A.G. Gavin (65) Trustee Chairman, Gamma Services Corp. (venture capital) (since 1968);
2100 Century Park West Principal, Gavin, Dailey & Partners (consulting) (since 1993); U.S.
Los Angeles, CA 90067 Ambassador to Mexico (1981-1986); Director, Atlantic Richfield
Co., Dresser Industries, Inc., Pinkertons, International Wire Corp.
and Kap Resources.

</TABLE>

B-18
<PAGE> 74

<TABLE>
<S> <C> <C>
Joe Grills (60) Trustee Member of the Committee of Investment of Employee Benefit
183 Soundview Lane Assets of the Financial Executives Institute ("CIEBA") since
New Canaan, CT 06840 1986; member of CIEBA's Executive Committee since 1988 and its
Chairman from 1991 to 1992; Assistant Treasurer of International
Business Machines Incorporated ("IBM") and Chief Investment
Officer of the IBM Retirement Funds from 1986 until 1993;
Member of the Investment Advisory Committee of the State of New
York Common Retirement Fund; Director Duke Management
Company and LaSalle Street Fund; Trustee or Director of a number
of investment companies for which Merrill Lynch Asset
Management is the advisor.

John F. Hotchkis* (64) Trustee Managing Director and Portfolio Manager of the Advisor
800 West 6th Street
Los Angeles, CA 90017

Robert B. Hutchinson (76) Trustee Former Chairman (1987-88) and Director (1976-88),
c/o Simpson Investment Co. Prudential Bank (savings bank); Director and former
1201 3rd Avenue Senior Vice President, Finance and Secretary, Simpson
Seattle, WA 98101 Investment Co. (holding company for a wood products company,
pulp and paper company and a PVC products company); Director,
Enterprises International, Inc. (industrial strapping material
manufacturer)

Michael L. Quinn* (50) Trustee Head of Merrill Lynch Capital Management Group since April
Merrill Lynch Capital 1995; co-head of the Equity Division of Merrill Lynch, Pierce,
Management Group Fenner & Smith Incorporated from February 1991 - April 1995;
800 Scudders Mill Road Trustee, Valley Hospital and the University of Denver

Merle T. Welshans (77) Trustee Adjunct Professor of Finance, Washington University;
14360 Ladue Road Director, Prudential Utility Fund, Inc., Prudential
Chesterfield, MO 63017 Structured Maturity Fund, Inc.

Richard R. West (58) Trustee Dean Emeritus of New York University's Leonard N. Stern School
Box 604 of Business (since 1993); formerly Dean (1984-1993) and Professor
Genoa, NV 89411 of Finance (1984-1995), New York University's Leonard N. Stern
School of Business; Director, Bornado, Inc., Alexander's Inc.,
Browne & Co., Inc. and Smith Corona Corp.; Trustee or Director
of a number of investment companies for which Merrill Lynch Asset
Management is the advisor.

Nancy D. Celick (45) President and Employee of the Advisor; Chief Financial Officer,
800 West 6th Street Principal Kennedy-Wilson, Inc. (Auction Marketing Services), 1992-1993;
Los Angeles, CA 90017 Executive Officer Chief Financial Officer, First National Corporation (Bank
Holding Company), 1984-1992

Roger DeBard, PhD (54) Executive Managing Director of the Advisor since 1995; Partner of the
800 West 6th Street Vice President Advisor (1994-1995); Principal of the Advisor (1992-1994);
Los Angeles, CA 90017 Portfolio Manager of the Advisor (1985-1992)

Mark D. Cone (28) Vice President Employee of the Advisor; Retail Account Manager,
800 West 6th Street Neuberger & Berman (1991-1994)
Los Angeles, CA 90017

</TABLE>

B-19
<PAGE> 75

<TABLE>
<S> <C> <C>
Gracie Fermelia (35) Secretary, Employee of the Advisor; Senior Manager,
800 West 6th Street Treasurer, and Price Waterhouse (1985-1994)
Los Angeles, CA 90017 Principal
Financial and
Accounting Officer

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

* "Interested" Trustee, as defined in the 1940 Act, due to the relationship
indicated with the Advisor.

The Trust does not pay salaries to any of its officers or fees to any of
its Trustees affiliated with the Advisor. The fees paid to the other Trustees
during the Trust's last fiscal year are as follows:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement Estimated Annual from Trust
Aggregate Benefits Accrued Benefits and Fund
Compensation as Part of Fund Upon Complex Paid
Name and Position from Fund Expenses Retirement to Trustees
- ----------------- --------- -------- ---------- -----------

<S> <C> <C> <C> <C>
Robert L. Burch III, $12,000 none n/a $12,000
Trustee

John A. Gavin, $ 9,000 none n/a $9,000
Trustee

Robert B. Hutchinson, $12,000 none n/a $12,000
Trustee

Merle T. Welshans, $12,000 none n/a $12,000
Trustee

</TABLE>
For information as to ownership of shares by officers and Trustees of
the Trust, see below under "General Information About the Trust."

The Advisor

The Advisor, a limited partnership, provides the Funds with management
and investment advisory services. In June 1996, the Advisor entered into a
Purchase Agreement with Merrill Lynch & Co., Inc., a Delaware corporation
("ML"), pursuant to which ML will acquire the partnership interests in the
Advisor. The purchase is subject to a number of contingencies, including
approval by the Funds' Board of Trustees and shareholders of new investment
advisory agreements relating to each Fund, which have occurred. If the
transaction occurs, it is anticipated that the Funds will be operated in the
same manner as they are currently.

Each Fund, except for the Equity Fund for Insurance Companies and the
Fixed-Income Funds, pays the Advisor for the services performed a fee at the
annual rate of 0.75% of the Fund's average net assets. The Equity Fund for
Insurance Companies pays the Advisor a fee at the annual rate of 0.60% on the
first $10,000,000 of its average net assets and 0.50% of average net assets in
excess of $10,000,000. The Total Return Bond Fund pays the Advisor a fee at
the annual rate of 0.55% of its average net assets, although prior to October
31, 1995, the Total Return Bond Fund paid the Advisor a fee at the annual rate
of 0.70% of its average net assets. The Low Duration Fund pays the Advisor a
fee at the annual rate of 0.46% of its average daily net assets. Prior to
October 31, 1995, the Low Duration Fund paid the Advisor at the same annual
rate as the Short-Term Investment Fund. The Short-Term Investment Fund pays a
fee at the annual rate of 0.40% of the Fund's average net assets under
$100,000,000, 0.35% of the Fund's average net assets from $100,000,000 up to
$250,000,000, 0.30% of the Fund's average net assets from $250,000,000 up to
$500,000,000, and 0.25% of the Fund's average net assets over $500,000,000.
However, each Investment Advisory Agreement provides that in the event the
expenses of a Fund (including the fees of the Advisor and amortization of
organization expenses but excluding interest, taxes, brokerage commissions and
extraordinary expenses) for any fiscal year exceed the limits set by applicable
regulations of state securities commissions, the

B-20
<PAGE> 76
Advisor will reduce its fee by the amount of such excess. Any such reductions
are accrued and paid in the same manner as the Advisor's fee and are subject to
readjustment during the year. Currently, the Advisor believes that the most
restrictive applicable expense limitation of state securities commissions is
2.5% of the first $30,000,000 of a Fund's average net assets, 2% of the next
$70,000,000 of average net assets, and 1.5% of average net assets in excess of
$100,000,000.

In addition, the Advisor has voluntarily agreed to limit the annual
operating expenses of the Equity Income Fund, Mid-Cap Fund, Small Cap Fund,
International Fund, Global Equity Fund, and Balanced Income Fund to 1% of each
Fund's average net assets. Additionally, the Advisor has agreed to limit the
annual operating expenses of the Total Return Bond Fund to 0.65%, the Low
Duration Fund to 0.58%, and the Short-Term Investment Fund to 0.48% of the
Fund's average net assets. There is no such limitation on the annual expenses
of the Equity Fund for Insurance Companies.

As a result of its agreement to limit Fund expenses, for the year
ended June 30, 1996, the Advisor waived a portion of its fee with respect to
the Small Cap Fund, Balanced Income Fund, International Fund, Total Return Bond
Fund, Low Duration Fund and Short-Term Investment Fund in the amounts of
$44,825, $31,555, $169,480, $84,461, $29,763 and $69,867, respectively. For
the year ended June 30, 1996, the Equity Income Fund, Small Cap Fund, Balanced
Income Fund, International Fund, Total Return Bond Fund, Low Duration Fund and
Short-Term Investment Fund paid $1,238,052, $114,521, $345,917, $939,065,
$80,247, $676,352, and $1,164, respectively, to the Advisor.

As a result of its agreement to limit Fund expenses, for the year
ended June 30, 1995, the Advisor waived a portion of its fee with respect to
the Equity Income Fund, Small Cap Fund, Balanced Income Fund, International
Fund, Total Return Bond Fund, Low Duration Fund, and Short-Term Investment Fund
in the amounts of $24,311, $77,404, $65,858, $125,088, $106,712, $132,208, and
$100,162, respectively. For the year ended June 30, 1995, the Equity Income
Fund, Small Cap Fund, Balanced Income Fund, International Fund, and Low
Duration Fund paid $772,117, $41,867, $189,426, $117,974, and $176,601,
respectively, to the Advisor. The Total Return Bond Fund and Short-Term
Investment Fund did not pay advisory fees for the year ended June 30, 1995.

As a result of its agreement to limit Fund expenses, for the year
ended June 30, 1994, the Advisor waived a portion of its fee with respect to
the Equity Income Fund, Small Cap Fund, Balanced Income Fund and International
Fund in the amounts of $43,225, $77,973, $68,952 and $90,832, respectively.
For the year ended June 30, 1994, the Equity Income Fund, Small Cap Fund,
Balanced Income Fund and International Fund paid $593,014, $11,831, $186,423,
and $21,531, respectively to the Advisor. The Low Duration Fund and Short-Term
Investment Fund did not pay advisory fees for the year ended June 30, 1994.

For the fiscal years ended June 30, 1996, 1995 and 1994, the Equity
Fund for Insurance Companies paid $67,516, $76,848, and $53,999, respectively,
to the Advisor. The Advisor pays all of the operating expenses, except for the
advisory fees, of the Equity Fund for Insurance Companies.

Each of the ten Investment Advisory Agreements provides that the
Advisor shall not be liable to the Trust for any error of judgment by the
Advisor or for any loss sustained by any of the Funds except in the case of a
breach of fiduciary duty with respect to the receipt of compensation for
services (in which case any award of damages will be limited as provided in the
1940 Act) or of willful misfeasance, bad faith, gross negligence or reckless
disregard of duty.

Portfolio Transactions and Brokerage

The Investment Advisory Agreements state that in connection with its
duties to arrange for the purchase and the sale of securities held in the
portfolio of each Fund by placing purchase and sale orders for that Fund, the
Advisor shall select such broker-dealers ("brokers") as shall, in the Advisor's
judgment, implement the policy of the Trust to achieve "best execution", i.e.,
prompt and efficient execution at the most favorable securities price. In
making such selection, the Advisor is authorized in the Agreements to consider
the reliability, integrity and financial condition of the broker. The Advisor
is also authorized by the Agreements to consider whether the broker provides
brokerage and/or research services to the Fund and/or other accounts of the
Advisor. The Agreements state that the commissions paid to brokers may be
higher than another broker would have charged if a good faith determination is
made by the Advisor that the commission is reasonable in relation to the
services provided, viewed in terms of either that particular

B-21
<PAGE> 77
transaction or the Advisor's overall responsibilities as to the accounts as to
which it exercises investment discretion and that the Advisor shall use its
judgment in determining that the amount of commissions paid are reasonable in
relation to the value of brokerage and research services provided and need not
place or attempt to place a specific dollar value on such services or on the
portion of commission rates reflecting such services. The Agreements provide
that to demonstrate that such determinations were in good faith, and to show
the overall reasonableness of commissions paid, the Advisor shall be prepared
to show that commissions paid (i) were for purposes contemplated by the
Agreements; (ii) were for products or services which provide lawful and
appropriate assistance to the Advisor's decision-making process; and (iii) were
within a reasonable range as compared to the rates charged by brokers to other
institutional investors as such rates may become known from available
information. The Advisor is also authorized to consider sales of shares of
each Fund and/or of any other investment companies for which the Advisor acts
as Advisor as a factor in the selection of brokers to execute brokerage and
principal transactions, subject to the requirements of "best execution", as
defined above.

The research services discussed above may be in written form or
through direct contact with individuals and may include information as to
particular companies and securities as well as market, economic or
institutional areas and information assisting the Trust in the valuation of the
Funds' investments. The research which the Advisor receives for the Funds'
brokerage commissions, whether or not useful to a Fund, may be useful to the
Advisor in managing the accounts of the Advisor's other advisory clients.
Similarly, the research received for the commissions of such accounts may be
useful to any Fund.

In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission although the price of the security usually includes a profit
to the dealer. Money market instruments usually trade on a "net" basis as
well. On occasion, certain money market instruments may be purchased by the
Funds directly from an issuer in which case no commissions or discounts are
paid. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount.

The International Fund and the Global Equity Fund anticipate that
their brokerage transactions involving securities of companies headquartered in
countries other than the U.S. will be conducted primarily on the principal
exchanges of such countries. Transactions on foreign exchanges are usually
subject to fixed commissions which are generally higher than negotiated
commissions on U.S. transactions, although the Trust will endeavor to achieve
the best net results in effecting its portfolio transactions. There is
generally less government supervision and regulation of exchanges and brokers
in foreign countries than in the U.S.

During the three most recent fiscal years of the Trust, the following
brokerage commissions were paid by the Funds:

<TABLE>
<CAPTION>
Fund Ended 6/30/96 Ended 6/30/95 Ended 6/30/94
---- ------------- ------------- -------------
<S> <C> <C> <C>
Equity Income $152,950 $ 175,248 $ 35,176
Small Cap $ 45,342 $ 48,006 $ 46,606
International $905,601* $ 118,165 $ 88,231
Balanced Income $28,215 $ 16,004 $ 15,550
Low Duration $ - 0 - $ - 0 - $ - 0 -
Total Return Bond $ - 0 - $ - 0 - $ - 0 -
Short-Term Investment $ - 0 - $ - 0 - $ - 0 -
Equity Fund for Insurance Companies $24,542 $ 17,419 $ 14,145

</TABLE>

* The increase in commissions paid by the International Fund for the year
ended June 30, 1996 is due to a significant increase in the Fund's assets,
resulting in an increase in investment purchases.

NET ASSET VALUE

As indicated in each Prospectus, the net asset value per share of each
Fund's shares will be determined on each day that the New York Stock Exchange
is open for trading. That Exchange annually announces the days on which it
will not be open for trading; the most recent announcement indicates that it
will not be open on the following days: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving

B-22
<PAGE> 78
Day and Christmas Day. However, that Exchange may close on days not included
in that announcement. Also, no Fund is required to compute its net asset value
on any day on which no order to purchase or redeem its shares is received.

In determining the net asset value of each Fund's shares, equity
securities that are listed on a securities exchange (whether domestic or
foreign) or quoted by the NASDAQ National Market System are valued at the last
sale price on that day as of the close of regular trading on the New York Stock
Exchange (which is currently 4:00 p.m., New York time), or, in the absence of
recorded sales, at the average of readily available closing bid and asked
prices on such exchange or on such System. Unlisted equity securities that are
not included in such National Market System are valued at the average of the
quoted bid and asked prices in the over-the-counter market.

Fixed-income securities which are traded on a national securities
exchange will be valued at the last sale price or, if there was no sale on such
day, at the average of readily available closing bid and asked prices on such
exchange. However, securities with a demand feature exercisable within one to
seven days are valued at par. Prices for fixed-income securities may be based
on quotations received from one or more market-makers in the securities, or on
evaluations from pricing services. Fixed-income securities for which
quotations or prices are not readily available are valued at their fair value
as determined by the Advisor under guidelines established by the Board of
Trustees, with reference to fixed-income securities whose prices are more
readily obtainable or to an appropriate matrix utilizing similar factors. As a
broader market does not exist, the proceeds received upon the disposal of such
securities may differ from their recorded value. Debt securities which mature
in less than 60 days are valued at amortized cost (unless the Board of Trustees
determines that this method does not represent fair value), if their original
maturity was 60 days or less or by amortizing the value as of the 61st day
prior to maturity, if their original term to maturity exceeded 60 days.

Options, futures contracts and options thereon which are traded on
exchanges are valued at their last sale or settlement price as of the close of
the exchanges or, if no sales are reported, at the average of the quoted bid
and asked prices as of the close of the exchange.

Trading in securities listed on foreign securities exchanges or
over-the-counter markets is normally completed before the close of regular
trading on the New York Stock Exchange. In addition, foreign securities
trading may not take place on all business days in New York and may occur on
days on which the New York Stock Exchange is not open. In addition, foreign
currency exchange rates are generally determined prior to the close of trading
on the New York Stock Exchange. Events affecting the values of foreign
securities and currencies will not be reflected in the determination of net
asset value unless the Board of Trustees determines that the particular event
would materially affect net asset value, in which case an adjustment will be
made. Investments quoted in foreign currency are valued daily in U.S. dollars
on the basis of the foreign currency exchange rate prevailing at the time of
valuation. Foreign currency exchange transactions conducted on a spot basis
are valued at the spot rate prevailing in the foreign exchange market.

Securities and other assets for which market quotations are not
readily available are valued at their fair value as determined by the Advisor
under guidelines established by and under the general supervision and
responsibility of the Board of Trustees.

DIVIDENDS AND TAX STATUS

The Mid-Cap Fund and Global Equity Fund intend to elect to qualify and
remain qualified as regulated investment companies under Subchapter M of the
Internal Revenue Code. Each other Fund has qualified as a regulated investment
company. Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of each Fund's annual gross income, without
offset for losses from the sale or other disposition of securities, be derived
from payments with respect to securities loans, interest, dividends and gains
from the sale or other disposition of securities, foreign currencies or options
(including forward contracts) thereon; (b) each Fund derive less than 30% of
its gross income from gains (without offset for losses) from the sale or other
disposition of securities or options thereon held for less than three months;
and (c) each Fund diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities and other securities limited in
respect of any one issuer to an amount not greater than 5% of the Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25%

B-23
<PAGE> 79
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities). In addition, in order not to be
subject to federal taxation, each Fund must distribute to its shareholders at
least 90% of its net investment income, other than net capital gains, earned in
each year.

A Fund is required to pay an excise tax to the extent it does not
distribute to its shareholders during such calendar year at least 98% of its
ordinary income for that calendar year, 98% of its capital gains over capital
losses for the one-year period ending October 31 in such calendar year, and all
undistributed ordinary income and capital gains for the preceding respective
one-year period. The Funds intend to meet these distribution requirements to
avoid excise tax liability. The Funds also intend to continue distributing to
shareholders all of the excess of net long-term capital gain over net
short-term capital loss on sales of securities. If the net asset value of
shares of a Fund should, by reason of a distribution of realized capital gains,
be reduced below a shareholder's cost, such distribution would to that extent
be a return of capital to that shareholder even though taxable to the
shareholder, and a sale of shares by a shareholder at net asset value at that
time would establish a capital loss for federal tax purposes.

In determining the extent to which a Fund's dividends may be eligible
for the 70% dividends received deduction by corporate shareholders, interest
income, capital gain net income, gain or loss from Section 1256 contracts,
dividend income from foreign corporations and income from other sources will
not constitute qualified dividends. Corporate shareholders should consult
their tax advisors regarding other requirements applicable to the dividends
received deduction.

Special rules apply to the treatment of certain forward foreign
currency exchange contracts (Section 1256 contracts). At the end of each year,
such investments held by a Fund must be "marked to market" for federal income
tax purposes; that is, treated as having been sold at market value. Except to
the extent that such gains or losses are treated as "Section 988" gains or
losses, as described below, sixty percent of any gain or loss recognized on
these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss.

Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or loss.
Similarly, gains or losses on forward foreign currency exchange contracts or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition are also treated as
ordinary gain or loss. These gains, referred to as "Section 988" gains or
losses, increase or decrease the amount of a Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the Fund's net capital gain. If Section
988 losses exceed other investment company taxable income during a taxable
year, the Fund would not be able to make any ordinary dividend distributions,
or distributions made before the losses were realized would be recharacterized
as a return of capital to shareholders, rather than as an ordinary dividend,
reducing the basis of each shareholder's shares.

Any loss realized on a sale, redemption or exchange of shares of a
Fund by a shareholder will be disallowed to the extent the shares are replaced
within a 61-day period (beginning 30 days before the disposition of shares).
Shares received in connection with the payment of a dividend by a Fund
constitute a replacement of shares.

PERFORMANCE INFORMATION

Total Return. Average annual total return quotations used in the
Funds' advertising and promotional materials are calculated according to the
following formula:

P(1 + T)n = ERV

where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending
redeemable value at the end of the period of a hypothetical $1000 payment made
at the beginning of the period.

Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters,

B-24
<PAGE> 80
updated to the last day of the most recent quarter prior to submission of the
advertising for publication. Average annual total return, or "T" in the above
formula, is computed by finding the average annual compounded rates of return
over the period that would equate the initial amount invested to the ending
redeemable value. Average annual total return assumes the reinvestment of all
dividends and distributions.

Average annual total returns for the periods ended June 30, 1996 are
as follows:

<TABLE>
<CAPTION>
Ten Years
One Five or Since
Year Years Inception
---- ----- ---------
<S> <C> <C> <C> <C>
Equity Income Fund 20.0% 14.8% 10.8% (Since 6/24/87)
Small Cap Fund 14.2% 14.2% 9.4% (Ten Years)
International Fund 18.6% 16.1% 14.4% (Since 10/1/90)
Balanced Income Fund 15.0% 12.0% 10.7% (Ten Years)
Total Return Bond Fund 7.1% -- 12.2% (Since 12/6/94)
Low Duration Fund 7.5% -- 8.7% (Since 5/18/93)
Short-Term Investment Fund 7.2% -- 6.6% (Since 5/18/93)
Equity Fund for Insurance Companies 22.9% -- 14.2% (Since 1/29/93)

</TABLE>
Yield. Annualized yield quotations used in a Fund's advertising and
promotional materials are calculated by dividing the Fund's interest income for
a specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:

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

where a equals dividends and interest earned during the period; b equals
expenses accrued for the period, net of reimbursements; c equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and d equals the maximum offering price per share on the
last day of the period.

Except as noted below, in determining net investment income earned
during the period ("a" in the above formula), a Fund calculates interest earned
on each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the period or,
if the obligation was purchased during the period, the purchase price plus
accrued interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totalling all such interest earned.

