HOTCHKIS & WILEY FUNDS, 485APOS, 1999-01-29

HOTCHKIS & WILEY FUNDS
485APOS, 1999-01-29

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<PAGE> 1
As filed with the Securities and Registration No. 2-96219

Exchange Commission on January 29, 1999. 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. 27 [x]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY

ACT OF 1940 [ ]

Amendment No. 29 [x]

(Check appropriate box or boxes)

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

(Exact name of registrant as specified in charter)

725 S. Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code (213) 430-1000
Gracie Fermelia
725 S. Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(Name and address of Agent for Service)
with a copy to:
Paul H. Dykstra, Esq.
Gardner, Carton & Douglas
321 North Clark Street
Chicago, IL 60610-4795

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)
[X] on April 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:

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

================================================================================
Title of Securities Being Registered..............Shares of Beneficial Interest,
no par value

<PAGE> 2

PROSPECTUS

APRIL 1, 1999

[HOTCHKIS AND WILEY FUNDS LOGO]

INVESTOR CLASS SHARES

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

EQUITY INCOME FUND

Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests primarily in U.S. stocks.

MID-CAP FUND

Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests primarily in stocks of U.S. companies with market
capitalizations of less than $5 billion.

SMALL CAP FUND

Seeks capital appreciation. The Fund invests primarily in stocks of U.S.
companies with market capitalizations of less than $2 billion.

INTERNATIONAL FUND

Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.

GLOBAL EQUITY FUND

Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in U.S. and international stocks.

BALANCED FUND

Seeks to preserve capital while producing a high total return. The Fund's assets
are allocated between stocks and bonds.

TOTAL RETURN BOND FUND

Seeks to maximize long-term total return. The Fund invests in bonds of varying
maturities with a portfolio duration of two to eight years.

LOW DURATION FUND

Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in bonds of varying maturities with a portfolio duration of one to
three years.

SHORT-TERM

INVESTMENT FUND

Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in bonds of varying maturities with a portfolio duration which will
generally not exceed one year.

The Securities and Exchange Commission has not approved or disapproved these
securities or the accuracy of this Prospectus. It is a criminal offense to state
otherwise.

- --------------------------------------------------------------------------------
<PAGE> 3

TABLE OF CONTENTS

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

<TABLE>
<S> <C>
KEY FACTS.............................................. 3
FEES AND EXPENSES...................................... 14
INVESTMENT OBJECTIVES AND POLICIES..................... 15
INVESTMENT RISKS....................................... 20
THE ADVISOR AND PORTFOLIO MANAGERS..................... 26
HOW TO BUY SHARES...................................... 28
HOW TO REDEEM SHARES................................... 29
HOW TO EXCHANGE SHARES................................. 31
DIVIDENDS AND TAXES.................................... 32
FINANCIAL HIGHLIGHTS................................... 33
INFORMATION ABOUT THE FUNDS........................back cover
</TABLE>

[HOTCHKIS AND WILEY FUNDS LOGO]

IMPORTANT TELEPHONE NUMBER

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

CLIENT SERVICES AND SHAREHOLDER INQUIRIES 800-236-4479

<PAGE> 4

KEY FACTS

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

INVESTMENT OBJECTIVES AND MAIN STRATEGIES

This section highlights important information about each Fund. Use this summary
to compare the Funds to other mutual funds. More detailed information follows
the summary.

STOCK FUNDS

<TABLE>
<CAPTION>
EQUITY INCOME FUND MID-CAP FUND SMALL CAP FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OBJECTIVE - current income - current income - capital appreciation
- long-term growth of - long-term growth of
income income
- growth of capital - growth of capital

MAIN INVESTMENTS - stocks of large U.S. - stocks of U.S. - stocks of U.S.
companies companies with market companies with market
capitalizations of capitalizations of
less than $5 billion less than $2 billion
</TABLE>

<TABLE>
<CAPTION>
INTERNATIONAL FUND GLOBAL EQUITY FUND BALANCED FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OBJECTIVE - current income - current income - preserve capital
- long-term growth of - long-term growth of while producing a high
income income total return
- growth of capital - growth of capital

MAIN INVESTMENTS - international stocks - U.S. and - U.S. stocks and
international stocks investment grade
bonds
</TABLE>

3
<PAGE> 5

BOND FUNDS

Each Bond Fund invests in a diversified portfolio of bonds of different
maturities. They differ in their objectives, the credit quality of their
portfolios and their volatility, as measured by their "duration." Duration is a
measure of how much the price of a bond would change compared to a change in
market interest rate; the longer the duration, the more a bond's price would go
down if interest rates rose.

<TABLE>
<CAPTION>
SHORT-TERM
TOTAL RETURN BOND FUND LOW DURATION FUND INVESTMENT FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OBJECTIVE - maximize long-term - maximize total return - maximize total return
total
return - preserve capital - preserve capital

CREDIT QUALITY - at least 85% - at least 70% in A - at least 70% in A
investment grade; up to rated or better; up to rated or better; up to
15% rated below 30% rated BBB/Baa; up 30% rated BBB/Baa; up
investment grade, to 10% rated below to 10% rated below
none below B investment grade, investment grade,
none below B none below B

DURATION 2-8 years 1-3 years 1 year or less
MOST VOLATILE [3 arrows to rt.] LEAST VOLATILE
</TABLE>

MAIN RISKS

As with any mutual fund, the value of a Fund's investments, and therefore the
value of Fund shares, may go up or down. For the Stock Funds, these changes may
occur because the stock market is rising or falling. At other times, there are
specific factors that may affect the value of a particular investment. For the
Bond Funds, these changes may occur in response to interest changes or other
factors that may affect a particular issuer or obligation. Generally, when
interest rates go up, the value of bonds goes down. The value of the Bond Funds'
shares also may be affected by market conditions and economic or political
developments. If the value of the Funds' investments goes down, you may lose
money.

Funds that invest in foreign securities have additional risks. For example, the
securities may go up or down in value depending on foreign exchange rates,
foreign political and economic developments and U.S. and foreign laws relating
to foreign investment. Foreign securities may also be less liquid, more volatile
and harder to value than U.S. securities. These risks are heightened when the
issuer of the securities is a country or is in a country with an emerging
capital market.

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

THE FUNDS' PERFORMANCE

A number of factors -- including risk -- can affect how each Fund performs. The
charts below show how each Fund has performed for each calendar year since it
began and how returns vary from year to year. They do not reflect the expense of
sub-transfer agency fees that began to be paid by the Funds on March 1, 1999.
How a Fund has performed in the past is not necessarily an indication of how the
Fund will perform in the future.

4
<PAGE> 6

EQUITY INCOME FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1989 23.67%
1990 -18.06%
1991 34.62%
1992 13.95%
1993 15.78%
1994 -3.49%
1995 34.43%
1996 17.39%
1997 31.16%
1998 4.34%
</TABLE>

Best Quarter: 17.70% (1st Quarter of 1991).

Worst Quarter: -19.94% (3rd Quarter of 1990).

<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10 YEARS 6/24/87
- ------------------------------------------------------------------------------------------------------------------
Equity Income Fund 4.34% 15.82% 14.13% 12.26%
- ------------------------------------------------------------------------------------------------------------------
S&P 500 Index 28.76% 24.15% 19.22% 15.92%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

This chart compares the Equity Income Fund's performance with the returns of the
Standard & Poor's Composite Index of 500 Stocks, a capital weighted, unmanaged
index representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange.

5
<PAGE> 7

MID-CAP FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1997 32.44%
1998 -10.26%
</TABLE>

Best Quarter: 13.84% (2nd Quarter of 1997).

Worst Quarter: -17.56% (3rd Quarter of 1998).

<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 1/2/97
- ------------------------------------------------------------------------------------------
Mid-Cap Fund -10.26% 9.02%
- ------------------------------------------------------------------------------------------
Russell Mid-Cap Index 10.10% 19.18%
- ------------------------------------------------------------------------------------------
</TABLE>

This chart compares the Mid-Cap Fund's performance with the returns of the
Russell Mid-Cap Index, an unmanaged index, measures the performance of the 800
smallest companies in the Russell 1000 Index, which represents approximately 55%
of the total market capitalization of the Russell 1000 Index.

6
<PAGE> 8

SMALL CAP FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1989 20.55%
1990 -9.01%
1991 48.24%
1992 13.73%
1993 12.59%
1994 1.12%
1995 18.43%
1996 14.26%
1997 39.52%
1998 -15.56%
</TABLE>

Best Quarter: 27.49% (1st Quarter of 1987).

Worst Quarter: -27.51% (3rd Quarter of 1990).

<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10 YEARS 9/20/85
- ------------------------------------------------------------------------------------------------------------------
Small Cap Fund -15.56% 10.02% 12.87% 11.98%
- ------------------------------------------------------------------------------------------------------------------
Russell 2000 Index -2.55% 11.86% 12.92% 12.27%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

This chart compares the Small Cap Fund's performance with the returns of the
Russell 2000 Index, a stock market index comprised of the 2,000 smallest U.S.
domiciled publicly-traded common stocks that are included in the Russell 3000
Index.