For purposes of these calculations, the maturity of an obligation with
one or more call provisions is assumed to be the next date on which the
obligation reasonably can be expected to be called or, if none, the maturity
date.

The 30-day yields for the Total Return Bond Fund, Low Duration Fund,
and Short-Term Investment Fund for the period ended June 30, 1996 were 7.74%,
6.11%, and 6.14%, respectively.

Other information. Each Fund's performance data quoted in advertising
and other promotional materials represents past performance and is not intended
to predict or indicate future results. The return and principal value of an
investment in a Fund will fluctuate, and an investor's redemption proceeds may
be more or less than the original investment amount. In advertising and
promotional materials a Fund may compare its performance with data published by
Lipper Analytical Services, Inc. ("Lipper") or CDA Investment Technologies,
Inc. ("CDA"). The Fund also may refer in such materials to mutual fund
performance rankings and other data, such as comparative asset, expense and fee
levels, published by Lipper or CDA. Advertising and promotional materials also
may refer to discussions of the Fund and comparative mutual fund data and
ratings reported in independent periodicals including, but not limited to, The
Wall Street Journal, Money Magazine, Forbes, Business Week, Financial World and
Barron's.

B-25
<PAGE> 81
GENERAL INFORMATION ABOUT THE TRUST

The Trustees changed the name of the Trust to Hotchkis and Wiley Funds
effective October 7, 1994. The Declaration of Trust permits the Trustees to
issue an unlimited number of full and fractional shares of beneficial interest
and to divide or combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interest in each Fund.
Each share represents an interest in a Fund proportionately equal to the
interest of each other share. Upon the Trust's liquidation, all shareholders
would share pro rata in the net assets of the Fund in question available for
distribution to shareholders. If they deem it advisable and in the best
interest of shareholders, the Board of Trustees may create classes of shares.
The Board of Trustees has created ten series of shares, and may create
additional series in the future, which have separate assets and liabilities;
each of such series has or will have a designation including the word "Series."
Income and operating expenses not specifically attributable to a particular
Fund are allocated fairly among the Funds by the Trustees, generally on the
basis of the relative net assets of each Fund.

The Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office. The Declaration of Trust also provides that the Trust
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon.

Ten shareholders holding the lesser of $25,000 worth or one percent of
a Fund's shares may advise the Trustees in writing that they wish to
communicate with other shareholders for the purpose of requesting a meeting to
remove a Trustee. The Trustees will then, if requested by the applicants, mail
at the applicants' expense the applicants' communication to all other
shareholders.

The Trust or any Fund may be terminated if approved by the vote of a
majority of the Trustees or by the approval of the holders of a majority of the
Trust's outstanding shares, as defined in the 1940 Act. If not so terminated,
the Trust will continue indefinitely.

Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule
contains special provisions for cases in which an advisory contract is approved
by one or more, but not all, series. A change in investment policy may go into
effect as to one or more series whose holders so approve the change even though
the required vote is not obtained as to the holders of other affected series.

The Trust's custodian, Firstar Trust Company, 615 East Michigan
Street, Milwaukee, Wisconsin, is responsible for holding the Funds' assets and
acts as the Trust's accounting services agent. Subcustodians provide custodial
services for assets of the Trust held outside the U.S. The Trust's independent
accountants, Price Waterhouse LLP, 100 East Wisconsin Ave, Milwaukee, Wisconsin
53202, examine the Trust's financial statements and assist in the preparation
of certain reports to the Securities and Exchange Commission.

As of September 30, 1996, the Savings Plan and the Retirement Plan of
Hotchkis and Wiley, the Advisor, owned 0.51% of the outstanding shares of the
Equity Income Fund. Together with such retirement and savings plan
participation, the Trust's officers and Trustees as a group owned 0.52% of the
Equity Income Fund's outstanding shares.

As of September 30, 1996, the following persons owned of record, and
to the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Equity Income Fund:

Lykes Bros. Inc., P.O. Box 1690, Tampa, FL 33601 - 11.07%

B-26
<PAGE> 82
McDonalds Charities Inv., State Street Bank, Custodian, 225 Franklin
St., Boston, MA 02110-2804 - 8.30%

First Trust NA Trustee for Northern States Power, P.O. Box 64482,
St. Paul, MN 55164-0482 - 5.88%

As of September 30, 1996, the following person owned of record, but
not beneficially, more than five percent of the outstanding shares of the
Equity Income Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104 - 14.80%

As of September 30, 1996, the Savings Plan and the Retirement Plan of
Hotchkis and Wiley, the Advisor, owned 2.04% of the outstanding shares of the
Balanced Income Fund. In addition, Mr. John F. Hotchkis, Trustee of the Trust
and managing director of the Advisor, through personal and trust accounts and
accounts of or for the benefit of certain family members, may be deemed to be
the beneficial owner of 2.19% of the Balanced Income Fund's outstanding shares.
Together with such retirement and savings plan participation, the Trust's
officers and Trustees as a group owned 5.70% of the Balanced Income Fund's
outstanding shares.

As of September 30, 1996, Retirement Plan for Employees of Texas
Utilities Company System, P.O. Box 320, Pittsburgh, PA 15230-0320, owned of
record and beneficially 27.90% of the Balanced Income Fund's shares and may be
deemed a controlling person of that Fund.

As of September 30, 1996, the following person owned of record, but
not beneficially, more than five percent of the outstanding shares of the
Balanced Income Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco,
CA 94104 - 26.54%

As of September 30, 1996, the Savings Plan and the Retirement Plan of
Hotchkis and Wiley, the Advisor, owned 6.30% of the outstanding shares of the
Small Cap Fund. In addition, Mr. John F. Hotchkis, Trustee of the Trust and
managing director of the Advisor, through personal and trust accounts and
accounts of or for the benefit of certain family members, may be deemed to be
the beneficial owner of 18.13% of the Small Cap Fund's outstanding shares.
Together with such retirement and savings plan participation, the Trust's
officers and Trustees as a group owned 30.99% of the Small Cap Fund's
outstanding shares.

As of September 30, 1996, the following persons owned of record, and
to the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Small Cap Fund:

Preston Hotchkis, 523 W. 6th St., #316, Los Angeles, CA 90014-1004 -
5.83%

Frances Mayhan, 26 Edgehill Road, Little Rock, AR 72207-5462 - 5.20%

As of September 30, 1996, the following person owned of record, but
not beneficially, more than five percent of the outstanding shares of the Small
Cap Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104 - 14.51%

As of September 30, 1996, the Savings Plan and the Retirement Plan of
Hotchkis and Wiley, the Advisor, owned 0.28% of the outstanding shares of the
International Fund. In addition, Mr. John F. Hotchkis, Trustee of the Trust
and managing director of the Advisor, through personal and trust accounts and
accounts of or for the benefit of certain family members, may be deemed to be
the beneficial owner of 0.53% of the International Fund's outstanding shares.
Together with such retirement and savings plan participation, the Trust's
officers and Trustees as a group owned 0.93% of the International Fund's
outstanding shares.

As of September 30, 1996, the following persons owned of record, and
to the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the International Fund:

B-27
<PAGE> 83

Retirement Plan for Employees of Texas Utilities Company System, P.O.
Box 320, Pittsburgh,
PA 15230-0320 - 9.98%

As of September 30, 1996, the following person owned of record, but
not beneficially, more than five percent of the outstanding shares of the
International Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104 - 43.30%

As of September 30, 1996, the Savings Plan and the Retirement Plan of
Hotchkis and Wiley, the Advisor, owned 0.10% of the outstanding shares of the
Low Duration Fund. In addition, Mr. John F. Hotchkis, Trustee of the Trust and
managing director of the Advisor, through personal and trust accounts and
accounts of or for the benefit of certain family members, may be deemed to be
the beneficial owner of 5.31% of the Low Duration Fund's outstanding shares.
Together with such retirement and savings plan participation, the Trust's
officers and Trustees as a group owned 5.68% of the Low Duration Fund's
outstanding shares.

As of September 30, 1996, the following persons owned of record, and
to the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Low Duration Fund:

M.J. Murdock Charitable Trust, USNB of Oregon, Custodian, 555 SW Oak,
Portland, OR 97204 - 12.69%

Santa Fe Energy Resources, Inc. Retirement Income Plan, 1616 South
Voss Road, Suite 1000, Houston, TX 77057 - 7.16%

As of September 30, 1996, the following person owned of record, but
not beneficially, more than five percent of the outstanding shares of the Low
Duration Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104 - 41.25%

As of September 30, 1996, the Savings Plan and the Retirement Plan of
Hotchkis and Wiley, the Advisor, owned 0.76% of the outstanding shares of the
Short-Term Investment Fund.

As of September 30, 1996, Trussell & Co., for the benefit of United
Airlines Group, P.O. Box 771072, Detroit, MI 48277-1072, owned of record and
beneficially 46.98% of the Short-Term Investment Fund's shares and may be
deemed a controlling person of that Fund.

As of September 30, 1996, the following persons owned of record, and
to the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Short-Term Investment Fund:

Citibank NA, trustees for Mercantile Stores Company, 111 Wall St.,
EBF/20th Flr, NY, NY 10043 - 12.74%

Susan Shanor, 4336 Town Commons Circle, Atlanta, GA 30319 - 10.64%

As of September 30, 1996, the following person owned of record, but
not beneficially, more than five percent of the outstanding shares of the
Short-Term Investment Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104 - 9.97%

As of September 30, 1996, the Savings Plan and the Retirement Plan of
Hotchkis and Wiley, the Advisor, owned 0.95% of the outstanding shares of the
Total Return Bond Fund.

As of September 30, 1996, the following persons owned of record, and
to the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Total Return Bond Fund:

B-28
<PAGE> 84

YMCA of Metropolitan Los Angeles, 201 3rd St., 11th Flr, San Francisco,
CA 94163-0001 - 14.36%

McRae Foundation, R3, Box 396, Jackson, MS 39213 - 5.88%

Vesper Society, Jack London Square, 384 Embarcadero West, Suite 200,
Oakland, CA 94607 - 17.15%

Santa Fe Energy Resources, Inc. Retirement Income Plan, 1616 South
Voss Road, Suite 1000, Houston, TX 77057 - 16.83%

As of September 30, 1996, the following person owned of record, but
not beneficially, more than five percent of the outstanding shares of the Total
Return Bond Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104 - 14.51%

B-29
<PAGE> 85

Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 98.6% Shares Value
<S> <C> <C>
- --------------------------------------------------------
AEROSPACE -- 2.1%
........................................................
Lockheed Martin Corporation 23,079 $ 1,938,636
........................................................
Northrop Grumman Corporation 28,318 1,929,164
........................................ ============
3,867,800
- --------------------------------------------------------
AUTO-RELATED -- 2.8%
........................................................
Dana Corporation 106,636 3,305,716
........................................................
PACCAR, Incorporated 35,161 1,722,889
........................................ ============
5,028,605
- --------------------------------------------------------
AUTOS & TRUCKS -- 8.3%
........................................................
Chrysler Corporation 30,000 1,860,000
........................................................
Ford Motor Company 185,954 6,020,261
........................................................
General Motors Corporation 140,000 7,332,500
........................................ ============
15,212,761
- --------------------------------------------------------
BANKS -- 8.6%
........................................................
BankAmerica Corporation 33,038 2,502,628
........................................................
The Chase Manhattan
Corporation 16,105 1,137,416
........................................................
First Chicago NBD Corporation 83,349 3,261,030
........................................................
First Hawaiian, Inc. 37,757 1,076,075
........................................................
First of America Bank
Corporation 32,477 1,453,346
........................................................
KeyCorp 57,415 2,224,831
........................................................
National City Corporation 38,758 1,361,375
........................................................
Regions Financial Corporation 56,636 2,647,733
........................................ ============
15,664,434
- --------------------------------------------------------
BEVERAGES -- 0.7%
........................................................
Anheuser-Busch Companies, Inc. 16,991 1,274,325
- --------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 1.4%
........................................................
Weyerhaeuser Company 60,016 2,550,680
- --------------------------------------------------------
CHEMICALS -- 2.2%
........................................................
Goodrich (B.F.) Company 60,412 2,257,898
........................................................
PPG Industries, Inc. 16,479 803,351
........................................................
Witco Corporation 27,631 949,816
........................................ ============
4,011,065
- --------------------------------------------------------
COAL & GAS -- 1.8%
........................................................
Eastern Enterprises 99,393 3,304,817
- --------------------------------------------------------
DIVERSIFIED -- 5.5%
........................................................
Ogden Corporation 173,655 3,147,497
........................................................
Olin Corporation 23,598 2,106,121
........................................................
Tenneco, Inc. 94,754 4,844,298
........................................ ============
10,097,916
- --------------------------------------------------------

<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
DRUGS -- 1.2%
........................................................
Merck & Company, Inc. 34,925 $ 2,257,028
- --------------------------------------------------------
ENGINEERING AND CONSTRUCTION -- 1.0%
........................................................
Harsco Corporation 26,241 1,764,707
- --------------------------------------------------------
FINANCIAL SERVICES -- 6.1%
........................................................
Great Western Financial
Corporation 109,027 2,603,020
........................................................
H.F. Ahmanson & Company 102,253 2,760,831
........................................................
Household International, Inc. 49,084 3,730,384
........................................................
Transamerica Corporation 25,486 2,064,366
........................................ ============
11,158,601
- --------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 0.2%
........................................................
Whirlpool Corporation 7,200 357,300
- --------------------------------------------------------
INSURANCE -- 6.0%
........................................................
Allstate Corporation 22,042 1,005,666
........................................................
Aon Corporation 102,183 5,185,787
........................................................
Lincoln National Corporation 41,699 1,928,579
........................................................
USLIFE Corporation 83,963 2,760,284
........................................ ============
10,880,316
- --------------------------------------------------------
MACHINERY -- 1.9%
........................................................
Deere & Company 84,954 3,398,160
- --------------------------------------------------------
METALS & MINING -- 0.6%
........................................................
Phelps Dodge Corporation 16,555 1,032,618
- --------------------------------------------------------
OIL -- DOMESTIC -- 2.9%
........................................................
Atlantic Richfield Company 3,776 447,456
........................................................
Occidental Petroleum
Corporation 121,589 3,009,328
........................................................
Sun Company, Inc. 57,237 1,738,574
........................................ ============
5,195,358
- --------------------------------------------------------
OIL -- INTERNATIONAL -- 3.2%
........................................................
Amoco Corporation 28,000 2,026,500
........................................................
Chevron Corporation 20,000 1,180,000
........................................................
Exxon Corporation 10,000 868,750
........................................................
Mobil Corporation 1,632 182,988
........................................................
Royal Dutch Petroleum Company
ADR 1,888 290,280
........................................................
TransCanada Pipelines Ltd. 93,071 1,372,797
........................................ ============
5,921,315
- --------------------------------------------------------
PAPER -- 1.9%
........................................................
Georgia Pacific Corporation 50,000 3,550,000
- --------------------------------------------------------
</TABLE>

See Notes to Financial Statements

1
<PAGE> 86
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
EQUITY INCOME FUND

<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.7%
........................................................
Eastman Kodak Company 40,589 $ 3,155,795
- --------------------------------------------------------
POLLUTION CONTROL -- 3.5%
........................................................
Browning-Ferris Industries,
Inc. 220,000 6,380,000
- --------------------------------------------------------
PROFESSIONAL SERVICES -- 1.5%
........................................................
PHH Corporation 47,385 2,700,945
- --------------------------------------------------------
RAILROADS -- 4.3%
........................................................
Burlington Northern Santa Fe
Corp. 24,542 1,984,834
........................................................
Norfolk Southern Corporation 37,757 3,199,906
........................................................
Union Pacific Corporation 37,757 2,638,270
........................................ ============
7,823,010
- --------------------------------------------------------
RETAIL -- GENERAL -- 4.6%
........................................................
J.C. Penney Co., Incorporated 44,323 2,326,957
........................................................
Kmart Corporation 144,671 1,790,304
........................................................
May Department Stores Company 47,196 2,064,825
........................................................
Sears, Roebuck & Company 47,196 2,294,906
........................................ ============
8,476,992
- --------------------------------------------------------
STEEL -- 7.7%
........................................................
Allegheny Ludlum Corporation 397,900 7,510,362
........................................................
Lukens, Inc. 120,000 2,865,000
........................................................
USX-U.S. Steel Group, Inc. 128,941 3,658,701
........................................ ============
14,034,063
- --------------------------------------------------------
TELECOMMUNICATIONS -- 1.2%
........................................................
Comsat Corporation 84,954 2,208,804
- --------------------------------------------------------
TOBACCO -- 7.5%
........................................................
American Brands, Inc. 165,000 7,486,875
........................................................
Philip Morris Companies, Inc. 26,150 2,719,600
........................................................
UST, Inc. 101,029 3,460,243
........................................ ============
13,666,718
- --------------------------------------------------------
TRUCKING -- 0.9%
........................................................
Ryder System, Inc. 56,636 1,592,887
- --------------------------------------------------------
UTILITY -- ELECTRIC -- 3.1%
........................................................
CMS Energy Corporation 70,795 2,185,796
........................................................
New York State Electric & Gas
Corporation 15,197 370,427
........................................................
Peco Energy Company 75,000 1,950,000
........................................................
Public Service Enterprises
Group 43,893 1,201,571
........................................ ============
5,707,794
- --------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
UTILITY -- TELEPHONE -- 4.2%
........................................................
BellSouth Corporation 35,114 $ 1,487,956
........................................................
Cincinnati Bell, Incorporated 60,000 3,127,500
........................................................
GTE Corporation 9,439 422,395
........................................................
NYNEX Corporation 56,636 2,690,210
........................................ ============
7,728,061
- --------------------------------------------------------
Total common stocks (cost
$145,227,490) 180,002,875
- --------------------------------------------------------
PREFERRED STOCKS -- 1.2%
- --------------------------------------------------------
Armco Incorporated Class A
........................................................
$2.10 Cum. Cv. Preferred 21,238 493,783
........................................................
$4.50 Cum. Cv. Preferred 6,702 315,832
........................................................
Bethlehem Steel Corporation
........................................................
$2.50 Cum. Cv. Preferred 4,600 122,475
........................................................
$5.00 Cum. Cv. Preferred 22,865 1,188,980
........................................ ============
Total preferred stocks
(cost $2,168,760) 2,121,070
- --------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
VARIABLE RATE Principal
DEMAND NOTES* -- 0.3% Amount
<S> <C> <C>
- --------------------------------------------------------
General Mills, Inc., 5.14% $241,721 241,721
........................................................
Pitney Bowes, Inc., 5.1441% 400,000 400,000
........................................ ============
Total variable rate demand
notes 641,721
(cost $641,721)
- --------------------------------------------------------
Total investments -- 100.1%
(cost $148,037,971) 182,765,666
........................................................
Liabilities in excess of
other
assets -- (0.1%) (227,561)
........................................ ============
Total net assets -- 100.0% $182,538,105
- --------------------------------------------------------
</TABLE>

* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of June 30, 1996.

ADR -- American Depository Receipt.

See Notes to Financial Statements

2
<PAGE> 87
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 96.5% Shares Value
<S> <C> <C>
- --------------------------------------------------------
APPAREL & TEXTILES -- 3.8%
........................................................
Donnkenny, Inc. # 15,000 $ 292,500
........................................................
Kellwood Company 7,000 128,625
........................................................
Kenneth Cole Productions, Class
A # 10,000 197,500
......................................... ===========
618,625
- --------------------------------------------------------
APPLIANCES & HOUSEHOLD FURNITURE -- 4.8%
........................................................
Open Plan Systems, Inc. # 20,000 240,000
........................................................
REX Stores Corporation # 35,000 538,125
......................................... ===========
778,125
- --------------------------------------------------------
AUTO PARTS -- 4.0%
........................................................
APS Holding Corporation, Class
A # 30,000 660,000
- --------------------------------------------------------
AUTO-RELATED -- 2.4%
........................................................
Special Devices, Inc. # 25,000 400,000
- --------------------------------------------------------
BANKS -- 4.3%
........................................................
Coastal Bancorp, Inc. 30,000 540,000
........................................................
Commercial Bank of New York 16,000 176,000
......................................... ===========
716,000
- --------------------------------------------------------
BUILDING MATERIALS -- 3.1%
........................................................
NCI Building Systems, Inc. # 15,000 506,250
- --------------------------------------------------------
CHEMICALS -- 1.8%
........................................................
Dexter Corporation 10,000 297,500
- --------------------------------------------------------
COMMUNICATIONS & MEDIA -- 6.7%
........................................................
Century Communications
Corporation, Class A # 50,000 425,000
........................................................
EIS International, Inc. # 15,000 382,500
........................................................
VTEL Corporation # 30,000 288,750
......................................... ===========
1,096,250
- --------------------------------------------------------
COMPUTERS -- 0.9%
........................................................
Key Tronic Corporation # 23,000 149,500
- --------------------------------------------------------
COMPUTER-RELATED -- 3.1%
........................................................
Applied Voice Technology, Inc.
# 45,000 517,500
- --------------------------------------------------------
COMPUTER SERVICES -- 0.5%
........................................................
AMX Corporation # 10,000 78,750
- --------------------------------------------------------
ELECTRONICS -- 3.7%
........................................................
FLIR Systems, Inc. # 50,000 612,500
- --------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.4%
........................................................
Stewart and Stevenson Services,
Inc. 10,000 227,500
- --------------------------------------------------------
FOODS -- 2.1%
........................................................
Michael Foods, Inc. 30,000 348,750
- --------------------------------------------------------

<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
HOMEBUILDERS -- 1.8%
........................................................
Del Webb Corporation 15,000 $ 300,000
- --------------------------------------------------------
HOSPITAL SUPPLIES & SERVICES -- 3.8%
........................................................
Healthcare Services Group, Inc.
# 70,000 630,000
- --------------------------------------------------------
INSURANCE -- 7.5%
........................................................
GCR Holdings, Ltd. 5,000 132,500
........................................................
Omni Insurance Group, Inc. # 60,000 555,000
........................................................
PXRE Corporation 22,500 545,625
......................................... ===========
1,233,125
- --------------------------------------------------------
OIL -- DOMESTIC -- 5.3%
........................................................
Abraxas Petroleum Corporation # 40,000 272,500
........................................................
Tom Brown, Inc. # 35,000 599,375
......................................... ===========
871,875
- --------------------------------------------------------
REAL ESTATE -- 10.2%
........................................................
NHP, Inc. # 20,000 412,500
........................................................
Redwood Trust, Inc. 45,000 1,260,000
......................................... ===========
1,672,500
- --------------------------------------------------------
RETAIL -- GENERAL -- 2.7%
........................................................
Orchard Supply Hardware Stores
Corporation # 15,000 451,875
- --------------------------------------------------------
RETAIL -- SPECIALTY APPAREL -- 2.0%
........................................................
Haggar Corporation 25,000 337,500
- --------------------------------------------------------
SAVINGS & LOANS -- 7.1%
........................................................
CENFED Financial Corporation 8,800 195,800
........................................................
First Republic Bancorp, Inc. # 40,000 615,000
........................................................
Metropolitan Bancorp
Corporation # 26,500 357,750
......................................... ===========
1,168,550
- --------------------------------------------------------
SEMICONDUCTORS -- 2.9%
........................................................
Lattice Semiconductor
Corporation # 20,000 482,500
- --------------------------------------------------------
STEEL FABRICATOR -- 1.8%
........................................................
Citation Corporation # 25,000 300,000
- --------------------------------------------------------
TOYS -- 2.5%
........................................................
Toy Biz, Inc., Class A # 20,000 405,000
- --------------------------------------------------------
TRANSPORTATION EQUIPMENT -- 1.3%
........................................................
Tranz Rail Holdings Ltd. -- ADR
# 15,000 208,125
- --------------------------------------------------------
</TABLE>

See Notes to Financial Statements

3
<PAGE> 88

Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
SMALL CAP FUND

<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
TRUCKING & SHIPPING -- 5.0%
........................................................
Covenant Transport, Inc. --
Class A # 15,000 $ 255,000
........................................................
Rollins Truck Leasing
Corporation 45,000 466,875
........................................................
USA Truck, Inc. # 10,000 105,000
......................................... ===========
826,875
- --------------------------------------------------------
Total common stocks
(cost $14,773,851) 15,895,175
- --------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
VARIABLE RATE Principal
DEMAND NOTES* -- 0.9% Amount
<S> <C> <C>
- --------------------------------------------------------
General Mills, Inc., 5.14% $153,675 153,675
......................................... ===========
Total variable rate demand
notes 153,675
(cost $153,675)
- --------------------------------------------------------
Total investments -- 97.4%
(cost $14,927,526) 16,048,850
........................................................
Other assets in excess of
liabilities -- 2.6% 431,836
......................................... ===========
Total net assets -- 100.0% $16,480,686
- --------------------------------------------------------
# Non-income producing security.
* Variable rate demand notes are considered short-term
obligations and are payable on demand. Interest rates
change periodically on specified dates. The rates
listed are as of June 30, 1996.
ADR -- American Depository Receipt.
</TABLE>

See Notes to Financial Statements

4
<PAGE> 89

Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 93.0%
- ---------------------------------------------------------
AUSTRALIA -- 5.2% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
BANKING -- 1.9%
.........................................................
Australia and New Zealand
Banking Group, Ltd. 1,338,000 $ 6,339,525
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.2%
.........................................................
Pioneer International, Ltd. 1,352,000 3,937,155
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 0.2%
.........................................................
Pacific Dunlop, Ltd. 389,000 875,628
- ---------------------------------------------------------
INSURANCE -- 1.9%
.........................................................
GIO Australia Holdings, Ltd. 1,731,786 4,266,215
.........................................................
QBE Insurance Group, Ltd. 320,646 1,905,359
......................................... ============
6,171,574
......................................... ============
Total Australia 17,323,882
- ---------------------------------------------------------
AUSTRIA -- 1.6%
- ---------------------------------------------------------
STEEL -- 1.6%
.........................................................
Boehler-Uddeholm AG 70,000 5,423,663
......................................... ============
Total Austria 5,423,663
- ---------------------------------------------------------
BELGIUM -- 0.8%
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 0.8%
.........................................................
Groupe Bruxelles Lambert, S.A. 20,100 2,514,986
.........................................................
Groupe Bruxelles Lambert rights
# 60 17
......................................... ============
Total Belgium 2,515,003
- ---------------------------------------------------------
CANADA -- 5.8%
- ---------------------------------------------------------
BANKS -- 2.7%
.........................................................
Bank of Nova Scotia 152,038 3,696,241
.........................................................
Canadian Imperial Bank of
Commerce 168,000 5,419,077
......................................... ============
9,115,318
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.5%
.........................................................
IMASCO, Ltd. 238,000 4,862,405
- ---------------------------------------------------------
METALS & MINERALS -- 0.5%
.........................................................
Noranda, Inc. 79,000 1,616,884
- ---------------------------------------------------------
RAILROADS -- 1.1%
.........................................................
Canadian National Railway 201,000 3,701,724
......................................... ============
Total Canada 19,296,331
- ---------------------------------------------------------

<CAPTION>
FINLAND -- 1.7% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
FOREST PRODUCTS & PAPER -- 1.7%
.........................................................
UPM-Kymmene OY # 270,000 $ 5,584,924
......................................... ============
Total Finland 5,584,924
- ---------------------------------------------------------
FRANCE -- 4.3%
- ---------------------------------------------------------
BUILDING MATERIALS & COMPONENTS -- 1.5%
.........................................................
LaFarge Coppee SA 83,173 5,032,623
- ---------------------------------------------------------
OIL & GAS -- 1.5%
.........................................................
Societe Nationale Elf
Acquitaine 66,000 4,853,762
- ---------------------------------------------------------
STEEL -- 1.3%
.........................................................
Unisor Sacilor # 297,000 4,283,580
......................................... ============
Total France 14,169,965
- ---------------------------------------------------------
GERMANY -- 3.1%
- ---------------------------------------------------------
CHEMICALS -- 1.6%
.........................................................
Bayer AG 155,000 5,453,017
- ---------------------------------------------------------
MANUFACTURING -- 1.5%
.........................................................
Buderus AG 11,500 4,873,077
......................................... ============
Total Germany 10,326,094
- ---------------------------------------------------------
HONG KONG -- 9.6%
- ---------------------------------------------------------
BANKS -- 1.8%
.........................................................
HSBC Holdings, PLC 392,800 5,937,285
- ---------------------------------------------------------
PRINTING & PUBLISHING -- 2.1%
.........................................................
Oriental Press Group, Ltd. 4,953,000 2,655,504
.........................................................
South China Morning Post
(Holdings), Ltd. 6,010,000 4,115,105
......................................... ============
6,770,609
- ---------------------------------------------------------
RETAIL -- SPECIALTY -- 1.5%
.........................................................
Dickson Concepts International,
Ltd. 2,850,000 3,645,110
.........................................................
Harbour Ring International
Holdings 11,426,000 1,239,950
......................................... ============
4,885,060
- ---------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 2.9%
.........................................................
Hang Lung Development Co., Ltd. 1,955,000 3,674,856
.........................................................
New World Development Co., Ltd. 1,305,000 6,052,510
......................................... ============
9,727,366
- ---------------------------------------------------------
UTILITY -- TELECOMMUNICATIONS -- 1.3%
.........................................................
Hong Kong Telecommunications
Ltd. 2,480,000 4,453,455
......................................... ============
Total Hong Kong 31,773,775
- ---------------------------------------------------------
</TABLE>

See Notes to Financial Statements

5
<PAGE> 90
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
IRELAND -- 1.7% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
PAPER -- 1.7%
.........................................................
Jefferson Smurfit Group PLC 2,129,430 $ 5,715,229
......................................... ============
Total Ireland 5,715,229
- ---------------------------------------------------------
ITALY -- 1.2%
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.2%
.........................................................
Danieli & Company 1,086,000 3,860,985
......................................... ============
Total Italy 3,860,985
- ---------------------------------------------------------
JAPAN -- 14.4%
- ---------------------------------------------------------
AUTOS & TRUCKS -- 1.3%
.........................................................
Bridgestone Corporation 165,000 3,144,104
.........................................................
Suzuki Motor Corporation 105,000 1,378,537
......................................... ============
4,522,641
- ---------------------------------------------------------
BUILDING MATERIAL & COMPONENTS -- 1.7%
.........................................................
Sekisui Chemical Co., Ltd. 469,000 5,729,864
- ---------------------------------------------------------
CONSTRUCTION & HOUSING -- 0.9%
.........................................................
Daiwa House Industry Co., Ltd. 187,000 2,898,392
- ---------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.3%
.........................................................
Nintendo Co., Ltd. 57,300 4,262,962
- ---------------------------------------------------------
ELECTRICAL MACHINERY -- 3.2%
.........................................................
Nichicon Corporation 339,000 4,914,320
.........................................................
Sony Corporation 87,400 5,745,309
......................................... ============
10,659,629
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.1%
.........................................................
Promise Company Ltd. 74,500 3,667,893
- ---------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.0%
.........................................................
Hokushin 250,600 3,198,717
- ---------------------------------------------------------
INSURANCE -- 1.3%
.........................................................
Nippon Fire & Marine Insurance 645,000 4,204,675
- ---------------------------------------------------------
IRON/STEEL -- 1.6%
.........................................................
Yodogawa Steel Works 701,000 5,349,462
- ---------------------------------------------------------
PHARMACEUTICALS -- 1.0%
.........................................................
Terumo 259,000 3,282,322
......................................... ============
Total Japan 47,776,557
- ---------------------------------------------------------

<CAPTION>
MALAYSIA -- 2.2% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
BUILDING MATERIALS -- 0.4%
.........................................................
Kedah Cement Holdings BHD 679,000 $ 1,257,187
- ---------------------------------------------------------
FINANCIAL SERVICES -- 0.9%
.........................................................
Arab Malaysian Finance Berhad 663,000 2,896,198
- ---------------------------------------------------------
TRUCKING & SHIPPING -- 0.9%
.........................................................
Malaysian International
Shipping Corporation BHD 1,013,000 3,146,294
......................................... ============
Total Malaysia 7,299,679
- ---------------------------------------------------------
NETHERLANDS -- 7.4%
- ---------------------------------------------------------
CHEMICALS -- 1.8%
.........................................................
Akzo Nobel NV 50,500 6,050,027
- ---------------------------------------------------------
CONSTRUCTION & HOUSING -- 1.4%
.........................................................
Hollandsche Beton Groep NV 24,479 4,689,365
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.4%
.........................................................
Internationale Nederlanden
Groep NV 155,857 4,647,471
- ---------------------------------------------------------
INSURANCE -- 1.3%
.........................................................
Fortis AMEV NV 147,843 4,235,267
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 1.5%
.........................................................
KPN 127,763 4,835,153
......................................... ============
Total Netherlands 24,457,283
- ---------------------------------------------------------
NEW ZEALAND -- 1.8%
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.0%
.........................................................
Fletcher Challenge Building 1,697,500 3,314,267
- ---------------------------------------------------------
FOREST PRODUCTS & PAPER -- 0.4%
.........................................................
Fletcher Challenge Paper 695,000 1,342,662
- ---------------------------------------------------------
OIL & GAS -- 0.4%
.........................................................
Fletcher Challenge Energy 522,500 1,152,590
......................................... ============
Total New Zealand 5,809,519
- ---------------------------------------------------------
NORWAY -- 1.3%
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.1%
.........................................................
Kvaerner AS--Class A 10,227 432,138
- ---------------------------------------------------------
PHARMACEUTICALS & HEALTH CARE -- 0.8%
.........................................................
Nycomed ASA -- Class B # 200,000 2,770,794
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 0.4%
.........................................................
Hafslund ASA -- Class B 200,000 1,262,251
......................................... ============
Total Norway 4,465,183
- ---------------------------------------------------------
</TABLE>

See Notes to Financial Statements

6
<PAGE> 91
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
SINGAPORE -- 2.7% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
DIVERSIFIED INDUSTRIES -- 2.2%
.........................................................
Jardine Matheson 1,002,200 $ 7,366,170
- ---------------------------------------------------------
MACHINERY & ENGINEERING -- 0.5%
.........................................................
Sembawang Corporation 291,000 1,443,204
......................................... ============
Total Singapore 8,809,374
- ---------------------------------------------------------
SPAIN -- 3.3%
- ---------------------------------------------------------
BANKS -- 1.7%
.........................................................
Banco Santander SA 122,500 5,713,633
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 1.6%
.........................................................
Telefonica De Espana 290,000 5,338,080
......................................... ============
Total Spain 11,051,713
- ---------------------------------------------------------
SWEDEN -- 3.1%
- ---------------------------------------------------------
COMPUTER SOFTWARE -- 0.7%
.........................................................
Enator AB # 101,500 2,332,727
- ---------------------------------------------------------
DEFENSE -- 0.4%
.........................................................
Celsius Industrier AB 101,500 1,330,802
- ---------------------------------------------------------
DIVERSIFIED -- 2.0%
.........................................................
Marieberg Tidnings AB -- Class
A 263,000 6,579,485
......................................... ============
Total Sweden 10,243,014
- ---------------------------------------------------------
SWITZERLAND -- 7.3%
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.2%
.........................................................
Sarna Kunststoff Holding AG
"registered" 3,750 3,954,808
- ---------------------------------------------------------
BUSINESS SERVICES -- 0.5%
.........................................................
SGS Surveillance Holding SA 3,900 1,713,750
- ---------------------------------------------------------
CHEMICALS -- 1.2%
.........................................................
Ciba-Geigy AG "registered" 3,300 4,020,722
- ---------------------------------------------------------
FOOD PRODUCERS -- 0.2%
.........................................................
Nestle SA "registered" 735 839,150
- ---------------------------------------------------------
INSURANCE -- 1.6%
.........................................................
Swiss Reinsurance Co.
"registered" 5,000 5,133,261
- ---------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.6%
.........................................................
Sig Schweizerische Industrie --
Gesellschaft Holding AG 2,010 4,753,440
.........................................................
Sulzer Gebruder AG (P.C.) 6,400 3,834,965
......................................... ============
8,588,405
......................................... ============
Total Switzerland 24,250,096
- ---------------------------------------------------------

<CAPTION>
UNITED KINGDOM -- 14.5% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
BANKS -- 1.5%
.........................................................
National Westminster Bank, PLC 529,000 $ 5,063,275
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.1%
.........................................................
Redland PLC 600,000 3,738,443
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.2%
.........................................................
Hanson, PLC 1,350,000 3,786,222
- ---------------------------------------------------------
FOOD PRODUCERS -- 1.5%
.........................................................
Hillsdown Holdings, PLC 1,840,000 4,974,646
- ---------------------------------------------------------
HOUSING CONSTRUCTION -- 0.7%
.........................................................
Barratt Developments PLC 562,500 2,219,992
- ---------------------------------------------------------
INSURANCE -- 0.7%
.........................................................
Commercial Union, PLC 270,000 2,433,251
- ---------------------------------------------------------
RETAIL -- 1.9%
.........................................................
Argyll Group PLC 1,150,000 6,200,439
- ---------------------------------------------------------
TOBACCO -- 1.4%
.........................................................
BAT Industries, PLC 602,500 4,690,184
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 1.7%
.........................................................
Powergen ORD 770,000 5,635,166
- ---------------------------------------------------------
UTILITY -- GAS -- 1.2%
.........................................................
British Gas PLC 1,400,000 3,915,576
- ---------------------------------------------------------
UTILITY -- WATER -- 1.6%
.........................................................
Hyder PLC 465,000 5,158,771
......................................... ============
Total United Kingdom 47,815,965
- ---------------------------------------------------------
Total common stocks -- 93.0%
(cost $291,115,551) 307,968,234
.........................................................
Other assets in excess of liabilities --
7.0% 23,025,209
......................................... ============
Total net assets -- 100% $330,993,443
- ---------------------------------------------------------
</TABLE>

# Non-income producing security.

P.C. -- Participation Certificates.

See Notes to Financial Statements

7
<PAGE> 92
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 41.2% Shares Value
<S> <C> <C>
- --------------------------------------------------------
AEROSPACE -- 1.8%
........................................................
Northrop Grumman Corporation 5,200 $ 354,250
........................................................
Rockwell International
Corporation 7,100 406,475
........................................................
United Technologies
Corporation 4,700 540,500
........................................ ============
1,301,225
- --------------------------------------------------------
AUTO-RELATED -- 0.4%
........................................................
Dana Corporation 10,000 310,000
- --------------------------------------------------------
AUTOS & TRUCKS -- 2.5%
........................................................
Ford Motor Company 30,100 974,486
........................................................
General Motors Corporation 14,500 759,438
........................................ ============
1,733,924
- --------------------------------------------------------
BANKS -- 2.4%
........................................................
BankAmerica Corporation 3,500 265,125
........................................................
The Chase Manhattan
Corporation 4,680 330,525
........................................................
Comerica, Inc. 5,500 245,438
........................................................
First Chicago NBD Corporation 3,300 129,113
........................................................
First of America Bank
Corporation 8,700 389,325
........................................................
National City Corporation 10,500 368,813
........................................ ============
1,728,339
- --------------------------------------------------------
BEVERAGES -- 0.5%
........................................................
Anheuser-Busch Companies, Inc. 5,000 375,000
- --------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 0.8%
........................................................
Weyerhaeuser Company 14,000 595,000
- --------------------------------------------------------
CHEMICALS -- 1.0%
........................................................
Dow Chemical Company 4,800 364,800
........................................................
Dupont (E.I.) De Nemours &
Company 4,800 379,800
........................................ ============
744,600
- --------------------------------------------------------
DIVERSIFIED -- 1.4%
........................................................
Hanson PLC, ADR 26,000 370,500
........................................................
Tenneco, Inc. 12,400 633,950
........................................ ============
1,004,450
- --------------------------------------------------------
DRUGS -- 1.5%
........................................................
American Home Products
Corporation 5,000 300,625
........................................................
Baxter International, Inc. 6,200 292,950
........................................................
Bristol-Myers Squibb Company 2,800 252,000
........................................................
Merck & Company, Inc. 3,600 232,650
........................................ ============
1,078,225
- --------------------------------------------------------

<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
FINANCIAL SERVICES -- 4.1%
........................................................
Beneficial Corporation 6,200 $ 347,975
........................................................
Great Western Financial
Corporation 31,000 740,125
........................................................
H.F. Ahmanson & Company 36,000 972,000
........................................................
Household International, Inc. 4,200 319,200
........................................................
Transamerica Corporation 6,000 486,000
........................................ ============
2,865,300
- --------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 0.1%
........................................................
Whirlpool Corporation 1,300 64,513
- --------------------------------------------------------
INSURANCE -- 1.4%
........................................................
Aetna Life & Casualty Company 4,600 328,900
........................................................
Aon Corporation 7,500 380,625
........................................................
USLIFE Corporation 7,700 253,138
........................................ ============
962,663
- --------------------------------------------------------
MACHINERY -- 0.6%
........................................................
Deere & Company 10,600 424,000
- --------------------------------------------------------
METALS & MINING -- 2.0%
........................................................
Aluminum Company of America 10,900 625,387
........................................................
Phelps Dodge Corporation 8,000 499,000
........................................................
Reynolds Metals Company 5,000 260,625
........................................ ============
1,385,012
- --------------------------------------------------------
OIL -- DOMESTIC -- 1.7%
........................................................
Atlantic Richfield Company 5,500 651,750
........................................................
Ultramar Corporation 2,500 72,500
........................................................
USX-Marathon Group, Inc. 22,500 452,812
........................................ ============
1,177,062
- --------------------------------------------------------
OIL -- INTERNATIONAL -- 2.4%
........................................................
Chevron Corporation 6,000 354,000
........................................................
Exxon Corporation 4,000 347,500
........................................................
Mobil Corporation 2,000 224,250
........................................................
Royal Dutch Petroleum Company
-- ADR 3,500 538,125
........................................................
TransCanada Pipelines Ltd. 14,000 206,500
........................................ ============
1,670,375
- --------------------------------------------------------
</TABLE>

See Notes to Financial Statements

8
<PAGE> 93

Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
BALANCED INCOME FUND

<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
PAPER -- 1.7%
........................................................
Georgia Pacific Corporation 5,000 $ 355,000
........................................................
International Paper Company 14,525 535,609
........................................................
Union Camp Corporation 6,000 292,500
........................................ ============
1,183,109
- --------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 0.5%
........................................................
Eastman Kodak Company 4,200 326,550
- --------------------------------------------------------
POLLUTION CONTROL -- 0.5%
........................................................
Browning-Ferris Industries,
Inc. 13,200 382,800
- --------------------------------------------------------
RAILROADS -- 1.3%
........................................................
Conrail, Inc. 8,500 564,188
........................................................
Norfolk Southern Corporation 3,800 322,050
........................................ ============
886,238
- --------------------------------------------------------
RETAIL -- GENERAL -- 2.6%
........................................................
J.C. Penney Co., Inc. 13,000 682,500
........................................................
May Department Stores Company 12,000 525,000
........................................................
Sears, Roebuck & Company 8,000 389,000
........................................................
Woolworth Corporation() 10,000 225,000
........................................ ============
1,821,500
- --------------------------------------------------------
SAVINGS & LOANS -- 0.4%
........................................................
Federal National Mortgage
Association 9,400 314,900
- --------------------------------------------------------
STEEL -- 0.7%
........................................................
USX-U.S. Steel Group, Inc. 17,500 496,562
- --------------------------------------------------------
TOBACCO -- 2.5%
........................................................
American Brands, Incorporated 16,000 726,000
........................................................
Philip Morris Companies,
Incorporated 9,700 1,008,800
........................................ ============
1,734,800
- --------------------------------------------------------
TRUCKING -- 0.6%
........................................................
Ryder System, Inc. 15,000 421,875
- --------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
UTILITY -- ELECTRIC -- 3.3%
........................................................
CMS Energy Corporation 20,000 $ 617,500
........................................................
DTE Energy Company 7,500 231,563
........................................................
Edison International 19,300 340,162
........................................................
Entergy Corporation 1,100 31,213
........................................................
Illinova Corporation 5,000 143,750
........................................................
New York State Electric & Gas
Corporation 9,000 219,375
........................................................
Niagara Mohawk Power Company 13,500 104,625
........................................................
Peco Energy Company 11,000 286,000
........................................................
Public Service Enterprises
Group, Inc. 14,000 383,250
........................................ ============
2,357,438
- --------------------------------------------------------
UTILITY -- GAS PIPELINE -- 0.8%
........................................................
British Gas PLC, ADR 4,700 131,600
........................................................
Nicor, Inc. 6,000 170,250
........................................................
Peoples Energy Corporation 7,500 251,250
........................................ ============
553,100
- --------------------------------------------------------
UTILITY -- TELEPHONE -- 1.7%
........................................................
NYNEX Corporation 10,500 498,750
........................................................
Pacific Telesis Group 10,500 354,375
........................................................
US West, Inc. 10,000 318,750
........................................ ============
1,171,875
- --------------------------------------------------------
Total common stocks
(cost $25,525,390) 29,070,435
- --------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CORPORATE Principal
BONDS -- 14.8% Amount
<S> <C> <C>
- --------------------------------------------------------
BANKS -- 4.3%
........................................................
Okobank,
6.9687%, 9/27/2049 # $ 700,000 717,990
........................................................
Midland Bank PLC,
5.9125%, 6/29/2049 # 500,000 419,000
........................................................
Westpac Banking,
5.6187%, 9/29/2049 # 2,200,000 1,895,740
........................................ ============
3,032,730
- --------------------------------------------------------
</TABLE>