7
<PAGE> 9

INTERNATIONAL FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1991 20.35%
1992 -2.66%
1993 45.76%
1994 -2.93%
1995 19.89%
1996 18.29%
1997 5.33%
1998 6.41%
</TABLE>

Best Quarter: 15.50% (4th Quarter of 1998).

Worst Quarter: -18.36% (3rd Quarter of 1998).

<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10/1/90
- ---------------------------------------------------------------------------------------------------------
International Fund 6.41% 9.05% 12.52%
- ---------------------------------------------------------------------------------------------------------
MSCI EAFE Index 20.33% 9.50% 10.60%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

This chart compares the International Fund's performance with the returns of the
Morgan Stanley Capital International Europe, Australia, Far East Index, an
arithmetic, market value-weighted average of the performance of over 1,000
non-U.S. companies representing 18 stock markets in Europe, Australia, New
Zealand and the Far East.

8
<PAGE> 10

GLOBAL EQUITY FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1997 7.80%
1998 6.71%
</TABLE>

Best Quarter: 15.83% (4th Quarter of 1998).

Worst Quarter: -17.84% (3rd Quarter of 1998).

<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 1/2/97
- ------------------------------------------------------------------------------------------
Global Equity Fund 6.71% 7.25%
- ------------------------------------------------------------------------------------------
MSCI World Index 24.80% 20.43%
- ------------------------------------------------------------------------------------------
</TABLE>

This chart compares the Global Equity Fund's performance with the returns of the
Morgan Stanley Capital International World Index, an arithmetic, market
value-weighted average of the performance of over 1,500 securities representing
24 stock markets in Europe, Australia, New Zealand, the Far East, South Africa,
Canada, the U.K. and the U.S.

9
<PAGE> 11

BALANCED FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1989 17.88%
1990 -0.45%
1991 20.53%
1992 9.41%
1993 12.59%
1994 0.82%
1995 24.80%
1996 11.71%
1997 16.75%
1998 5.20%
</TABLE>

Best Quarter: 10.33% (4th Quarter of 1985).

Worst Quarter: -8.32% (3rd Quarter of 1990).

<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10 YEARS 8/13/85
- ------------------------------------------------------------------------------------------------------------------
Balanced Fund 5.20% 11.54% 11.64% 11.89%
- ------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index 28.76% 24.15% 19.22% 18.36%
- ------------------------------------------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Index 9.47% 7.30% 9.33% N/A
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

This chart compares the Balanced Fund's performance with the returns of two
indexes. The Standard & Poor's Composite Index of 500 Stocks is a capital
weighted, unmanaged index representing the aggregate market value of the common
equity of 500 stocks primarily traded on the New York Stock Exchange. The Lehman
Brothers Government/Corporate Index is a weighted index comprised of
publicly-traded intermediate and long-term government and corporate debt with an
average maturity of 11 years.

10
<PAGE> 12

TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1994 21.32%
1995 4.34%
1996 10.76%
1997 8.79%
</TABLE>

Best Quarter: 6.57% (2nd Quarter of 1995).

Worst Quarter: -2.38% (1st Quarter of 1996).

<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 12/6/94
- ------------------------------------------------------------------------------------------
Total Return Bond Fund 8.79% 11.03%
- ------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.69% 9.82%
- ------------------------------------------------------------------------------------------
</TABLE>

This chart compares the Total Return Bond Fund's performance with the returns of
the Lehman Brothers Aggregate Index, a weighted, unmanaged index of U.S.
Government and corporate bonds, mortgage-backed securities and asset-backed
securities rated at least investment grade with at least one year to maturity.

11
<PAGE> 13

LOW DURATION FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1994 5.23%
1995 12.75%
1996 6.23%
1997 7.59%
1998 5.65%
</TABLE>

Best Quarter: 5.24% (3rd Quarter of 1993).

Worst Quarter: -0.09% (4th Quarter of 1998).

<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 5/18/93
- ---------------------------------------------------------------------------------------------------------
Low Duration Fund 5.64% 7.45% 7.92%
- ---------------------------------------------------------------------------------------------------------
Merrill Lynch 1-3 Year U.S. Treasury Index 7.00% 5.99% 5.79%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

This chart compares the Low Duration Fund's performance with the returns of the
Merrill Lynch 1-3 Year U.S. Treasury Index, an unmanaged index of U.S. Treasury
securities with maturities ranging from one to three years.

12
<PAGE> 14

SHORT-TERM INVESTMENT FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1994 4.42%
1995 7.83%
1996 6.17%
1997 6.18%
1998 5.77%
</TABLE>

Best Quarter: 2.44% (3rd Quarter of 1998).

Worst Quarter: 0.71% (4th Quarter of 1998).