See Notes to Financial Statements

9
<PAGE> 94

Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
BALANCED INCOME FUND

<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- --------------------------------------------------------
FINANCIAL SERVICES -- 3.0%
........................................................
Salomon, Inc.:
5.65%, 2/10/1998 $ 500,000 $ 492,352
........................................................
6.58%, 12/01/1998 # 500,000 500,563
........................................................
5.799%, 4/05/1999 # 1,100,000 1,093,074
........................................ ============
2,085,989
- --------------------------------------------------------
PRINTING & PUBLISHING -- 0.7%
........................................................
Time Warner, Inc.,
6.46%, 8/15/2000 # 500,000 502,132
- --------------------------------------------------------
REAL ESTATE -- 2.1%
........................................................
Taubman Realty Group,
6.00%, 11/03/1997 # 1,500,000 1,492,200
- --------------------------------------------------------
SOVEREIGN -- 1.4%
........................................................
Swedish Export Credit Corp.,
9.875%, 3/15/2038 900,000 982,080
- --------------------------------------------------------
TELECOMMUNICATIONS -- 1.1%
........................................................
Southern New England Telephone,
8.70%, 8/15/2031 750,000 769,989
- --------------------------------------------------------
TRANSPORTATION -- 0.2%
........................................................
Delta Air Lines ETC,
9.90%, 1/02/2002 150,000 165,407
- --------------------------------------------------------
UTILITY -- ELECTRIC -- 2.0%
........................................................
CTC Mansfield Funding Corp. CLB,
11.125%, 9/30/2016 1,400,000 1,447,821
- --------------------------------------------------------
Total corporate bonds
(cost $10,435,557) 10,478,348
- --------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 5.1%
- --------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.0%
........................................................
Federal Home Loan Mortgage
Corporation, 1316 Z, 8.00%,
6/15/2022 674,076 671,488
........................................................
Federal National Mortgage
Association:
1993-202 VS, 9.75%,
2/25/2023 # 599,328 481,004
........................................................
1994-2 SB, 10.00%,
1/25/2024 # 591,732 524,792
........................................................
1994-13 SJ, 8.75%,
2/25/2009 # 525,000 454,946
........................................ ============
2,132,230
- --------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- --------------------------------------------------------
PASS-THROUGH SECURITIES -- 1.4%
........................................................
Federal Home Loan Bank,
6.44%, 12/21/2000 $1,000,000 $ 981,475
- --------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.7%
........................................................
Federal Home Loan Mortgage
Corporation, 1543 TH (IO),
3.559%, 1/15/2019 # 8,644,287 493,329
- --------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $3,806,515) 3,607,034
- --------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED
SECURITIES -- 15.5%
- --------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--13.2%
........................................................
Bear Stearns Mortgage
Securities,
Inc., 1993-8 A9, 7.50%,
8/25/2024 926,596 877,996
........................................................
Citicorp Mortgage Securities,
Inc.:
........................................................
1988-3 A2, 9.00%, 4/01/2018 246,281 253,665
........................................................
1991-7 M, 8.75%, 5/25/2021 743,831 753,985
........................................................
Donaldson, Lufkin & Jenrette,
1992-MF3 A3, 7.1375%,
6/18/2007 # 500,000 503,600
........................................................
Greenwich Capital Acceptance,
Inc., 1994-LB1, 7.6364%,
4/25/2024 # 1,442,198 1,461,235
........................................................
Independent National Mortgage
Corporation, 1995-N A5,
7.50%, 10/25/2025 1,500,000 1,397,850
........................................................
Marine Midland, 1991-3 AM,
8.00%, 12/25/2022 1,051,623 1,045,142
........................................................
PNC Mortgage Securities
Corporation, 1996-1 A11,
Class Z, 7.50%, 6/25/2026 1,577,864 1,462,285
........................................................
Ryland Mortgage Securities Corp.,
1992-15 B1, 7.5159%,
11/25/2022 # 1,682,653 1,559,651
........................................ ==========
9,315,409
- --------------------------------------------------------
PASS-THROUGH SECURITIES -- 0.0%
........................................................
Citicorp Mortgage Securities, Inc.,
1987-14, 9.50%, 9/25/2002 29,778 30,480
- --------------------------------------------------------
</TABLE>

See Notes to Financial Statements

10
<PAGE> 95
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
BALANCED INCOME FUND

<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- --------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.3%
........................................................
Bear Stearns, 1993-06 AS2
(Inverse IO),
3.5812%, 6/25/2024 # $7,784,458 $ 362,911
........................................................
Donaldson, Lufkin & Jenrette:
1993-Q16 IS (IO),
3.7392%, 11/25/2023 # 318,932 23,875
........................................................
1993-Q16 IIS (IO),
2.1783%, 11/25/2023 # 7,583,468 317,444
........................................................
1993-Q18 SC (IO),
3.0627%, 1/25/2024 # 5,275,913 255,671
........................................................
GE Capital Mortgage Services,
Inc.,
1993-1 G (IO),
657.2504%, 2/25/2022 # 29,415 411,800
........................................................
Greenwich Capital Acceptance,
Inc., 1992-LB8 (IO),
2.5542%, 2/25/2023 # 2,275,330 28,669
........................................................
Structured Mortgage Asset
Residential Trust:
1991-1 I (IO),
1000%, 6/25/2022 3,005 48,111
........................................................
1991-7 I (IO),
14669.70%, 12/25/2022 # 637 168,159
........................................ ============
1,616,640
- --------------------------------------------------------
Total non-agency mortgage-
backed securities
(cost $10,677,877) 10,962,529
- --------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 21.0%
- --------------------------------------------------------
U.S. Treasury Notes:
........................................................
5.375%, 5/31/1998 1,000,000 986,875
........................................................
8.00%, 8/15/1999 2,000,000 2,092,500
........................................................
6.75%, 4/30/2000 900,000 909,843
........................................................
6.375%, 3/31/2001 3,000,000 2,986,875
........................................................
7.25%, 5/15/2004 755,000 781,897
........................................................
7.50%, 2/15/2005 250,000 262,969
........................................................
6.50%, 5/15/2005 3,700,000 3,649,125
........................................ ============
11,670,084
- --------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- --------------------------------------------------------
U.S. Treasury Bonds:
8.125%, 8/15/2019 $ 250,000 $ 280,469
........................................................
7.25%, 8/15/2022 500,000 512,500
........................................ ============
792,969
- --------------------------------------------------------
U.S. Treasury Bill,
5.64%, 5/29/1997 2,500,000 2,376,882
- --------------------------------------------------------
Total U.S. Treasury
obligations
(cost $14,942,811) 14,839,935
- --------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 1.5%
- --------------------------------------------------------
........................................................
Pitney Bowes, Inc., 5.1441% 127,670 127,670
........................................................
Southwestern Bell, Inc.,
5.1239% 900,935 900,935
........................................ ============
Total variable rate demand
notes
(cost $1,028,605) 1,028,605
- --------------------------------------------------------
Total investments -- 99.1%
(cost $66,416,755) 69,986,886
........................................................
Other assets in excess
of liabilities -- 0.9% 611,307
........................................ ============
Total net assets -- 100% $ 70,598,193
- --------------------------------------------------------
</TABLE>

() Non-income producing security.

# Variable rate security. The rate listed is as of June 30, 1996.

* Variable rate demand notes are considered short-term obligations
and are payable on demand. Interest rates change periodically on specified
dates. The rates listed are as of June 30, 1996.

IO -- Interest only.

ETC -- Equipment Trust Certificate.

ADR -- American Depository Receipt.

CLB -- Callable.

See Notes to Financial Statements

11
<PAGE> 96
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 39.0% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
BANKS -- 7.7%
.........................................................
Den Norske Bank,
5.40%, 8/29/2049 # $ 400,000 $ 325,640
.........................................................
Kansallis-Osake-Pankki,
7.53%, 9/30/2043 # 500,000 515,700
.........................................................
Midland Bank PLC,
5.9125%, 6/29/2049 # 650,000 544,700
.........................................................
Swedbank,
6.8125%, 12/29/2049 # 1,500,000 1,508,550
.........................................................
Westpac Banking,
5.6187%, 9/29/2049 # 500,000 430,850
.......................................... ===========
3,325,440
- ---------------------------------------------------------
FINANCIAL SERVICES -- 4.1%
.........................................................
Salomon, Inc.:
6.3937%, 4/01/1997 # 600,000 602,094
.........................................................
6.00%, 7/28/1998 250,000 246,163
.........................................................
6.58%, 12/01/1998 # 150,000 150,169
.........................................................
5.799%, 4/05/1999 # 600,000 596,222
.........................................................
6.26%, 5/20/1999 # 200,000 198,080
.......................................... ===========
1,792,728
- ---------------------------------------------------------
FOOD, BEVERAGE & TOBACCO -- 4.1%
.........................................................
RJR Nabisco, Inc.:
8.00%, 7/15/2001 350,000 347,558
.........................................................
7.625%, 9/15/2003 1,200,000 1,150,415
.........................................................
8.75%, 8/15/2005 300,000 297,351
.......................................... ===========
1,795,324
- ---------------------------------------------------------
PRINTING & PUBLISHING -- 3.1%
.........................................................
Valassis Inserts,
9.375%, 3/15/1999 1,300,000 1,319,348
- ---------------------------------------------------------
REAL ESTATE -- 3.4%
.........................................................
Taubman Reality Group,
6.00%, 11/03/1997 # 1,500,000 1,492,200
- ---------------------------------------------------------

<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
RETAIL -- 2.0%
.........................................................
Woolworth Corporation,
7.00%, 10/15/2002 $ 900,000 $ 853,640
- ---------------------------------------------------------
SAVINGS & LOAN -- 1.2%
.........................................................
Western Financial Savings,
8.50%, 7/01/2003 500,000 505,361
- ---------------------------------------------------------
SOVEREIGN -- 2.7%
.........................................................
Government of Mexico,
10.8125%, 7/21/1997 # 850,000 884,000
.........................................................
Republic of Argentina,
5.25%, 3/31/2023 # 500,000 275,312
.......................................... ===========
1,159,312
- ---------------------------------------------------------
TRANSPORTATION -- 0.6%
.........................................................
Delta Air Lines ETC,
9.90%, 1/02/2002 250,000 275,679
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 10.1%
.........................................................
Cleveland Electric Illum,
7.375%, 6/01/2003 800,000 724,294
.........................................................
Greece Public Power
Corporation,
7.25%, 11/15/2000 1,400,000 1,411,340
.........................................................
Hydro-Quebec,
9.40%, 2/01/2021 200,000 232,536
.........................................................
Northern States Power Co.
CLB,
9.125%, 4/01/2021 500,000 532,684
.........................................................
Westinghouse Electric Corporation:
9.30%, 6/07/1999 1,200,000 1,235,976
.........................................................
8.93%, 6/22/1999 250,000 258,472
.......................................... ===========
4,395,302
- ---------------------------------------------------------
Total corporate bonds
(cost $16,674,552) 16,914,334
- ---------------------------------------------------------
</TABLE>

See Notes to Financial Statements

12
<PAGE> 97
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 19.1% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 16.0%
.........................................................
Federal Home Loan Mortgage
Corporation:
1261 J, 8.00%, 7/15/2021 $ 553,935 $ 551,946
.........................................................
1316 Z, 8.00%, 6/15/2022 550,266 548,153
.........................................................
1468 S, 11.877%, 2/15/2023
# 449,224 446,557
.........................................................
1564 SE, 8.3612%, 8/15/2008
# 353,637 281,031
.........................................................
1627 SD, 9.50%, 12/15/2023
# 598,273 437,218
.........................................................
1761 Z, 8.50%, 11/15/2024 1,143,517 1,164,741
.........................................................
Federal National Mortgage
Association:
G93-27 SB, 6.6606%,
8/25/2023 # 115,176 62,356
.........................................................
1993-37 SB, 7.5396%,
3/25/2023 # 224,549 156,834
.........................................................
1993-45 SA, 9.0043%,
6/25/2022 # 550,360 429,797
.........................................................
1993-165 SJ, 10.25%,
1/25/2022 # 1,341,956 1,191,294
.........................................................
1993-202 VS, 9.75%,
2/25/2023 # 998,878 801,672
.........................................................
X-10B Z, 6.50%, 3/25/2024 1,072,751 880,740
.......................................... ===========
6,952,339
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.8%
.........................................................
Federal Home Loan Mortgage
Corporation, 1543 TH (IO),
3.559%, 1/15/2019 # 5,762,858 328,886
- ---------------------------------------------------------
GOVERNMENT AGENCY NOTE -- 2.3%
.........................................................
Federal Home Loan Mortgage
Corporation (CLB on
5/20/1997), 8.14%,
5/20/2004 1,000,000 1,001,884
- ---------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $8,254,996) 8,283,109
- ---------------------------------------------------------

<CAPTION>
NON-AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 26.5% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 23.7%
.........................................................
CMC Securities Corporation,
1994-G, 7.00%, 9/25/2024 $ 200,000 $ 180,208
.........................................................
Citicorp Mortgage Securities,
Inc.:
1990-D A1, 9.50%,
10/25/2005 263,904 262,716
.........................................................
1991-5 A, 6.248%, 5/25/2021
# 661,689 549,202
.........................................................
Collateralized Mortgage
Obligations Trust,
57-D, 9.90%, 2/01/2019 600,000 655,464
.........................................................
Countrywide Funding
Corporation, 1994-2 A12T,
9.00%, 2/25/2009 # 465,685 416,508
.........................................................
GE Capital Mortgage Services,
Inc.:
1993-17 A17, 9.00%,
12/25/2023 # 197,759 168,177
.........................................................
1994-24 A4, 7.00%,
7/25/2024 169,843 153,343
.........................................................
Greenwich Capital Acceptance,
Inc.,
1992-1 B1, 6.9252%,
1/25/2023 # 496,254 394,373
.........................................................
Guardian Savings & Loan
Assoc.:
1989-1 A, 7.47519%,
2/25/2019 # 287,791 250,608
.........................................................
1989-3 A, 7.7233%,
5/25/2019 # 283,238 255,141
.........................................................
Housing Securities, Inc.:
1994-1 AB2, 6.50%,
3/25/2009 540,316 383,287
.........................................................
1994-2 B1, 6.50%, 7/25/2009 274,629 234,012
.........................................................
Independent National Mortgage
Corporation:
1995-F, 8.25%, 5/25/2010 1,000,000 1,012,749
.........................................................
1995-MO A, 7.50%, 9/25/2025 1,000,000 930,800
.........................................................
1995-N A5, 7.50%,
10/25/2025 1,300,000 1,211,470
.........................................................
Resident Funding Mortgage
Securities I:
1993-S47 A15, 9.00%,
12/25/2023 # 1,116,689 698,489
.........................................................
1993-S47 A16, 5.4844%,
12/25/2023 # 1,753,018 619,890
.........................................................
</TABLE>

See Notes to Financial Statements

13
<PAGE> 98

Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
Resolution Trust Corp.:
1991-M4 A1, 6.341%,
2/25/2020 # $ 275,131 $ 269,986
.........................................................
1995-2 B6, 6.8362%,
5/25/2029 # 491,825 479,382
.........................................................
1995-2 B7, 7.2303%,
5/25/2029 # 721,387 692,315
.........................................................
Saxon Mortgage Securities
Corporation,
1994-6 B2, 8.1857%,
6/25/2024 # 488,810 485,193
.......................................... ===========
10,303,313
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.8%
.........................................................
Nomura Asset Securities
Corporation:
1994-2A 1 (IO), 2.1298%,
5/25/2024 # 9,331,045 360,598
.........................................................
1994-4A 2 (IO), 1.3988%,
9/25/2024 # 15,654,137 404,080
.........................................................
Ryland Mortgage Securities
Corporation, 42 2X1 (IO),
3428.23022%, 6/25/2023 # 8,233 452,844
.......................................... ===========
1,217,522
- ---------------------------------------------------------
Total non-agency mortgage-backed
securities
(cost $12,109,258) 11,520,835
- ---------------------------------------------------------

<CAPTION>
U.S. TREASURY Principal
OBLIGATIONS -- 8.5% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
U.S. Treasury Bonds:
8.125%, 8/15/2019 $ 1,875,000 $ 2,103,516
.........................................................
8.75%, 8/15/2020 585,000 699,623
.........................................................
7.875%, 2/15/2021 400,000 438,375
.........................................................
6.25%, 8/15/2023 500,000 453,125
.......................................... ===========
Total U.S. Treasury
obligations
(cost $3,956,894) 3,694,639
- ---------------------------------------------------------
DISCOUNT NOTES -- 5.8%
- ---------------------------------------------------------
American Bankers Institute,
5.54%, 7/02/1996 1,000,000 999,846
.........................................................
Columbia/HCA Healthcare
Corp.,
5.60%, 8/16/1996 919,000 912,424
.........................................................
Source One Mortgage Services
Corp.,
5.60%, 7/08/1996 600,000 599,347
.......................................... ===========
Total discount notes
(cost $2,511,617) 2,511,617
- ---------------------------------------------------------
VARIABLE RATE DEMAND NOTE* -- 0.1%
- ---------------------------------------------------------
General Mills, Inc., 5.14% 60,945 60,945
.......................................... ===========
Total variable rate demand
note (cost $60,945) 60,945
- ---------------------------------------------------------
Total investments--99.0%
(cost $43,568,262) 42,985,479
.........................................................
Other assets in excess
of liabilities--1.0% 434,713
.......................................... ===========
Total net assets--100% $43,420,192
- ---------------------------------------------------------
</TABLE>

# Variable rate security. The rate listed is as of June 30, 1996.

* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rate changes periodically on specified dates. The
rate listed is as of June 30, 1996.

IO -- Interest only.

CLB -- Callable.

See Notes to Financial Statements

14
<PAGE> 99
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES Principal
- -- 39.9% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
BANKS -- 17.3%
.........................................................
Den Norske Bank,
5.40%, 8/29/2049 # $ 2,600,000 $ 2,116,660
.........................................................
Kansallis-Osake-Pankki,
7.53%, 9/30/2043 # 4,660,000 4,806,324
.........................................................
Midland Bank PLC,
5.9125%, 6/29/2049 # 3,650,000 3,058,700
.........................................................
National Australia Bank,
5.8062%, 10/29/2049 # 4,150,000 3,592,447
.........................................................
Okobank,
6.9687%, 9/27/2049 # 6,700,000 6,872,190
.........................................................
Swedbank:
7.3359%, 10/29/2049 # 6,000,000 6,154,800
.........................................................
6.8125%, 12/29/2049 # 900,000 905,130
.........................................................
Westpac Banking,
5.6187%, 9/29/2049 # 6,100,000 5,256,370
......................................... ============
32,762,621
- ---------------------------------------------------------
FINANCIAL SERVICES -- 7.3%
.........................................................
Lehman Brothers, Inc.:
9.50%, 6/15/1997 800,000 823,334
.........................................................
5.04%, 12/15/2003,
putable 10/15/1996 # 3,300,000 3,264,459
.........................................................
Salomon, Inc.:
6.0515%, 11/26/1996 # 720,000 720,000
.........................................................
5.20%, 1/20/1997 1,000,000 995,088
.........................................................
8.67%, 2/14/1997 400,000 405,938
.........................................................
5.53%, 1/30/1998 2,100,000 2,065,005
.........................................................
5.65%, 2/10/1998 200,000 196,941
.........................................................
5.70%, 2/11/1998 2,000,000 1,970,870
.........................................................
9.43%, 3/15/1998 1,000,000 1,042,998
.........................................................
6.125%, 5/15/1998 315,000 311,621
.........................................................
6.58%, 12/01/1998 # 1,500,000 1,501,690
.........................................................
6.26%, 5/20/1999 # 500,000 495,200
......................................... ============
13,793,144
- ---------------------------------------------------------

<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
HEALTH -- 0.1%
.........................................................
Health & Rehabilitation
Property Trust,
CLB 7/13/1996, 6.2551%,
7/13/1999 # $ 200,000 $ 198,300
- ---------------------------------------------------------
INDUSTRIALS -- 0.3%
.........................................................
Westinghouse Credit Co.,
9.07%, 7/25/1996 500,000 500,949
- ---------------------------------------------------------
PRINTING & PUBLISHING -- 5.2%
.........................................................
Time Warner, Inc.,
6.46%, 8/15/2000 # 3,195,000 3,208,626
.........................................................
Valassis Inserts,
9.375%, 3/15/1999 6,600,000 6,698,227
......................................... ============
9,906,853
- ---------------------------------------------------------
REAL ESTATE -- 2.8%
.........................................................
Taubman Reality Group,
6.00%, 11/03/1997 # 5,400,000 5,371,920
- ---------------------------------------------------------
SOVEREIGN -- 3.0%
.........................................................
Government of Mexico,
10.8125%, 7/21/1997 # 4,600,000 4,784,000
.........................................................
Republic of Argentina,
5.25%, 3/31/2023 # 1,550,000 853,469
......................................... ============
5,637,469
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 0.2%
.........................................................
Illinois Bell Telephone Co.
CLB, 7.625%, 4/01/2006 300,000 304,810
- ---------------------------------------------------------
</TABLE>

See Notes to Financial Statements

15
<PAGE> 100
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 3.7%
.........................................................
Cleveland Electric Illum:
9.25%, 7/29/1999 $ 1,900,000 $ 1,935,786
.........................................................
8.55%, 11/15/2001 2,000,000 1,931,632
.........................................................
CTC Mansfield Funding Corp.
CLB, 11.125%, 9/30/2016 350,000 361,955
.........................................................
Gulf States Utilities CLB,
6.75%, 10/01/1998 700,000 692,763
.........................................................
Northern States Power Co.
CLB, 9.125%, 4/01/2021 2,000,000 2,130,738
......................................... ============
7,052,874
- ---------------------------------------------------------
Total corporate bonds and
notes (cost $73,923,633) 75,528,940
- ---------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 13.4%
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.2%
.........................................................
Federal Home Loan Mortgage
Corporation:
GNMA Series 16 PU,
4.50%, 10/25/2006 215,797 215,044
.........................................................
1081 I, 7.00%, 12/15/2019 392,030 394,417
.........................................................
1096 D, 7.00%, 6/15/2020 92,744 93,285
.........................................................
1194 G, 6.50%, 10/15/2006 500,000 487,440
.........................................................
1201 D, 7.00%, 10/15/2020 763,575 767,935
.........................................................
1262 F, 7.50%, 3/15/2015 500,000 508,594
.........................................................
1267 O, 7.25%, 12/15/2005 100,000 101,195
.........................................................
1336 H, 7.75%, 1/15/2021 400,000 403,248
.........................................................
1358 F, 6.75%, 1/15/2019 600,000 600,780
.........................................................
1499 SB, 9.9088%,
4/15/2023 # 1,282,435 1,066,825
.........................................................
1543 KE, 9.4456%,
9/15/2022 # 1,046,602 684,870
.........................................................
1617 D, 6.50%, 11/15/2023 71,000 61,637
.........................................................
1686 SG, 7.00%, 2/15/2024 # 924,490 721,969
.........................................................
1761 Z, 8.50%, 11/15/2024 1,143,517 1,164,741
- ---------------------------------------------------------

<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
Federal National Mortgage
Association:
1988-26 C, 7.50%,
7/25/2018 $ 154,670 $ 156,607
.........................................................
1990-112 E, 8.50%,
7/25/2019 149,733 153,507
.........................................................
1991-147 K, 7.00%,
1/25/2021 5,000 4,883
.........................................................
1991-153 N, 7.50%,
2/25/2007 300,000 306,234
.........................................................
G92-9 K, 7.00%, 1/25/2020 250,000 251,005
.........................................................
1992-138 O, 7.50%,
7/25/2022 88,509 85,203
.........................................................
1992-158 Z, 7.75%,
3/25/2021 1,344,642 1,302,031
.........................................................
1992-163 E, 6.75%,
9/25/2022 500,000 494,490
.........................................................
1993-45 SB, 9.118%,
4/25/2023 # 1,500,000 1,070,157
.........................................................
1993-141 SB, 9.4456%,
3/25/2023 # 2,103,469 1,403,409
.........................................................
1994-2 SB, 10.00%,
1/25/2024 # 373,185 330,969
.........................................................
1994-13 SJ, 8.75%,
2/25/2009 # 800,000 693,250
.........................................................
1994-27 SE, 10.00%,
3/25/2023 # 725,668 597,089
.........................................................
1994-60 D, 7.00%,
4/25/2024 30,000 25,894
.........................................................
Government National
Mortgage Association,
1995-2 G, 8.50%,
3/20/2020 1,300,000 1,347,359
......................................... ============
15,494,067
- ---------------------------------------------------------
</TABLE>

See Notes to Financial Statements

16
<PAGE> 101
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
GOVERNMENT AGENCY NOTES -- 2.9%
.........................................................
Federal Home Loan Bank,
6.44%, 12/21/2000 $ 1,500,000 $ 1,472,212
.........................................................
Federal Home Loan Mortgage
Corporation:
8.14%, 5/20/2004 (CLB
5/20/1997) 2,000,000 2,003,768
.........................................................
8.44%, 10/27/2004 (CLB
10/27/1997) 2,000,000 2,038,682
......................................... ============
5,514,662
- ---------------------------------------------------------
PASS-THROUGH SECURITIES -- 1.8%
.........................................................
Federal Home Loan Mortgage
Corporation,
255452, 8.50%, 2/01/2008 722,090 748,331
.........................................................
Federal National Mortgage
Association:
21130, 8.00%, 9/01/2000 19,820 19,842
.........................................................
308798, 7.311%,
4/01/2025 # 1,926,798 1,980,162
.........................................................
312155, 7.317%,
3/01/2025 # 633,796 641,275
......................................... ============
3,389,610
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.5%
.........................................................
Federal Home Loan Mortgage
Corporation, 1543 TH
(IO), 3.559%, 1/15/2019 # 11,640,973 664,350
.........................................................
Federal National Mortgage
Association,
1993-97 L (IO), 7.50%,
5/25/2023 2,371,152 304,456
......................................... ============
968,806
- ---------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $25,228,143) 25,367,145
- ---------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED
SECURITIES -- 31.1%
- ---------------------------------------------------------
ASSET-BACKED SECURITIES -- 0.1%
.........................................................
Western Financial Grantor
Trust, 1992-3, 4.70%,
1/01/1998 202,774 202,267
- ---------------------------------------------------------

<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 29.0%
.........................................................
Bear Stearns Mortgage
Securities, Inc.,
1993-8 A9, 7.50%,
8/25/2024 $ 1,667,874 $ 1,580,394
.........................................................
Capstead Securities Corp.:
1992-2 C, 7.80%,
2/25/2022 437,774 439,153
.........................................................
1992-11 1B, 7.875%,
8/25/2022 440,881 420,910
.........................................................
Chemical Mortgage
Securities, Inc.,
1993-3 A1, 7.125%,
7/25/2023 407,827 407,297
.........................................................
Citicorp Mortgage
Securities, Inc.:
1987-9 A1, 9.00%,
7/25/2002 740,157 756,167
.........................................................
1988-3 A2, 9.00%,
4/01/2018 49,256 50,733
.........................................................
1989-8 A1, 10.50%,
6/25/2019 664,203 717,040
.........................................................
1989-17 A1, 7.1347%,
10/25/2019 # 1,233,201 1,235,544
.........................................................
1989-18 A1, 9.50%,
11/25/2004 202,631 202,065
.........................................................
1990-D A1, 9.50%,
10/25/2005 527,808 525,433
.........................................................
1990-4 A5, 9.50%,
3/25/2005 652,629 655,240
.........................................................
1991-5 A, 6.248%,
5/25/2021 # 1,386,395 1,150,708
.........................................................
1993-13 A6, 8.50%,
11/25/2008 # 285,000 226,853
.........................................................
</TABLE>

See Notes to Financial Statements

17
<PAGE> 102

Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
Countrywide Funding Corp.,
1994-17 A9, 8.00%,
7/25/2024 $ 4,000 $ 3,996
.........................................................
Donaldson, Lufkin &
Jenrette: 1992-M10 A1,
7.3125%, 12/22/2002 # 3,412,729 3,488,833
.........................................................
1992-MF3 A3, 7.1375%,
6/18/2007 # 4,000,000 4,028,800
.........................................................
First Bank Systems,
1993 AT T2, 8.25%,
3/25/2023 405,964 407,832
.........................................................
Fleet Mortgage Securities,
1992-2 2A4, 8.55%,
6/25/2023 2,632,953 2,677,450
.........................................................
GE Capital Mortgage
Services, Inc.:
1992-7A A6, 8.30%,
7/25/2023 1,962,448 2,009,468
.........................................................
1993-17 A17, 9.00%,
12/25/2023 # 461,538 392,499
.........................................................
Greenwich Capital
Acceptance, Inc.:
1992-1 B1, 6.9252%,
1/25/2023 # 2,481,270 1,971,865
.........................................................
1994-LB1, 7.6364%,
4/25/2024 # 961,466 974,157
.........................................................
Guardian Savings &
Loan Assoc.,
1991-1 A1, 7.2201%,
1/25/2021 # 1,581,927 1,158,306
.........................................................
Housing Securities, Inc.,
1994-2 B1, 6.50%,
7/25/2009 245,853 209,491
.........................................................
Independent National
Mortgage Corporation:
1995-A4, 8.75%, 3/25/2025 18,000 18,950
.........................................................
1995-MA4 A, 7.50%,
9/25/2025 1,000,000 930,800
.........................................................
Marine Midland,
1991-3 AM, 8.00%,
12/25/2022 4,503,750 4,475,994
.........................................................
Paine Webber Mortgage,
1993-9 A6, 7.00%,
10/25/2023 3,121,299 2,980,060
.........................................................

<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
Prudential Home Mortgage
Securities, Co.:
1993-36 A10, 7.25%,
10/25/2023 $ 500,000 $ 481,720
.........................................................
Residential Funding Corp.,
1993-S9 A8, 8.75%,
2/25/2008 # 125,305 86,365
.........................................................
Residential Funding
Mortgage
Securities, Inc.:
1989-SW1 A, 7.065%,
1/25/2019 # 808,144 791,577
.........................................................
1992-S5 A5, 7.50%,
2/25/2007 1,350,000 1,348,434
.........................................................
Resolution Trust Corp.:
1991-6 B6, 8.7563%,
3/25/2021 # 1,600,000 1,642,320
.........................................................
1991-M4 A1, 6.341%,
2/25/2020 # 2,109,336 2,069,891
.........................................................
1995-2 B6, 6.8362%,
5/25/2029 # 3,977,999 3,877,356
.........................................................
1995-2 B7, 7.2303%,
5/25/2029 # 3,428,390 3,290,226
.........................................................
Ryland Mortgage Securities
Corp.:
1989-8 E, 9.00%,
8/25/2020 931,556 929,599
.........................................................
1992-15 B1, 7.5159%,
11/25/2022 # 967,651 896,915
.........................................................
Saxon Mortgage
Securities Corp.,
1994-6 B2, 8.1844%,
6/25/2024 # 2,427,430 2,409,467
.........................................................
Structured Mortgage Asset
Residential Trust:
1991-1H, 8.25%, 6/25/2022 351,103 336,953
.........................................................
1992-3 A, 8.00%,
10/25/2007 272,501 262,746
.........................................................
1993-5A AA, 6.9456%,
6/25/2024 # 435,453 422,041
.........................................................
SML, Inc.,
1994-C 1, 6.4375%,
9/20/1999 # 2,000,000 2,006,700
......................................... ============
54,948,348
- ---------------------------------------------------------
</TABLE>

See Notes to Financial Statements

18
<PAGE> 103
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
PASS-THROUGH SECURITIES -- 0.1%
.........................................................
Citicorp Mortgage
Securities, Inc.:
1987-5, 8.50%, 4/25/2017 $ 32,771 $ 32,831
.........................................................
1987-14, 9.50%, 9/25/2002 59,556 60,961
.........................................................
1988-16 A1, 10.00%,
11/25/2018 64,242 68,623
......................................... ============
162,415
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 1.9%
.........................................................
Donaldson, Lufkin &
Jenrette: 1993-Q16 IIS
(IO), 2.1783%, 11/25/2023 # 4,139,371 173,274
.........................................................
1993-Q16 IS (IO),
3.7392%, 11/25/2023 # 917,744 68,702
.........................................................
1993-Q18 SC (IO),
3.0627%, 1/25/2024 # 2,374,161 115,052
.........................................................
1994-Q8 IIS (IO), 1.95%,
5/25/2024 # 24,032,772 979,095
.........................................................
Nomura Asset Securities
Corporation:
1994-2A 1 (IO), 2.2144%,
5/25/2024 # 27,952,580 1,080,227
.........................................................
1994-5A 1 (IO), 1.0681%,
11/25/2024 # 51,111,414 762,838
.........................................................
Residential Funding Corp.,
1992-S2 A16 (IO), 0.50%,
1/25/2022 36,029,672 270,006
.........................................................
Structured Mortgage Asset
Residential Trust,
1991-2 I (IO), 28.1035%,
6/25/2022 # 53,325 68,795
......................................... ============
3,517,989
- ---------------------------------------------------------
Total non-agency mortgage-
backed securities
(cost $59,585,128) 58,831,019
- ---------------------------------------------------------

<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 10.9%
- ---------------------------------------------------------
U.S. Treasury Notes:
5.375%,11/30/1997 $ 1,000,000 $ 991,875
.........................................................
5.00%, 1/31/1998 2,000,000 1,968,750
.........................................................
7.875%, 4/15/1998 7,000,000 7,210,000
.........................................................
7.50%, 10/31/1999 600,000 620,062
.........................................................
6.125%, 7/31/2000 950,000 939,609
.........................................................
6.25%, 8/31/2000 1,000,000 993,437
.........................................................
5.75%, 8/15/2003 7,885,000 7,505,534
.........................................................
U.S. Treasury Bonds,
8.75%, 8/15/2020 300,000 358,781
......................................... ============
Total U.S. Treasury
obligations
(cost $20,808,303) 20,588,048
- ---------------------------------------------------------
DISCOUNT NOTES -- 3.7%
- ---------------------------------------------------------
Columbia/HCA Healthcare
Corp.:
5.52%, 7/10/1996 3,000,000 2,995,860
.........................................................
5.50%, 8/15/1996 3,000,000 2,979,375
.........................................................
Source One Mortgage
Services Corporation,
5.60%, 7/08/1996 1,000,000 998,911
......................................... ============
Total discount notes
(cost $6,974,146) 6,974,146
- ---------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 0.1%
- ---------------------------------------------------------
Pitney Bowes, Inc.,
5.1441% 256,243 256,243
......................................... ============
Total variable rate demand
note (cost $256,243) 256,243
- ---------------------------------------------------------
Total investments -- 99.1%
(cost $186,775,596) 187,545,541
.........................................................
Other assets in excess of
liabilities -- 0.9% 1,615,641
......................................... ============
Total net assets -- 100% $189,161,182
- ---------------------------------------------------------
</TABLE>

# Variable rate security. The rate listed is as of June 30, 1996.

* Variable rate demand notes are considered short-term obligations
and are payable on demand. Interest rates change periodically on specified
dates. The rates listed are as of June 30, 1996.

IO -- Interest Only.

CLB -- Callable.

See Notes to Financial Statements

19
<PAGE> 104
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND

<TABLE>
<CAPTION>
Principal
CORPORATE BONDS -- 30.5% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
BANKS -- 18.1%
.........................................................
Den Norske Bank,
5.75%, 11/29/2049 # $ 700,000 $ 574,875
.........................................................
Kansallis-Osake-Pankki,
7.53%, 9/30/2043 # 200,000 206,280
.........................................................
National Australia Bank,
5.8062%, 10/29/2049 # 1,000,000 865,650
.........................................................
Okobank,
6.9687%, 9/27/2049 # 900,000 923,130
.........................................................
Swedbank,
7.3359%, 10/29/2049 # 800,000 820,640
.......................................... ===========
3,390,575
- ---------------------------------------------------------
FINANCIAL SERVICES -- 4.8%
.........................................................
Salomon, Inc.:
5.53%, 1/30/1998 500,000 491,668
.........................................................
6.58%, 12/01/1998 # 400,000 400,451
.......................................... ===========
892,119
- ---------------------------------------------------------
SOVEREIGN -- 3.0%
.........................................................
Government of Mexico,
10.8125%, 7/21/1997 # 550,000 572,000
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 0.8%
.........................................................
Illinois Bell Telephone Co.
CLB, 7.625%, 4/01/2006 150,000 152,405
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 3.8%
.........................................................
Gulf States Utilities CLB,
6.75%, 10/01/1998 300,000 296,899
.........................................................
Westinghouse Electric
Corporation,
9.30%, 6/07/1999 400,000 411,992
.......................................... ===========
708,891
- ---------------------------------------------------------
Total corporate bonds
(cost $5,589,648) 5,715,990
- ---------------------------------------------------------

GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 8.8% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.1%
.........................................................
Federal Home Loan Mortgage
Corporation:
16-B, 10.00%, 10/15/2019 $ 26,444 $ 27,006
.........................................................
1081 I, 7.00%, 12/15/2019 161,222 162,204
.........................................................
1722 PB, 6.50%, 2/15/2009 171,177 171,122
.........................................................
Federal Housing Authority
Project, 7.43%, 2/01/2023 139,560 140,785
.........................................................
Federal National Mortgage
Association:
G92-40 B, 7.00%, 12/25/2015 # 124,603 124,390
.........................................................
1992-43 B, 7.50%,
11/25/2018 669,283 673,961
.........................................................
1992-185 VA, 5.10%,
5/25/1997 225,632 224,221
.......................................... ===========
1,523,689
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.7%
.........................................................
Federal National Mortgage
Association, 1993-97 L
(IO),
7.50%, 5/25/2023 874,486 112,284
.........................................................
Government National Mortgage
Association, 103695,
11.50%, 9/15/1998 19,943 20,908
.......................................... ===========
133,192
- ---------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $1,624,225) 1,656,881
- ---------------------------------------------------------
</TABLE>

See Notes to Financial Statements

20
<PAGE> 105
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND

<TABLE>
<CAPTION>
NON-AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 17.9% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 17.0%
.........................................................
Citicorp Mortgage Securities,
Inc.:
1989-18 A1, 9.50%,
11/25/2004 $ 159,210 $ 158,766
.........................................................
1990-D A1, 9.50%,
10/25/2005 263,904 262,716
.........................................................
1991-5 A, 6.248%,
5/25/2021 # 189,054 156,915
.........................................................
1991-7 M, 8.75%, 5/25/2021 82,648 83,776
.........................................................
Donaldson, Lufkin & Jenrette:
1992-M10 A1, 7.3125%,
12/22/2002 # 663,586 678,384
.........................................................
1992-MF3 A3, 7.1375%,
6/18/2007 # 500,000 503,600
.........................................................
Prudential Home Mortgage
Securities, Inc.,
1993-1 A1, 7.50%, 2/25/2023 279,189 280,895
.........................................................
Ryland Mortgage Securities
Corp.,
1992-15 B1, 7.5159%,
11/25/2022 # 387,060 358,766
.........................................................
Saxon Mortgage Securities
Corp.,
1994-6 B2, 8.1844%,
6/25/2024 # 488,810 485,193
.........................................................
Structured Mortgage Asset
Residential Trust,
1992-11B BH, 7.80%,
8/25/2021 209,903 212,300
.......................................... ===========
3,181,311
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.9%
.........................................................
Donaldson, Lufkin & Jenrette:
1993-Q16 IS (IO), 3.7392%,
11/25/2023 # 533,723 39,955
.........................................................
1993-Q18 SC (IO), 3.0627%,
1/25/2024 # 2,637,956 127,835
.......................................... ===========
167,790
- ---------------------------------------------------------
Total non-agency mortgage-
backed securities
(cost $3,447,235) 3,349,101
- ---------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
U.S. TREASURY Principal
OBLIGATIONS -- 20.6% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
U.S. Treasury Notes:
5.625%, 1/31/1998 $2,100,000 $ 2,086,875
.........................................................
5.375%, 5/31/1998 1,800,000 1,776,375
.......................................... ===========
Total U.S. Treasury
obligations
(cost $3,859,227) 3,863,250
- ---------------------------------------------------------
DISCOUNT NOTES -- 19.2%
- ---------------------------------------------------------
Alloman Funding Corp.,
5.42%, 7/22/1996 800,000 797,471
.........................................................
C & H Sugar,
5.50%, 7/09/1996 700,000 699,144
.........................................................
Columbia/HCA Healthcare
Corp.,
5.52%, 7/26/1996 700,000 697,317
.........................................................
Kerr McGee Credit Corp.,
5.55%, 7/08/1996 700,000 699,245
.........................................................
Source One Mortgage Services
Corp.,
5.55%, 7/19/1996 700,000 698,058
.......................................... ===========
Total discount notes
(cost $3,591,233) 3,591,235
- ---------------------------------------------------------
VARIABLE RATE DEMAND NOTE* -- 2.2%
- ---------------------------------------------------------
Southwestern Bell, Inc.,
5.1239% 408,706 408,706
.......................................... ===========
Total variable rate demand
note
(cost $408,706) 408,706
- ---------------------------------------------------------
Total investments -- 99.2%
(cost $18,520,274) 18,585,163
.......................................... ===========
Other assets in excess of
liabilities -- 0.8% 140,619
.......................................... ===========

Total net assets -- 100% $18,725,782
- ---------------------------------------------------------
</TABLE>

# Variable rate security. Rate listed is as of June 30, 1996.

* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of June 30, 1996.

IO -- Interest Only.

CLB -- Callable.

See Notes to Financial Statements

21
<PAGE> 106

Financial Statements -- June 30, 1996
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
EQUITY SMALL
INCOME CAP
FUND FUND
--------------------------------
<S> <C> <C>
ASSETS:
Investments, at value*...................................... $182,765,666 $16,048,850
Foreign currency**.......................................... 0 0
Cash........................................................ 76,709 1,360
Dividends and interest receivable........................... 465,207 23,474
Receivable from Advisor..................................... 0 6,149
Receivable for investments sold............................. 0 427,792
Receivable for Fund shares sold............................. 53,000 10,000
Other receivables........................................... 1,567 7,010
------------ -----------
Total assets........................................... $183,362,149 $16,524,635
------------ -----------
LIABILITIES:
Payable to Advisor.......................................... 120,437 0
Payable for investments purchased........................... 348,725 0
Payable for Fund shares repurchased......................... 203,041 3,639
Dividends payable........................................... 0 0
Accrued expenses and other liabilities...................... 151,841 40,310
------------ -----------
Total liabilities...................................... 824,044 43,949
------------ -----------
Net assets............................................. $182,538,105 $16,480,686
============ ===========
NET ASSETS CONSIST OF:
Paid in capital............................................. $142,852,990 $13,319,788
Undistributed net investment income......................... 0 56,471
Undistributed net realized gain (loss) on securities
and foreign currency transactions........................ 4,957,420 1,983,103
Net unrealized appreciation (depreciation) of
securities and foreign currency.......................... 34,727,695 1,121,324
------------ -----------
Net assets............................................. $182,538,105 $16,480,686
============ ===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of
no par value authorized)................................. 9,650,910 772,618
Net asset value per share (offering and redemption price)... $ 18.91 $ 21.33
============ ===========
*Cost of Investments......................................... $148,037,971 $14,927,526
============ ===========
**Cost of Foreign Currency.................................... $ 0 $ 0
============ ===========
</TABLE>

See Notes to Financial Statements

22
<PAGE> 107

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

<TABLE>
<CAPTION>
BALANCED TOTAL LOW SHORT-TERM
INTERNATIONAL INCOME RETURN BOND DURATION INVESTMENT
FUND FUND FUND FUND FUND
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$307,968,234 $69,986,886 $42,985,479 $187,545,541 $18,585,163
11,925,048 0 0 0 0
32,747,429 9,795 199 0 0
1,614,376 612,636 607,099 2,397,030 201,176
0 0 4,001 0 0
0 109,685 100,738 243,424 12,144
1,265,558 100,200 0 203,600 7,467
29,515 15,560 17,910 83,739 37,545
------------ ----------- ----------- ------------ -----------
355,550,160 70,834,762 43,715,426 190,473,334 18,843,495
------------ ----------- ----------- ------------ -----------
150,825 57,241 0 38,703 487
23,847,083 77,095 0 0 0
292,540 37,769 0 163,181 0
1,639 0 245,467 1,016,632 82,289
264,630 64,464 49,767 93,636 34,937
------------ ----------- ----------- ------------ -----------
24,556,717 236,569 295,234 1,312,152 117,713
------------ ----------- ----------- ------------ -----------
$330,993,443 $70,598,193 $43,420,192 $189,161,182 $18,725,782
============ =========== =========== ============ ===========
$312,994,774 $64,561,629 $43,688,951 $188,103,806 $18,745,835
503,115 80,910 79,541 290,152 0
664,767 2,385,523 234,483 (2,721) (84,942)
16,830,787 3,570,131 (582,783) 769,945 64,889
------------ ----------- ----------- ------------ -----------
$330,993,443 $70,598,193 $43,420,192 $189,161,182 $18,725,782
============ =========== =========== ============ ===========
16,192,046 3,865,012 3,396,308 18,700,254 1,841,171
$ 20.44 $ 18.27 $ 12.78 $ 10.12 $ 10.17
============ =========== =========== ============ ===========
$291,115,551 $66,416,755 $43,568,262 $186,775,596 $18,520,274
============ =========== =========== ============ ===========
$ 11,926,443 $ 0 $ 0 $ 0 $ 0
============ =========== =========== ============ ===========
</TABLE>

See Notes to Financial Statements

23
<PAGE> 108

Financial Statements -- Year Ended June 30, 1996
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
EQUITY SMALL
INCOME CAP
FUND FUND
-------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income*
Dividends................................................. $ 5,537,019 $ 172,082
Interest.................................................. 296,099 91,009
----------- -----------
Total income......................................... 5,833,118 263,091
----------- -----------
Expenses
Advisory fee.............................................. 1,238,052 159,346
Legal and auditing fees................................... 69,358 22,576
Custodian fees and expenses............................... 60,383 6,426
Accounting and transfer agent fees and expenses........... 94,976 25,211
Administration fee........................................ 33,744 2,784
Trustees' fees............................................ 6,275 6,275
Reports to shareholders................................... 28,000 20,000
Registration fees......................................... 55,374 12,726
Other expenses............................................ 29,925 1,268
----------- -----------
Total expenses....................................... 1,616,087 256,612
Less, expense reimbursement............................... 0 (44,825)
----------- -----------
Net expenses......................................... 1,616,087 211,787
----------- -----------
Net investment income........................................ 4,217,031 51,304
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on securities and foreign currency
transactions............................................ 6,697,177 3,242,921
Net change in unrealized appreciation (depreciation) of
securities and foreign currency......................... 17,517,007 (1,035,528)
----------- -----------
Net gain (loss) on investments............................... 24,214,184 2,207,393
----------- -----------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $28,431,215 $ 2,258,697
=========== ===========
*Net of Foreign Taxes Withheld................................. $ 15,236 $ 0
=========== ===========
</TABLE>

See Notes to Financial Statements

24
<PAGE> 109
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
BALANCED TOTAL LOW SHORT-TERM
INTERNATIONAL INCOME RETURN BOND DURATION INVESTMENT
FUND FUND FUND FUND FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5,192,070 $ 858,947 $ 0 $ 0 $ 0
420,748 2,291,873 2,226,847 12,311,794 1,242,397
----------- ---------- ----------- ----------- ----------
5,612,818 3,150,820 2,226,847 12,311,794 1,242,397
----------- ---------- ----------- ----------- ----------
1,108,545 377,472 164,708 706,115 71,031
35,277 26,043 18,419 48,834 15,227
265,000 37,964 11,159 41,208 5,893
73,391 33,131 21,882 66,907 22,464
34,924 10,211 5,975 27,965 2,445
6,275 6,275 6,275 6,275 6,275
20,000 20,000 20,000 20,000 20,000
105,000 22,088 27,939 38,316 10,501
3,365 1,667 1,195 5,294 984
----------- ---------- ----------- ----------- ----------
1,651,777 534,851 277,552 960,914 154,820
(169,480) (31,555) (84,461) (29,763) (69,867)
----------- ---------- ----------- ----------- ----------
1,482,297 503,296 193,091 931,151 84,953
----------- ---------- ----------- ----------- ----------
4,130,521 2,647,524 2,033,756 11,380,643 1,157,444
----------- ---------- ----------- ----------- ----------
1,311,404 2,948,927 386,435 302,726 17,041
14,489,301 587,322 (1,233,325) (603,922) 72,725
----------- ---------- ----------- ----------- ----------
15,800,705 3,536,249 (846,890) (301,196) 89,766
----------- ---------- ----------- ----------- ----------
$19,931,226 $6,183,773 $1,186,866 $11,079,447 $1,247,210
=========== ========== =========== =========== ==========
$ 550,504 $ 14,043 $ 0 $ 0 $ 0
=========== ========== =========== =========== ==========
</TABLE>

See Notes to Financial Statements

25
<PAGE> 110

Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
EQUITY INCOME FUND
---------------------------------
<S> <C> <C>
Year Ended Year Ended
June 30, 1996 June 30, 1995
---------------------------------
OPERATIONS:
Net investment income (loss)........................... $ 4,217,031 $ 3,330,418
Net realized gain on securities and foreign currency
transactions......................................... 6,697,177 8,380,400
Net change in unrealized appreciation (depreciation)
of securities and foreign currency................... 17,517,007 8,445,277
------------- -------------
Net increase in net assets resulting from
operations...................................... 28,431,215 20,156,095
------------- -------------
NET EQUALIZATION CREDITS.................................... 0 101,938
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (5,190,178) (3,053,827)
Net realized gain on securities transactions........... (9,231,395) (2,560,940)
------------- -------------
Total dividends and distributions................. (14,421,573) (5,614,767)
------------- -------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 71,541,636 41,289,943
Shares issued in connection with payment of dividends
and distributions.................................... 13,515,453 5,234,238
Cost of shares redeemed................................ (43,625,015) (21,285,555)
------------- -------------
Net increase (decrease) in net assets from Fund
share transactions.............................. 41,432,074 25,238,626
------------- -------------
Total increase (decrease) in net assets..................... 55,441,716 39,881,892
NET ASSETS:
Beginning of period.................................... 127,096,389 87,214,497
------------- -------------
End of period*......................................... $ 182,538,105 $ 127,096,389
============= =============
*Including undistributed net investment income of: $ 0 $ 1,600,193
============= =============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 3,846,201 2,625,774
Shares issued in connection with payment of dividends
and distributions.................................... 743,944 345,347
Shares redeemed........................................ (2,311,587) (1,384,748)
------------- -------------
Net increase (decrease)........................... 2,278,558 1,586,373
============= =============
</TABLE>

See Notes to Financial Statements

26
<PAGE> 111

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

<TABLE>
<CAPTION>
SMALL CAP FUND INTERNATIONAL FUND
------------------------------- -------------------------------
Year Ended Year Ended Year Ended Year Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------------------------- -------------------------------
<S> <C> <C> <C>
$ 51,304 $ (53,458) $ 4,130,521 $ 918,248
3,242,921 2,051,312 1,311,404 235,087
(1,035,528) 315,290 14,489,301 2,640,106
----------- ----------- ------------ ------------
2,258,697 2,313,144 19,931,226 3,793,441
----------- ----------- ------------ ------------
0 0 0 105,891
----------- ----------- ------------ ------------
0 0 (3,924,997) (1,058,855)
(3,229,051) (567,724) (911,877) (727,274)
----------- ----------- ------------ ------------
(3,229,051) (567,724) (4,836,874) (1,786,129)
----------- ----------- ------------ ------------
9,973,586 6,033,472 324,232,058 25,589,662
2,737,936 548,049 4,533,313 1,758,581
(15,737,773) (931,042) (64,341,082) (3,959,148)
----------- ----------- ------------ ------------
(3,026,251) 5,650,479 264,424,289 23,389,095
----------- ----------- ------------ ------------
(3,996,605) 7,395,899 279,518,641 25,502,298
20,477,291 13,081,392 51,474,802 25,972,504
----------- ----------- ------------ ------------
$16,480,686 $20,477,291 $330,993,443 $ 51,474,802
=========== =========== ============ ============
$ 56,471 $ 464,275 $ 503,115 $ 325,550
=========== =========== ============ ============
444,190 298,181 16,283,849 1,484,025
137,516 28,967 227,114 103,654
(760,129) (45,954) (3,226,302) (227,394)
----------- ----------- ------------ ------------
(178,423) 281,194 13,284,661 1,360,285
=========== =========== ============ ============
</TABLE>

See Notes to Financial Statements

27
<PAGE> 112

Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
BALANCED INCOME FUND
---------------------------------
Year Ended Year Ended
June 30, 1996 June 30, 1995
---------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 2,647,524 $ 1,917,881
Net realized gain (loss) on securities transactions..... 2,948,927 434,314
Net change in unrealized appreciation (depreciation) of
securities............................................ 587,322 2,852,215
------------- -------------
Net increase in net assets resulting from
operations....................................... 6,183,773 5,204,410
------------- -------------
NET EQUALIZATION (DEBITS).................................... 0 (65,989)
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (2,554,681) (1,672,655)
Net realized gain on securities transactions............ (55,137) (1,199,739)
Return of capital....................................... 0 (30,446)
------------- -------------
Total dividends and distributions.................. (2,609,818) (2,902,840)
------------- -------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 43,038,215 10,526,666
Shares issued in connection with payment of dividends
and distributions..................................... 2,406,463 2,688,210
Cost of shares redeemed................................. (10,483,447) (19,360,405)
------------- -------------
Net increase (decrease) in net assets from Fund
share transactions............................... 34,961,231 (6,145,529)
------------- -------------
Total increase (decrease) in net assets...................... 38,535,186 (3,909,948)
NET ASSETS:
Beginning of period..................................... 32,063,007 35,972,955
------------- -------------
End of period**......................................... $ 70,598,193 $ 32,063,007
============= =============
**Including undistributed net investment income of: $ 80,910 $ 0
============= =============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 2,395,366 668,502
Shares issued in connection with payment of dividends
and distributions..................................... 134,345 172,367
Shares redeemed......................................... (580,252) (1,215,259)
------------- -------------
Net increase (decrease)............................ 1,949,459 (374,390)
============= =============
</TABLE>

* Commencement of operations.

See Notes to Financial Statements

28
<PAGE> 113

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

<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND LOW DURATION FUND SHORT-TERM INVESTMENT FUND
----------------------------------- ------------------------------- -------------------------------
December 6, 1994*
Year Ended through Year Ended Year Ended Year Ended Year Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
----------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$ 2,033,756 $ 352,723 $ 11,380,643 $ 5,880,534 $ 1,157,444 $ 838,304
386,435 167,201 302,726 622,634 17,041 (131,070)
(1,233,325) 650,542 (603,922) 1,891,223 72,725 38,083
----------- ----------- ------------- ------------ ------------ -----------
1,186,866 1,170,466 11,079,447 8,394,391 1,247,210 745,317
----------- ----------- ------------- ------------ ------------ -----------
0 0 0 0 0 0
----------- ----------- ------------- ------------ ------------ -----------
(2,033,756) (352,723) (11,385,745) (5,880,534) (1,150,687) (838,304)
(239,612) 0 (680,292) (75,968) 0 0
0 0 0 0 (6,473) 0
----------- ----------- ------------- ------------ ------------ -----------
(2,273,368) (352,723) (12,066,037) (5,956,502) (1,157,160) (838,304)
----------- ----------- ------------- ------------ ------------ -----------
31,603,393 14,983,481 187,622,316 160,502,377 14,567,153 17,020,236
1,813,318 358,388 10,272,786 5,661,434 634,339 365,441
(4,198,498) (880,731) (131,067,667) (81,760,823) (16,377,951) (7,986,845)
----------- ----------- ------------- ------------ ------------ -----------
29,218,213 14,461,138 66,827,435 84,402,988 (1,176,459) 9,398,832
----------- ----------- ------------- ------------ ------------ -----------
28,131,711 15,278,881 65,840,845 86,840,877 (1,086,409) 9,305,845
15,288,481 9,600 123,320,337 36,479,460 19,812,191 10,506,346
----------- ----------- ------------- ------------ ------------ -----------
$43,420,192 $15,288,481 $ 189,161,182 $123,320,337 $ 18,725,782 $19,812,191
=========== =========== ============= ============ ============ ===========
$ 79,541 $ 167,201 $ 290,152 $ 693,241 $ 0 $ 0
=========== =========== ============= ============ ============ ===========
2,396,355 1,223,013 18,411,897 16,119,314 1,435,371 1,683,176
138,416 28,352 1,008,556 567,024 62,521 36,134
(319,560) (70,268) (12,866,489) (8,215,536) (1,613,876) (791,051)
----------- ----------- ------------- ------------ ------------ -----------
2,215,211 1,181,097 6,553,964 8,470,802 (115,984) 928,259
=========== =========== ============= ============ ============ ===========
</TABLE>

See Notes to Financial Statements

29
<PAGE> 114

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996

NOTE 1.

ACCOUNTING POLICIES. Hotchkis and Wiley Funds (the "Trust") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Trust was organized as a Massachusetts business trust on
August 22, 1984 and consists of eight series of shares comprising the Balanced
Income Fund, the Small Cap Fund, the Equity Income Fund, the International Fund,
the Total Return Bond Fund, the Low Duration Fund, the Short-Term Investment
Fund and the Equity Fund for Insurance Companies (collectively, the "Funds"),
the assets of which are invested in separate, independently managed portfolios.
The accompanying financial statements exclude financial information for the
Equity Fund for Insurance Companies; financial statements for that Fund are
reported on separately. Investment operations of the Funds began on August 13,
1985 (the Balanced Income Fund), September 20, 1985 (the Small Cap Fund), June
24, 1987 (the Equity Income Fund), October 1, 1990 (the International Fund),
January 29, 1993 (the Equity Fund for Insurance Companies), May 18, 1993 (the
Low Duration Fund and the Short-Term Investment Fund), and December 6, 1994 (the
Total Return Bond Fund).

The Balanced Income Fund seeks to preserve capital while producing a high total
return. The Small Cap Fund seeks capital appreciation. The Equity Income Fund
seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The International Fund seeks to provide current income and
long-term growth of income, accompanied by growth of capital. The Total Return
Bond Fund seeks to maximize long-term total return. The Low Duration Fund seeks
to maximize total return, consistent with preservation of capital. The
Short-Term Investment Fund seeks to maximize total return, consistent with
preservation of capital. The following is a summary of significant accounting
policies followed by the Funds in the preparation of the financial statements.

SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or the NASDAQ National Market System
("System") are valued at the last sale price as of 4:00 p.m., Eastern time, or,
in the absence of recorded sales, at the average of readily available closing
bid and asked prices on such exchange or such System. Unlisted securities that
are not included in such System are valued at the average of the quoted bid and
asked price in the over-the-counter market. Fixed income securities are normally
valued on the basis of quotes obtained from brokers and dealers or pricing
services. Certain fixed income securities for which daily market quotations are
not readily available may be valued pursuant to guidelines established by the
Board of Trustees, with reference to fixed income securities whose prices are
more readily obtainable or an appropriate matrix utilizing similar factors. As a
broader market does not exist, the proceeds received upon the disposal of such
securities may differ from quoted values previously furnished by such market
makers. Securities for which market quotations are not otherwise available are
valued at fair value as determined in good faith by Hotchkis and Wiley (the
"Advisor") under procedures established by the Board of Trustees.

30
<PAGE> 115

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

Short-term investments which mature in less than 60 days are valued at amortized
cost (unless the Board of Trustees determines that this method does not
represent fair value), if their original maturity was 60 days or less, or by
amortizing the values as of the 61st day prior to maturity, if their original
term to maturity exceeded 60 days. Investments quoted in foreign currency are
valued daily in U.S. dollars on the basis of the foreign currency exchange rate
prevailing at the time of valuation.

REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with banks
or broker-dealers that meet credit guidelines established by the Board of
Trustees. In connection with transactions in repurchase agreements, it is the
Funds' policy that the custodian take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults, and the value
of the collateral declines, realization of the collateral by the Funds may be
delayed or limited.

FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are maintained
in U.S. dollars. For the International Fund, foreign currency transactions are
translated into U.S. dollars on the following basis: (i) market value of
investment securities, assets and liabilities at the daily rates of exchange,
and (ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions. The International Fund does not isolate
and treat as ordinary income that portion of the results of operations arising
as a result of changes in the exchange rate from the fluctuations arising from
changes in the market prices of securities held during the period. However, for
federal income tax purposes the International Fund does isolate and treat as
ordinary income the effect of changes in foreign exchange rates arising from
actual foreign currency transactions and the effect of changes in foreign
exchange rates from the fluctuations arising from trade date and settlement date
differences.

FORWARD CURRENCY EXCHANGE CONTRACTS: The International Fund utilizes forward
currency exchange contracts for the purpose of hedging foreign currency risk on
unsettled trades. Under these contracts, it is obligated to exchange currencies
at specific future dates. Risks arise from the possible inability of
counter-parties to meet the terms of their contracts and from movements in
currency values.

FEDERAL INCOME TAXES: It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and intends
to distribute investment company net taxable income and net capital gains to
shareholders. Therefore, no federal income tax provision is required.

EXPENSE ALLOCATION: Common expenses incurred by the Funds are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.

EQUALIZATION: Effective July 1, 1995, the Funds discontinued the practice of
equalization. The Balanced Income Fund, the Equity Income Fund, and the
International Fund each followed the accounting practice known as equalization,
by which

31
<PAGE> 116
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996

a portion of the proceeds from sales and costs of redemptions of capital shares,
equivalent on a per share basis to the amount of undistributed net investment
income on the date of the transaction, is credited or charged to undistributed
net investment income. As a result, undistributed net investment income per
share was unaffected by sales or redemptions of the Fund's shares.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

OTHER: Security and shareholder transactions are recorded no later than the
first business day after the trade date. Realized gains and losses on sales of
investments are calculated on the identified cost basis. Dividend income and
dividends and distributions to shareholders are recorded on the ex-dividend
date. Interest income is recognized on the accrual basis. Generally accepted
accounting principles require that permanent financial reporting and tax
differences relating to shareholder distributions be reclassified to paid in
capital.

NOTE 2.

INVESTMENT ADVISORY AGREEMENT. Each Fund has an investment advisory agreement
with the Advisor. The Advisor receives a fee, computed daily and payable
monthly, at the annual rates presented below as applied to each Fund's daily net
assets. The Advisor has voluntarily agreed to pay all operating expenses in
excess of the annual rates presented below as applied to each Fund's daily net
assets. For the year ended June 30, 1996, the Advisor waived the following fees
by Fund:

<TABLE>
<CAPTION>
Equity Income Small Cap International Balanced
Fund Fund Fund Income Fund
----------------------------------------------------------------
<S> <C> <C> <C> <C>
ANNUAL ADVISORY RATE.................. 0.75% 0.75% 0.75% 0.75%
ANNUAL CAP ON EXPENSES................ 1.00% 1.00% 1.00% 1.00%
FEES WAIVED........................... $0 $44,825 $169,480 $31,555
</TABLE>

<TABLE>
<CAPTION>
Total Return Low Duration Short-Term
Bond Fund Fund Investment Fund
-------------------------------------------------------
<S> <C> <C> <C>
ANNUAL ADVISORY RATE............................ 0.55%(2) 0.46%(2) 0.40%
ANNUAL CAP ON EXPENSES.......................... 0.65%(1) 0.58% 0.48%
FEES WAIVED..................................... $84,461 $29,763 $69,867
</TABLE>

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

(1) Prior to October 31, 1995 the cap on expenses was 0.80%.

(2) Prior to October 31, 1995 the annual advisory rate was 0.70% and 0.40% for
the Total Return Bond Fund and the Low Duration Fund, respectively.

32
<PAGE> 117

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

NOTE 3.

SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended June 30, 1996 were as follows:

<TABLE>
<CAPTION>
Purchases Sales
--------------------------------- --------------------------------
Fund U.S. Government Other U.S. Government Other
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INCOME FUND.......... -- $ 75,874,959 -- $38,653,126
SMALL CAP FUND.............. -- 23,177,790 -- 28,434,706
INTERNATIONAL FUND.......... -- 259,607,748 -- 17,421,880
BALANCED INCOME FUND........ $43,329,290 34,484,505 $29,749,363 13,853,364
TOTAL RETURN BOND FUND...... 17,375,098 25,284,188 8,117,336 4,987,113
LOW DURATION FUND........... 77,928,167 76,885,465 44,188,340 29,656,743
SHORT-TERM INVESTMENT
FUND...................... 4,306,944 7,112,715 138,491 9,066,542
</TABLE>

As of June 30, 1996, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:

<TABLE>
<CAPTION>
Net Appreciation Appreciated Depreciated
Fund (Depreciation) Securities Securities
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY INCOME FUND.............................. $ 34,682,882 $37,918,503 $(3,235,621)
SMALL CAP FUND.................................. 1,121,324 2,064,976 (943,652)
INTERNATIONAL FUND.............................. 16,419,100 24,406,777 (7,987,677)
BALANCED INCOME FUND............................ 3,545,902 5,358,698 (1,812,796)
TOTAL RETURN BOND FUND.......................... (589,991) 970,827 (1,560,818)
LOW DURATION FUND............................... 769,945 2,897,019 (2,127,074)
SHORT-TERM INVESTMENT FUND...................... 64,889 190,720 (125,831)
</TABLE>

33
<PAGE> 118

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996

At June 30, 1996, the cost of investments for federal income tax purposes was
$148,082,784, $14,927,526, $291,549,134, $66,440,984, $43,575,470, $186,775,596
and $18,520,274 for the Equity Income, Small Cap, International, Balanced
Income, Total Return Bond, Low Duration and Short-Term Investment Funds,
respectively.

The International, Low Duration and Short-Term Investment Funds realized, on a
tax basis, post-October losses of $58,680, $2,721 and $1,827, respectively. Such
amounts may be used to offset future capital gains.

At June 30, 1996, the Short-Term Investment Fund had accumulated net realized
capital loss carryovers of $19,570 expiring in 2003 and $63,545 expiring in
2004. To the extent the Short-Term Investment Fund realizes future net capital
gains, taxable distributions to its shareholders will be offset by any unused
capital loss carryover.

For the year ended June 30, 1996, the following percent of dividends and
distributions paid qualifies for the dividend received deduction available to
corporate stockholders: Equity Income Fund 97%, Small Cap Fund 13% and Balanced
Income Fund 29%.

NOTE 4.

SUBSEQUENT EVENT. In June 1996, the Advisor, a limited partnership, entered into
a Purchase Agreement with Merrill Lynch & Co., Inc., a Delaware corporation
("ML"), pursuant to which ML will acquire the partnership interests in the
Advisor. The purchase is subject to a number of contingencies, including
approval by the Funds' Board of Trustees (which has occurred) and shareholders
of new investment advisory agreements relating to each Fund. If the transaction
occurs, it is anticipated that the Funds will be operated in the same manner as
they are currently.

The net assets and net asset value per share of each Fund as of August 16, 1996
were as follows:

<TABLE>
<CAPTION>
Net Assets Net Asset Value
Fund (in millions) Per Share
- -------------------------------------------------------
<S> <C> <C>
Equity Income Fund...... $ 177.8 $ 18.68
Small Cap Fund.......... 16.1 20.88
International Fund...... 346.8 20.41
Balanced Fund........... 70.1 18.30
Total Return Fund....... 35.4 12.94
Low Duration Fund....... 171.2 10.12
Short-Term Investment
Fund.................. 14.0 10.17
- -------------------------------------------------------
</TABLE>

TAX STATUS OF DIVIDENDS (UNAUDITED)

During the year ended June 30, 1996, the following Funds paid capital gain
dividends (taxable as long-term capital gains) as follows:

<TABLE>
<CAPTION>
Per Share
---------
<S> <C>
EQUITY INCOME FUND.................. $0.86
SMALL CAP FUND...................... $2.03
</TABLE>

34
<PAGE> 119

Financial Highlights
- --------------------------------------------------------------------------------
EQUITY INCOME FUND

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year........... $17.24 $15.07 $15.50 $14.51 $12.53
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income................... 0.45(1) 0.49 0.46 0.44 0.40
Net realized and unrealized gain on
investments........................... 2.89 2.48 0.10 1.21 1.99
------ ------ ------ ------ ------
Total from investment operations........ 3.34 2.97 0.56 1.65 2.39
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income)............................... (0.57) (0.44) (0.46) (0.43) (0.41)
Distributions (from realized gains)..... (1.10) (0.36) (0.53) (0.23) --
------ ------ ------ ------ ------
Total Distributions..................... (1.67) (0.80) (0.99) (0.66) (0.41)
------ ------ ------ ------ ------
Net Asset Value, End of Year................. $18.91 $17.24 $15.07 $15.50 $14.51
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Total Return................................. 20.04% 20.49% 3.40% 11.67% 19.28%
Net assets, end of year (millions)........... $182.5 $127.1 $87.2 $86.7 $71.6
Ratio of expenses to average net assets:
Before expense reimbursement............ 0.98% 1.02% 1.05% 1.02% 1.02%
After expense reimbursement............. 0.98% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement............ 2.56% 3.11% 2.85% 2.97% 2.93%
After expense reimbursement............. 2.56% 3.14% 2.90% 2.99% 2.95%
Portfolio turnover rate...................... 24% 50% 36% 25% 32%
</TABLE>

(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.

See Notes to Financial Statements

35
<PAGE> 120

Financial Highlights
- --------------------------------------------------------------------------------
SMALL CAP FUND

<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year................ $21.53 $19.53 $19.88 $18.10 $17.30
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income (loss)................. 0.05(1) (0.06) (0.01) 0.27 0.09
Net realized and unrealized gain on
investments................................ 2.80 2.84 0.78 3.18 3.09
------- ------- ------- ------- -------
Total from investment operations............. 2.85 2.78 0.77 3.45 3.18
------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income)....... -- -- (0.20) (0.04) (0.13)
Distributions (from realized gains).......... (3.05) (0.78) (0.92) (1.63) (2.25)
------- ------- ------- ------- -------
Total Distributions.......................... (3.05) (0.78) (1.12) (1.67) (2.38)
------- ------- ------- ------- -------
Net Asset Value, End of Year...................... $21.33 $21.53 $19.53 $19.88 $18.10
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Total Return...................................... 14.24% 14.79% 3.77% 19.80% 19.04%
Net assets, end of year (millions)................ $16.5 $20.5 $13.1 $10.8 $8.8
Ratio of expenses to average net assets:
Before expense reimbursement................. 1.21% 1.49% 1.65% 1.40% 1.45%
After expense reimbursement.................. 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average
net assets:
Before expense reimbursement................. 0.03% (0.82)% (0.71)% 1.03% (0.06)%
After expense reimbursement.................. 0.24% (0.34)% (0.06)% 1.42% 0.40%
Portfolio turnover rate........................... 119% 81% 44% 20% 26%
</TABLE>

(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.

See Notes to Financial Statements

36
<PAGE> 121

Financial Highlights
- --------------------------------------------------------------------------------
INTERNATIONAL FUND

<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.............. $17.70 $16.79 $14.63 $13.97 $12.56
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income...................... 0.56(1) 0.28 0.26 0.23 0.22
Net realized and unrealized gain on
investments.............................. 2.51 1.52 2.19 0.74 3.09
------ ------ ------ ------ ------
Total from investment operations........... 3.07 1.80 2.45 0.97 3.31
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)..... (0.14) (0.44) (0.14) -- (0.61)
Distributions (from realized gains)........ (0.19) (0.45) (0.15) (0.31) (1.29)
------ ------ ------ ------ ------
Total Distributions........................ (0.33) (0.89) (0.29) (0.31) (1.90)
------ ------ ------ ------ ------
Net Asset Value, End of Year.................... $20.44 $17.70 $16.79 $14.63 $13.97
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Total Return.................................... 18.61% 11.08% 16.71% 7.36% 27.48%
Net assets, end of year (millions).............. $331.0 $51.5 $26.0 $6.6 $4.0
Ratio of expenses to average net assets:
Before expense reimbursement............... 1.11% 1.39% 1.61% 2.44% 4.19%
After expense reimbursement................ 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement............... 2.67% 2.45% 2.01% 1.14% 0.42%
After expense reimbursement................ 2.78% 2.83% 2.62% 2.58% 3.61%
Portfolio turnover rate......................... 12% 24% 23% 24% 88%
</TABLE>

(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.

See Notes to Financial Statements

37
<PAGE> 122

Financial Highlights
- --------------------------------------------------------------------------------
BALANCED INCOME FUND

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year........... $16.74 $15.71 $16.69 $16.35 $15.23
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income................... 0.94 0.89 0.89 0.77 0.79
Net realized and unrealized gain (loss)
on investments........................ 1.53 1.53 (0.27) 0.82 1.45
------ ------ ------ ------ ------
Total from investment operations........ 2.47 2.42 0.62 1.59 2.24
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income)............................... (0.92) (0.80) (0.94) (0.74) (0.76)
Distributions (from realized gains)..... (0.02) (0.57) (0.66) (0.51) (0.36)
Return of capital....................... -- (0.02) -- -- --
------ ------ ------ ------ ------
Total Distributions..................... (0.94) (1.39) (1.60) (1.25) (1.12)
------ ------ ------ ------ ------
Net Asset Value, End of Year................. $18.27 $16.74 $15.71 $16.69 $16.35
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Total Return................................. 15.04% 16.40% 3.60% 10.10% 15.10%
Net assets, end of year (millions)........... $70.6 $32.1 $36.0 $30.3 $16.7
Ratio of expenses to average net assets:
Before expense reimbursement............ 1.06% 1.19% 1.20% 1.15% 1.27%
After expense reimbursement............. 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement............ 5.20% 5.44% 5.04% 4.62% 4.64%
After expense reimbursement............. 5.26% 5.63% 5.24% 4.77% 4.90%
Portfolio turnover rate...................... 92% 51% 97% 155% 36%
</TABLE>

See Notes to Financial Statements

38
<PAGE> 123

Financial Highlights
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
December 6, 1994*
Year Ended through
June 30, 1996 June 30, 1995
--------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period............................. $12.94 $12.00
----------- --------
Income from Investment Operations:
Net investment income....................................... 0.84(1) 0.46
Net realized and unrealized gain on investments............. 0.06 0.94
----------- --------
Total from investment operations............................ 0.90 1.40
----------- --------
Less Distributions:
Dividends (from net investment income)...................... (0.93) (0.46)
Distributions (from realized gains)......................... (0.13) --
----------- --------
Total Distributions......................................... (1.06) (0.46)
----------- --------
Net Asset Value, End of Period................................... $12.78 $12.94
=========== ========
RATIOS/SUPPLEMENTAL DATA:
Total Return..................................................... 7.05% 11.88%
Net assets, end of period (millions)............................. $43.4 $15.3
Ratio of expenses to average net assets:
Before expense reimbursement................................ 0.98% 2.93%+
After expense reimbursement................................. 0.68% 0.80%+
Ratio of net investment income to average net assets:
Before expense reimbursement................................ 6.86% 4.92%+
After expense reimbursement................................. 7.16% 7.05%+
Portfolio turnover rate.......................................... 51% 68%
</TABLE>

* Commencement of operations.
+ Annualized.
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.

See Notes to Financial Statements

39
<PAGE> 124

Financial Highlights
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
May 18, 1993*
Year Ended June 30, through
1996 1995 1994 June 30, 1993
-------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $10.15 $ 9.93 $10.00 $ 10.00
-------- -------- -------- --------
Income from Investment Operations:
Net investment income............................... 0.68 0.75 0.77 0.05
Net realized and unrealized gain on investments..... 0.06 0.23 0.11 0.00
-------- -------- -------- --------
Total from investment operations.................... 0.74 0.98 0.88 0.05
-------- -------- -------- --------
Less Distributions:
Dividends (from net investment income).............. (0.72) (0.75) (0.77) (0.05)
Distributions (from realized gains)................. (0.05) (0.01) (0.18) (0.00)
-------- -------- -------- --------
Total Distributions................................. (0.77) (0.76) (0.95) (0.05)
-------- -------- -------- --------
Net Asset Value, End of Period........................... $10.12 $10.15 $ 9.93 $ 10.00
======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Total Return............................................. 7.47% 10.23% 9.02% 4.36%+
Net assets, end of period (millions)..................... $189.2 $123.3 $36.5 $7.6
Ratio of expenses to average net assets:
Before expense reimbursement........................ 0.60% 0.75% 1.10% 4.94%+
After expense reimbursement......................... 0.58% 0.58% 0.58% 0.58%+
Ratio of net investment income to average net assets:
Before expense reimbursement........................ 7.07% 7.43% 6.82% 1.93%+
After expense reimbursement......................... 7.09% 7.61% 7.34% 6.28%+
Portfolio turnover rate.................................. 50% 71% 254% 34%
</TABLE>

* Commencement of operations.
+ Annualized.

See Notes to Financial Statements

40
<PAGE> 125

Financial Highlights
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND

<TABLE>
<CAPTION>
May 18, 1993*
Year Ended June 30, through
1996 1995 1994 June 30, 1993
-------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $10.12 $10.21 $10.00 $ 10.00
-------- -------- -------- --------
Income from Investment Operations:
Net investment income............................... 0.66 0.66 0.53 0.03
Net realized and unrealized
gain (loss) on investments........................ 0.05 (0.09) 0.21 --
-------- -------- -------- --------
Total from investment operations.................... 0.71 0.57 0.74 0.03
-------- -------- -------- --------
Less Distributions:
Dividends (from net investment income).............. (0.66) (0.66) (0.53) (0.03)
Return of capital................................... (0.00) -- -- --
-------- -------- -------- --------
Total Distributions................................. (0.66) (0.66) (0.53) (0.03)
-------- -------- -------- --------
Net Asset Value, End of Period........................... $10.17 $10.12 $10.21 $ 10.00
======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Total Return............................................. 7.23% 5.78% 7.47% 2.30%+
Net assets, end of period (millions)..................... $18.7 $19.8 $10.5 $.003
Ratio of expenses to average net assets:
Before expense reimbursement........................ 0.88% 1.26% 2.06% 57.02%+
After expense reimbursement......................... 0.48% 0.48% 0.48% 0.48%+
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement........................ 6.15% 5.74% 4.16% (56.99)%+
After expense reimbursement......................... 6.55% 6.52% 5.74% 2.32%+
Portfolio turnover rate.................................. 60% 81% 135% 0%
</TABLE>

* Commencement of operations.
+ Annualized.

See Notes to Financial Statements

41
<PAGE> 126

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders of Hotchkis and Wiley Funds:

In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Equity Income Fund, the Small
Cap Fund, the International Fund, the Balanced Income Fund, the Total Return
Bond Fund, the Low Duration Fund and the Short-Term Investment Fund (seven of
the eight separately managed portfolios of Hotchkis and Wiley Funds, the
"Funds") at June 30, 1996, the results of each of their operations for the year
then ended, and the changes in each of their net assets and their financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.

/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Milwaukee, WI
August 16, 1996

42
<PAGE> 127

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1996

<TABLE>
<CAPTION>
COMMON STOCKS--95.8% SHARES VALUE
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
AEROSPACE--4.3%
Lockheed Martin Corporation...................................... 1,800 $ 151,200
Northrop Grumman Corporation..................................... 3,000 204,375
Rockwell International Corporation............................... 5,100 291,975
United Technologies Corporation.................................. 3,600 414,000
-----------
1,061,550
-----------
AUTO-RELATED--1.4%
Dana Corporation................................................. 11,000 341,000
-----------
AUTOS & TRUCKS--5.2%
Ford Motor Company............................................... 23,300 754,338
General Motors Corporation....................................... 10,200 534,225
-----------
1,288,563
-----------
BANKS--8.3%
BankAmerica Corporation.......................................... 3,600 272,700
The Chase Manhattan Corporation.................................. 4,784 337,870
Comerica, Inc.................................................... 8,100 361,463
First Chicago NBD Corporation.................................... 9,700 379,513
First of America Bank Corporation................................ 4,700 210,325
KeyCorp.......................................................... 5,800 224,750
NationsBank Corporation.......................................... 3,200 264,400
-----------
2,051,021
-----------
BEVERAGES--1.6%
Anheuser-Busch Companies, Inc.................................... 5,200 390,000
-----------
BUILDING & FOREST PRODUCTS--1.8%
Weyerhaeuser Company............................................. 10,600 450,500
-----------
CHEMICALS--2.0%
Dow Chemical Company............................................. 3,400 258,400
Dupont (E.I.) De Nemours & Company............................... 3,000 237,375
-----------
495,775
-----------
COAL & GAS--1.8%
Eastern Enterprises.............................................. 13,000 432,250
-----------
</TABLE>

1
<PAGE> 128

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1996

<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
DIVERSIFIED--4.9%
Hanson PLC, ADR.................................................. 22,000 $ 313,500
Ogden Corporation................................................ 11,500 208,438
Olin Corporation................................................. 2,700 240,975
Tenneco, Inc..................................................... 8,500 434,563
-----------
1,197,476
-----------
DRUGS--3.1%
American Home Products Corporation............................... 4,800 288,600
Baxter International, Inc........................................ 7,200 340,200
Merck & Company, Inc............................................. 2,000 129,250
-----------
758,050
-----------
ENGINEERING & CONSTRUCTION--1.0%
Harsco Corporation............................................... 3,700 248,825
-----------
FINANCIAL SERVICES--7.5%
Beneficial Corporation........................................... 4,800 269,400
Great Western Financial Corporation.............................. 15,300 365,287
H.F. Ahmanson & Company.......................................... 18,000 486,000
Household International, Inc..................................... 6,100 463,600
Transamerica Corporation......................................... 3,300 267,300
-----------
1,851,587
-----------
HOUSEHOLD FURNISHINGS & APPLIANCES--0.2%
Whirlpool Corporation............................................ 1,000 49,625
-----------
INSURANCE--5.3%
Aetna Life & Casualty Company.................................... 4,400 314,600
Aon Corporation.................................................. 7,000 355,250
Lincoln National Corporation..................................... 5,200 240,500
SAFECO Corporation............................................... 6,000 212,250
USLIFE Corporation............................................... 5,500 180,812
-----------
1,303,412
-----------
MACHINERY--1.6%
Deere & Company.................................................. 9,900 396,000
-----------
</TABLE>

2
<PAGE> 129

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1996

<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
METALS & MINING--3.3%
Aluminum Company of America...................................... 8,600 $ 493,425
Reynolds Metals Company.......................................... 6,200 323,175
-----------
816,600
-----------
OIL--DOMESTIC--4.2%
Ashland, Inc..................................................... 7,200 285,300
Atlantic Richfield Company....................................... 2,200 260,700
Sun Company, Inc................................................. 6,710 203,816
USX-Marathon Group, Inc.......................................... 13,900 279,737
-----------
1,029,553
-----------
OIL--INTERNATIONAL--1.0%
Chevron Corporation.............................................. 4,000 236,000
-----------
PAPER--4.5%
Georgia Pacific Corporation...................................... 3,500 248,500
International Paper Company...................................... 11,000 405,625
Union Camp Corporation........................................... 4,000 195,000
Westvaco Corporation............................................. 9,000 268,875
-----------
1,118,000
-----------
PHOTOGRAPHY & OPTICAL--1.9%
Eastman Kodak Company............................................ 6,000 466,500
-----------
POLLUTION CONTROL--1.2%
Browning-Ferris Industries, Inc.................................. 10,500 304,500
-----------
PROFESSIONAL SERVICES--0.7%
PHH Corporation.................................................. 3,200 182,400
-----------
RAILROADS--2.3%
Conrail, Inc..................................................... 4,000 265,500
Norfolk Southern Corporation..................................... 3,600 305,100
-----------
570,600
-----------
</TABLE>

3
<PAGE> 130

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1996

<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
RETAIL--GENERAL--7.2%
J.C. Penney Company, Inc......................................... 9,800 $ 514,500
Kmart Corporation................................................ 16,200 200,475
May Department Stores Company.................................... 11,800 516,250
Sears, Roebuck & Company......................................... 7,400 359,825
Woolworth Corporation(+)......................................... 8,300 186,750
-----------
1,777,800
-----------
SAVINGS & LOANS--1.1%
Federal National Mortgage Association............................ 8,000 268,000
-----------
STEEL--1.4%
USX-U.S. Steel Group, Inc........................................ 12,000 340,500
-----------
TELECOMMUNICATIONS--0.9%
Harris Corporation............................................... 3,500 213,500
-----------
TOBACCO--4.3%
American Brands, Inc............................................. 9,200 417,450
Philip Morris Companies, Inc..................................... 6,300 655,200
-----------
1,072,650
-----------
TRUCKING--0.9%
Ryder System, Inc................................................ 8,000 225,000
-----------
UTILITY--ELECTRIC--6.6%
CMS Energy Corporation........................................... 12,000 370,500
DTE Energy Company............................................... 4,000 123,500
Edison International............................................. 6,000 105,750
Entergy Corporation.............................................. 4,000 113,500
Illinova Corporation............................................. 6,500 186,875
New York State Electric & Gas Corporation........................ 5,300 129,187
Peco Energy Company.............................................. 11,300 293,800
Public Service Enterprises Group, Inc............................ 11,000 301,125
-----------
1,624,237
-----------
UTILITY--GAS PIPELINE--0.9%
British Gas PLC, ADR............................................. 2,089 223,262
-----------
</TABLE>

4
<PAGE> 131

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1996

<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
UTILITY--TELEPHONE--3.4%
NYNEX Corporation................................................ 4,900 $ 232,750
Pacific Telesis Group............................................ 11,000 371,250
US West, Inc..................................................... 7,000 223,125
-----------
827,125
-----------
Total common stocks (cost $18,829,185)........................... 23,611,861
-----------
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL
SHORT-TERM INVESTMENTS--4.2% AMOUNT
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES#--4.2%
Pitney Bowes, Inc., 5.1441%.................................... $484,847 484,847
Southwestern Bell, Inc., 5.1239%............................... 500,000 500,000
Warner Lambert, Inc., 5.115%................................... 50,000 50,000
-----------
Total variable rate demand notes (cost $1,034,847)............. 1,034,847
-----------
Total investments--100.0% (cost $19,864,032)........................ 24,646,708
Liabilities in excess of other assets--0.0%......................... 2,321
-----------
TOTAL NET ASSETS--100.0%....................................... $24,649,029
==========
</TABLE>

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

<TABLE>
<C> <S>
# Variable rate demand notes are considered short-term obligations and are payable on
demand. Interest rate changes periodically on specified dates. The rate listed is as of
June 30, 1996.
(+) Non-income producing security.
ADR --American Depository Receipts
</TABLE>

5
<PAGE> 132

HOTCHKIS
AND WILEY FUNDS Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996

<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $19,864,032)................................... $24,646,708
Cash....................................................................... 13,678
Dividends and interest receivable.......................................... 56,495
Receivable for investments sold............................................ 64,494
Receivable from Advisor.................................................... 11,458
Other receivables.......................................................... 185
-----------
Total assets.......................................................... 24,793,018
-----------
LIABILITIES:
Payable for investments purchased.......................................... 121,219
Accrued expenses and other liabilities..................................... 22,770
-----------
Total liabilities.......................................................... 143,989
-----------
Net assets............................................................ $24,649,029
===========
NET ASSETS CONSIST OF:
Paid in capital............................................................ $19,415,596
Undistributed net investment income........................................ 11,105
Undistributed net realized gains on investments............................ 439,652
Net unrealized appreciation on investments................................. 4,782,676
-----------
Net assets............................................................ $24,649,029
===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value authorized)........... 1,823,836
Net asset value per share (offering and redemption price).................. $ 13.51
===========
</TABLE>

See Notes to the Financial Statements.

6
<PAGE> 133

HOTCHKIS
AND WILEY FUNDS Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year ended June 30, 1996

<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends *................................................................. $ 723,958
Interest.................................................................... 36,865
---------
Total income........................................................... 760,823
---------
EXPENSES:
Advisory fee................................................................ 115,773
Legal and auditing fees..................................................... 14,865
Custodian fees and expenses................................................. 7,291
Transfer agent fees and expenses............................................ 12,332
Administration fee.......................................................... 2,424
Trustees' fees and expenses................................................. 6,275
Reports to shareholders..................................................... 100
Registration fees........................................................... 3,867
Other expenses.............................................................. 1,103
---------
Total expenses......................................................... 164,030
Less: expense reimbursement................................................. (48,257)
---------
Net expenses........................................................... 115,773
---------
NET INVESTMENT INCOME............................................................ 645,050
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................................ 809,778
Net change in unrealized appreciation on investments........................ 2,827,246
---------
Net gain on investments................................................ 3,637,024
---------
NET INCREASE IN NET ASSETS FROM OPERATIONS....................................... $4,282,074
=========
- ---------------
* Net of Foreign Taxes withheld.................................................. $ 3,449
=========
</TABLE>

See Notes to the Financial Statements

7
<PAGE> 134

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................... $ 645,050 $ 515,636
Net realized gain on securities transactions............. 809,778 53,938
Net change in unrealized appreciation of securities...... 2,827,246 2,320,505
----------- -----------
Net increase in net assets resulting from
operations........................................ 4,282,074 2,890,079
----------- -----------
NET EQUALIZATION CREDITS...................................... 0 48,905
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................... (688,368) (458,833)
Net realized gain on securities transactions............. (378,446) (37,220)
----------- -----------
Total dividends and distributions................... (1,066,814) (496,053)
----------- -----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold............................ 3,000,002 3,960,772
Shares issued in connection with payment of dividends.... 1,066,814 496,053
Cost of shares redeemed.................................. (22,500) (59,677)
----------- -----------
Net increase in net assets from Fund share
transactions...................................... 4,044,316 4,397,148
----------- -----------
Total Increase in Net Assets.................................. 7,259,576 6,840,079
NET ASSETS:
Beginning of year........................................ 17,389,453 10,549,374
----------- -----------
End of year*............................................. $ 24,649,029 $ 17,389,453
=========== ===========
*Including undistributed net investment income of:............ $ 11,105 $ 54,604
=========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares sold.............................................. 234,558 400,117
Shares issued in connection with payment of dividends.... 83,286 46,972
Shares redeemed.......................................... (2,403) (5,704)
----------- -----------
Net increase........................................ 315,441 441,385
=========== ===========
</TABLE>

See Notes to the Financial Statements.

8
<PAGE> 135

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996

NOTE 1. ACCOUNTING POLICIES. The Equity Fund for Insurance Companies (the
"Fund") is a series of Hotchkis and Wiley Funds (the "Trust"), an
open-end, management investment company organized as a Massachusetts
business trust on August 22, 1984 and registered under the Investment
Company Act of 1940. The Fund commenced operations on January 29,
1993. In addition to the Fund, the Trust also offers the Balanced
Income Fund, the Small Cap Fund, the Equity Income Fund, the
International Fund, the Low Duration Fund, the Short-Term Investment
Fund, and the Total Return Bond Fund. The assets of each series are
invested in separate, independently managed portfolios. The following
is a summary of significant accounting policies followed by the Fund
in the preparation of the financial statements.

SECURITY VALUATION: Portfolio securities that are listed on a
securities exchange (whether domestic or foreign) or the NASDAQ
National Market System ("System") are valued at the last sale price
as of 4:00 p.m., Eastern time, or, in the absence of recorded sales,
at the average of readily available closing bid and asked prices on
such exchange or such System. Unlisted securities that are not
included in such System are valued at the average of the quoted bid
and asked price in the over-the-counter market. Securities for which
market quotations are not readily available are valued at fair value
as determined in good faith by Hotchkis and Wiley (the "Advisor")
under procedures established by and under the general supervision and
responsibility of the Board of Trustees. Short-term investments which
mature in less than 60 days are valued at amortized cost (unless the
Board of Trustees determines that this method does not represent fair
value), if their original maturity was 60 days or less, or by
amortizing the values as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days. Investments quoted in
foreign currency are valued daily in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the time of valuation.

REPURCHASE AGREEMENTS: The Fund may enter into repurchase
agreements with banks or broker-dealers that meet credit guidelines
established by the Board of Trustees. In connection with transactions
in repurchase agreements, it is the Fund's policy that the custodian
take possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction,
including accrued interest. If the seller defaults, and the value of
the collateral declines, realization of the collateral by the Fund
may be delayed or limited.

FEDERAL INCOME TAXES: It is the Fund's policy to meet the
requirements of the Internal Revenue Code applicable to regulated
investment companies and intends to distribute net investment company
taxable income and net capital gains to its shareholders. Therefore,
no federal income tax provision is required.

9
<PAGE> 136

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1996

EQUALIZATION: Effective July 1, 1995, the Fund discontinued the
practice of equalization. The Fund followed the accounting practice
known as equalization, by which a portion of the proceeds from sales
and costs of redemptions of capital shares, equivalent on a per share
basis to the amount of undistributed net investment income on the
date of the transaction, is credited or charged to undistributed net
investment income. As a result, undistributed net investment income
per share was unaffected by sales or redemptions of the Fund's
shares.

USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

EXPENSE ALLOCATION: Common expenses incurred by the Trust are
allocated among the funds based upon (i) relative average net assets,
(ii) as incurred on a specific identification basis, or (iii) evenly
among the Funds, depending on the nature of the expenditure.

OTHER: Security and shareholder transactions are recorded no
later than the first business day after the trade date. Realized
gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and
distributions to shareholders are recorded on the ex-dividend date.
Interest income is recognized on the accrual basis. Generally
accepted accounting principles require that permanent financial
reporting and tax differences relating to shareholder distributions
be reclassified to paid in capital.

NOTE 2. INVESTMENT ADVISORY AGREEMENT. The Fund has an investment advisory
agreement with the Advisor. The Advisor receives a fee, computed
daily and payable monthly, at an annual rate of 0.60% of the first
$10 million of the Fund's average net assets, and 0.50% of average
net assets in excess of $10 million.

The Advisor provides continuous supervision of the investment
portfolio and pays all of the operating expenses relating to the Fund
other than the Advisory fee. For the year ended June 30, 1996, the
Advisor paid $48,257 of operating expenses on behalf of the Fund.

NOTE 3. PURCHASES AND SALES OF SECURITIES. Purchases and sales of investment
securities, other than short-term investments, for the year ended
June 30, 1996 were $7,265,980 and $4,250,059, respectively.

10
<PAGE> 137

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1996

At June 30, 1996 (for financial reporting and federal income tax
purposes), net unrealized appreciation aggregated $4,782,676, of
which $5,168,773 related to appreciated securities and $(386,097)
related to depreciated securities.

NOTE 4. SUBSEQUENT EVENT. In June 1996, the Advisor, a limited partnership,
entered into a Purchase Agreement with Merrill Lynch & Co., Inc., a
Delaware corporation ("ML"), pursuant to which ML will acquire the
partnership interests in the Advisor. The purchase is subject to a
number of contingencies, including approval by the Funds' Board of
Trustees (which has occurred) and shareholders of a new investment
advisory agreement relating to the Fund. If the transaction occurs,
it is anticipated that the Fund will be operated in the same manner
as it is currently.

11
<PAGE> 138

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
JANUARY 29, 1993+
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 11.53 $ 9.89 $ 10.31 $10.00
------------- ------------- ------------- -------
Income from Investment Operations:
Net investment income............. 0.34 0.41 0.40 0.16
Net realized and unrealized gain
(loss) on investments........... 2.26 1.59 (0.24) 0.30
------------- ------------- ------------- -------
Total from investment
operations...................... 2.60 2.00 0.16 0.46
------------- ------------- ------------- -------
Less Distributions:
Dividends (from net investment
income)......................... (0.40) (0.34) (0.38) (0.15)
Distributions (from capital
gains).......................... (0.22) (0.02) (0.20) (0.00)
------------- ------------- ------------- -------
Total Distributions............... (0.62) (0.36) (0.58) (0.15)
------------- ------------- ------------- -------
Net Asset Value, End of Period......... $ 13.51 $ 11.53 $ 9.89 $10.31
========== ========== ========== ==============
RATIOS/SUPPLEMENTAL DATA:
Total Return........................... 22.93% 20.62% 1.38% 11.45%#
Net assets, end of period (millions)... $24.6 $17.4 $10.5 $7.1
Ratio of expenses to average net
assets:
Before expense reimbursement...... 0.76% 1.05% 1.20% 1.45%#
After expense reimbursement....... 0.54% 0.58% 0.60% 0.60%#
Ratio of net investment income to
average net assets:
Before expense reimbursement...... 2.78% 3.58% 3.32% 2.81%#
After expense reimbursement....... 3.00% 4.03% 3.91% 3.66%#
Portfolio turnover..................... 21% 29% 26% 2%
</TABLE>

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

+ Commencement of operations.

# Annualized.

See Notes to Financial Statements.

12
<PAGE> 139

HOTCHKIS
AND WILEY FUNDS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders of the Equity Fund for Insurance
Companies:

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Equity Fund for Insurance
Companies (one of the eight separately managed portfolios of Hotchkis and Wiley
Funds, the "Fund") at June 30, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the three years in
the period then ended and for the period from January 29, 1993 (commencement of
operations) through June 30, 1993, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.

/s/ PRICE WATERHOUSE LLP
- ------------------------

PRICE WATERHOUSE LLP
Milwaukee, WI
August 16, 1996
<PAGE> 140
PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements:

The following audited financial statements are included in the
Statement of Additional Information constituting Part B of this Registration
Statement:

Equity Fund for Insurance Companies Series

Portfolio of Investments, June 30, 1996
Statement of Assets and Liabilities, June 30, 1996
Statement of Operations, June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1996
and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants

Equity Income Series
Portfolio of Investments, June 30, 1996
Statement of Assets and Liabilities, June 30, 1996
Statement of Operations, June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1996
and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants

Balanced Income Series
Portfolio of Investments, June 30, 1996
Statement of Assets and Liabilities, June 30, 1996
Statement of Operations, June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1996
and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants

Small Cap Series
Portfolio of Investments, June 30, 1996
Statement of Assets and Liabilities, June 30, 1996
Statement of Operations, June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1996
and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants

International Series
Portfolio of Investments, June 30, 1996
Statement of Assets and Liabilities, June 30, 1996
Statement of Operations, June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1996
and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants

C-1
<PAGE> 141
Low Duration Series
Portfolio of Investments, June 30, 1996
Statement of Assets and Liabilities, June 30, 1996
Statement of Operations, June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1996
and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants

Short-Term Investment Series
Portfolio of Investments, June 30, 1996
Statement of Assets and Liabilities, June 30, 1996
Statement of Operations, June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1996
and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants

Total Return Bond Series
Portfolio of Investments, June 30, 1996
Statement of Assets and Liabilities, June 30, 1996
Statement of Operations, June 30, 1996
Statement of Changes in Net Assets, year ended June 30, 1996
and December 6, 1994 through June 30, 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants

The following financial statements are included in the Prospectuses
constituting Part A of this Registration Statement:

Financial Highlights

(b) Exhibits:

(1) Declaration of Trust1
(a) Supplemental Declaration of Trust1
(b) Supplemental Declaration of Trust9
(c) Supplemental Declaration of Trust9

(d) Supplemental Declaration of Trust*

(2) By-Laws1
(3) Not applicable
(4) Specimen stock certificate2
(5) (a) Investment Advisory Agreement relating to the
Small Cap and Balanced Income Funds1
(b) Investment Advisory Agreement relating to the
Equity Income Fund3
(c) Amended and Restated Investment Advisory
Agreement relating to the International Fund6
(d) Investment Advisory Agreement relating to the
Equity Fund for Insurance Companies8

(e) Amended and Restated Investment Advisory
Agreement relating to the Low Duration Fund
and the Short-Term Investment Fund10
(f) Amended and Restated Investment Advisory
Agreement relating to the Total Return Bond
Fund10

(6) Agreement with First Fund Distributors, Inc.6
(7) Not applicable
(8) (a) Custodian Agreement with First Wisconsin Trust
Company5

C-2
<PAGE> 142
(b) Sub-Custodian Agreement between First Wisconsin
Trust Company and Chase Manhattan Bank, N.A.7

(9) Fund Administration Servicing Agreement10

(10) Not applicable
(11) Consents of Price Waterhouse LLP*
(12) Not applicable
(13) Investment letter2
(14) Individual Retirement Account application4
(15) Not applicable
(16) Performance calculation7
(18) Not applicable

(27) Financial Data Schedules10

(27.1) Financial Data Schedule Balanced Income Fund
(27.2) Financial Data Schedule Small Cap Fund
(27.3) Financial Data Schedule Equity Income Fund
(27.4) Financial Data Schedule International Fund
(27.5) Financial Data Schedule Equity Fund For
Insurance Companies
(27.6) Financial Data Schedule Low Duration Fund
(27.7) Financial Data Schedule Short-Term Investment Fund
(27.8) Financial Data Schedule Total Return Bond Fund

1Incorporated herein by reference and previously filed as an exhibit
to the Registration Statement on Form N-1A (File No. 2-96219), filed on
March 5, 1985.

2Incorporated herein by reference and previously filed as an exhibit
to Pre-effective Amendment No. 2 to the Registration Statement on Form N-1A.

3Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 3 to the Registration Statement on Form N-1A,
filed on March 30, 1987.

4Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 7 to the Registration Statement on Form N-1A,
filed on July 20, 1990.

5Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 8 to the Registration Statement on Form N-1A,
filed on September 18, 1990.

6Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 9 to the Registration Statement on Form N-1A,
filed on May 22, 1991.

7Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 11 to the Registration Statement on Form N-1A,
filed on September 23, 1992.

8Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 12 to the Registration Statement on Form N-1A,
filed on October 8, 1992.

9Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 17 to the Registration Statement on Form N-1A,
filed on September 29, 1994.

10Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 21 to the Registration Statement on Form N-1A
filed via EDGAR on October 3, 1996.

- --------------------------
* Filed herewith.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

See "General Information About the Trust" in the Statement of
Additional Information.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

At September 13, 1996, there were 147 record holders of shares of
beneficial interest of the Small Cap Series of the Registrant, 370 record
holders of shares of beneficial interest of the Balanced Income Series, 518
record holders of shares of beneficial interest of the Equity Income Series,
6,605 record holders of shares of beneficial interest of the International
Series, 1 record holder of shares of beneficial interest of the Equity Fund
for Insurance Companies Series, 1,021 record holders of shares of beneficial
interest of the Low Duration Series, 90 record holders of shares of beneficial
interest of the Short-Term Investment Series and 76 record holders of shares of
beneficial interest of the Total Return Bond Series.

C-3
<PAGE> 143

ITEM 27. INDEMNIFICATION.

Section 12 of Article SEVENTH of Registrant's Declaration of Trust,
states as follows:

(c)(1) As used in this paragraph the following terms shall
have the meanings set forth below:

(i) the term "indemnitee" shall mean any present
or former Trustee, officer or employer of the Trust, any
present or former Trustee or officer of another trust or
corporation whose securities are or were owned by the Trust of
which the Trust is or was a creditor and who served or serves
in such capacity at the request of the Trust, any present or
former investment adviser, sub-adviser or principal
underwriter of the Trust and the heirs, executors,
administrators, successors and assigns of any of the
foregoing; however, whenever conduct by an indemnitee is
referred to, the conduct shall be that of the original
indemnitee rather than that of the heir, executor,
administrator, successor or assignee;

(ii) the term "covered proceeding" shall mean any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, to
which an indemnitee is or was a party or is threatened to be
made a party by reason of the fact or facts under which he or
it is an indemnitee as defined above;

(iii) the term "disabling conduct" shall mean
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office
in question;

(iv) the term "covered expenses" shall mean
expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by
an indemnitee in connection with a covered proceeding; and

(v) the term "adjudication of liability" shall
mean, as to any covered proceeding and as to any indemnitee,
an adverse determination as to the indemnitee whether by
judgment order, settlement, conviction or upon a plea of nolo
contendere or its equivalent.

(d) The Trust shall not indemnify any indemnitee for any
covered expenses in any covered proceeding if there has been an
adjudication or liability against such indemnitee expressly based on a
finding of disabling conduct.

(e) Except as set forth in (d) above, the Trust shall
indemnify an indemnitee for covered expenses in any covered
proceeding, whether or not there is an adjudication of liability as to
such indemnitee, if a determination has been made that the indemnitee
was not liable by reason of disability conduct by (i) a final decision
of the court or other body before which covered proceeding was
brought; or (ii) in the absence of such decision, a reasonable
determination, based on a review of the facts, by either (a) the vote
of a majority of a quorum of Trustees who are neither "interested
persons," as defined in the 1940 Act nor parties to the covered
proceeding or (b) an independent legal counsel in a written opinion;
provided that such Trustees or counsel, in reaching such
determination, may but need not presume the absence of disabling
conduct on the part of the indemnitee by reason of the manner in which
the covered proceeding was terminated.

(f) Covered expenses incurred by an indemnitee in
connection with a covered proceeding shall be advanced by the Trust to
an indemnitee prior to the final disposition of a covered proceeding
upon the request of the indemnitee for such advance and the
undertaking by or on behalf of the indemnitee to repay the advance
unless it is ultimately determined that the indemnitee is entitled to
indemnification thereunder, but only if one or more of the following
is the case: (i) the indemnitee shall provide a security for such
undertaking; (ii) the Trust shall be insured against losses arising
out of any lawful advances; or (iii) there shall have been a
determination, based on a review of the readily available facts (as,
opposed to a full trial-type inquiry) that there is a reason to
believe that the indemnitee ultimately will be found entitled to
indemnification by either independent legal counsel in a written
opinion or by the vote of a majority of a

C-4
<PAGE> 144
quorum of trustees who are neither "interested persons" as defined in
the 1940 Act nor parties to the covered proceeding.

(g) Nothing herein shall be deemed to affect the right of
the Trust and/or any indemnitee to acquire and pay for any insurance
covering any or all indemnitees to the extent permitted by the 1940
Act or to affect any other indemnification rights to which any
indemnitee may be entitled to the extent permitted by the 1940 Act.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a trustee, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Hotchkis and Wiley is the investment advisor of the Registrant's eight
series of shares. For information as to the business, profession, vocation or
employment of a substantial nature of Hotchkis and Wiley and its managing
directors, reference is made to Part B of this Registration Statement and to
the Form ADV filed under the Investment Advisers Act of 1940 by Hotchkis and
Wiley (File No. 801-15345).

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) The Registrant's principal underwriter, First Fund
Distributors, Inc., also acts as principal underwriter for the following
investment companies:

Brandes Investment Funds
Guinness Flight Investment Funds
Jurika & Voyles Fund Group
PIC Investment Trust
Professionally Managed Portfolios:
Academy Value Fund
Avondale Total Return Fund
Boston Managed Growth Fund
Crescent Fund
Harris, Bretall, Sullivan & Smith
Growth Equity Fund
Kayne Anderson Rising Dividends Fund
Leonetti Balanced Fund
Lighthouse Growth Fund
Osterweis Fund
Perkins Opportunity Fund
Pro-Conscience Women's Equity Mutual Fund
Pzena Focused Value Fund
Titan Financial Services Fund
Trent Equity Fund
US Global Leadeers Growth Fund
Rainier Investment Management Mutual Funds
RNC Liquid Assets Fund, Inc.

C-5
<PAGE> 145
(b) The following information is furnished with respect to the
officers and directors of First Fund Distributors, Inc.:

Position and Offices Position and
Name and Principal with Principal Offices with
Business Address Underwriter Registrant
---------------- ----------- ----------
Robert H. Wadsworth President & None
4455 E. Camelback Road Treasurer
Suite 261E
Phoenix, Arizona 85018
Steven J. Paggioli Vice President & Assistant Secretary
479 West 22nd Street Secretary
New York, New York 10011
Eric Banhazl Vice President None
20025 East Financial Way
Glendora, California 91741

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of Registrant or
Registrant's investment adviser, 800 West 6th Street, Fifth Floor, Los Angeles,
California 90017, Registrant's custodian and administrator, Firstar Trust
Company, 615 East Michigan Street, Milwaukee, Wisconsin 53202, or Registrant's
sub-custodian, The Chase Manhattan Bank, N.A., Four Chase Metro Tech Center,
Brooklyn, New York 11245.

ITEM 31. MANAGEMENT SERVICES.

Not applicable.

ITEM 32. UNDERTAKINGS.

The Registrant hereby undertakes to furnish to each person to whom a
Prospectus is delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.

The Registrant hereby undertakes to file a post-effective amendment,
using financial statements which need not be certified, within four to six
months from the effective date of Post-Effective Amendment No. 22 to
Registrant's Registration Statement.

C-6
<PAGE> 146
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles and State of California
on the 18th day of October, 1996.

HOTCHKIS AND WILEY FUNDS

By: /s/ NANCY D. CELICK
-------------------------------
Nancy D. Celick
President

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

Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ NANCY D. CELICK Principal Executive Officer October 18, 1996
- ----------------------------------------
Nancy D. Celick

/s/ GRACIE FERMELIA Principal Financial and Accounting October 18, 1996
- ---------------------------------------- Officer
Gracie Fermelia

/s/ ROBERT L. BURCH III Trustee October 18, 1996
- ----------------------------------------
Robert L. Burch III

/s/ JOHN GAVIN Trustee October 18, 1996
- ----------------------------------------
John Gavin

/s/ JOHN F. HOTCHKIS Trustee October 18, 1996
- ----------------------------------------
John F. Hotchkis

/s/ ROBERT B. HUTCHINSON Trustee October 18, 1996
- ----------------------------------------
Robert B. Hutchinson

/s/ MERLE T. WELSHANS Trustee October 18, 1996
- ----------------------------------------
Merle T. Welshans

Trustee
- ----------------------------------------
Joe Grills

Trustee
- ----------------------------------------
Michael L. Quinn

Trustee
- ----------------------------------------
Richard R. West

</TABLE>

<PAGE> 147
HOTCHKIS AND WILEY FUNDS

EXHIBIT INDEX

Exhibit
Number Description Page
- ------- ---------- ----

(1) Declaration of Trust1
(a) Supplemental Declaration of Trust1
(b) Supplemental Declaration of Trust9
(c) Supplemental Declaration of Trust9

(d) Supplemental Declaration of Trust*

(2) By-Laws1

(3) Not applicable

(4) Specimen stock certificate2

(5) (a) Investment Advisory Agreement relating to the Small
Cap and Balanced Income Funds1
(b) Investment Advisory Agreement relating to the Equity
Income Fund3
(c) Amended and Restated Investment Advisory Agreement
relating to the International Fund6
(d) Investment Advisory Agreement relating to the Equity
Fund for Insurance Companies8

(e) Amended and Restated Investment Advisory Agreement
relating to the Low Duration Fund and the Short-Term
Investment Fund10
(f) Amended and Restated Investment Advisory Agreement
relating to the Total Return Bond Fund10

(6) Agreement with First Fund Distributors, Inc.6

(7) Not applicable

(8) (a) Custodian Agreement with First Wisconsin Trust
Company5
(b) Sub-Custodian Agreement between First Wisconsin Trust
Company and Chase Manhattan Bank, N.A.7

(9) Fund Administration Servicing Agreement10

(10) Not applicable

(11) Consents of Price Waterhouse LLP*
<PAGE> 148
Exhibit
Number Description Page
- ------- ----------- ----

(12) Not applicable

(13) Investment letter2

(14) Individual Retirement Account application4

(15) Not applicable

(16) Performance calculation7
(18) Not applicable

(27) Financial Data Schedules10

(27.1) Financial Data Schedule Balanced Income Fund
(27.2) Financial Data Schedule Small Cap Fund
(27.3) Financial Data Schedule Equity Income Fund
(27.4) Financial Data Schedule International Fund
(27.5) Financial Data Schedule Equity Fund For Insurance Companies
(27.6) Financial Data Schedule Low Duration Fund
(27.7) Financial Data Schedule Short-Term Investment Fund
(27.8) Financial Data Schedule Total Return Bond Fund