<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 5/18/93
- ---------------------------------------------------------------------------------------------------------
Short-Term Investment Fund 5.77% 6.07% 6.31%
- ---------------------------------------------------------------------------------------------------------
Merrill Lynch 6 Month Treasury Bill Index 5.58% 5.37% 5.14%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

This chart compares the Short-Term Investment Fund's performance with the
returns of the Merrill Lynch 6 Month U.S. Treasury Bill Index, an unmanaged
index of U.S. Treasury bills with maturities of six months.

13
<PAGE> 15

FEES AND EXPENSES

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

This table shows the expenses paid by the Investor Class shares of the Funds. No
sales load, exchange fee or redemption fee is charged on the purchase or sale of
Fund shares.

Investment dealers and other firms may charge you additional fees for buying and
selling Fund shares or for advisory services. See their materials for details.

<TABLE>
<CAPTION>
ANNUAL FUND Equity Mid- Small Inter- Global Total Low
OPERATING EXPENSES Income Cap Cap national Equity Balanced Return Duration
(expenses that are deducted from Fund assets) Fund Fund Fund Fund Fund Fund Bond Fund Fund
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees... .75% .75% .75% .75% .75% .75% .55% .46%
Distribution fees... 0% 0% 0% 0% 0% 0% 0% 0%
Other expenses... .17% 2.02% .31% .25% 2.15% .23% .53% .26%
--- ---- ---- ---- ---- --- ---- ---
Total Fund operating expenses... .92% 2.77% 1.06% 1.00% 2.90% .98% 1.08% .72%
=== ==== ==== ==== ==== === ==== ===
Expense reimbursement... 0% 1.62% 0% 0% 1.65% .03% .43% .14%
--- ---- ---- ---- ---- --- ---- ---
Net Fund operating expenses... .92% 1.15% 1.06% 1.00% 1.25% .95% .65% .58%
=== ==== ==== ==== ==== === ==== ===

<CAPTION>
ANNUAL FUND Short-Term
OPERATING EXPENSES Investment
(expenses that are deducted from Fund assets) Fund
- ---------------------------------------------------------
<S> <C>
Management fees... .40%
Distribution fees... 0%
Other expenses... .54%
---
Total Fund operating expenses... .94%
===
Expense reimbursement... .46%
---
Net Fund operating expenses... .48%
===
</TABLE>

Although not required to do so, Hotchkis and Wiley (the "Advisor") has agreed to
limit the annual operating expenses of each Fund, except the Small Cap and the
International Fund, as follows:

<TABLE>
<CAPTION>
Expense Limits
(as a percentage of
FUND average net assets)
- --------------------------------------------------------------------------------
<S> <C>
Equity Income.......................................... .95%
Mid-Cap................................................ 1.15%
Global Equity.......................................... 1.25%
Balanced............................................... .95%
Total Return Bond...................................... .65%
Low Duration........................................... .58%
Short-Term Investment.................................. .48%
</TABLE>

These expense limits changed on March 1, 1999. In addition, on March 1, 1999,
the Funds began paying sub-transfer agency fees. The table above has been
restated to reflect the sub-transfer agency fees as if they had been in effect
for the Funds' fiscal year ended June 30, 1998. The Advisor has contractually
agreed to keep the expense limits in place for one year.

EXAMPLE

This example compares the cost of investing in the Funds with the cost of
investing in other mutual funds. The example assumes that you invest $10,000 in
the Funds and that each Fund returns 5% each year. Your actual costs may be
higher or lower.

<TABLE>
<CAPTION>
Equity Mid- Small Inter- Global Total Low Short-Term
Income Cap Cap national Equity Balanced Return Duration Investment
Fund Fund Fund Fund Fund Fund Bond Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year................ $ 94 $ 117 $ 108 $ 102 $ 127 $ 97 $ 66 $ 59 $ 49
Three Years............. $ 293 $ 365 $ 337 $ 318 $ 397 $ 303 $208 $186 $154
Five Years.............. $ 509 $ 633 $ 585 $ 552 $ 686 $ 525 $362 $324 $269
Ten Years............... $1,131 $1,398 $1,294 $1,225 $1,511 $1,166 $810 $726 $604
</TABLE>

14
<PAGE> 16

INVESTMENT OBJECTIVES AND POLICIES

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

STOCK FUNDS

VALUE INVESTING

In investing the Stock Funds and the stock portion of the Balanced Fund, the
Advisor follows a value style. This means that the Advisor buys stocks that it
believes are currently undervalued by the market and thus have a lower price
than their true worth. Typical value characteristics include:

- - low price-to-earnings ratio relative to the market

- - high dividend yield relative to the market

- - low price-to-book value ratio relative to the market

- - financial strength

The different Stock Funds emphasize these characteristics in different degrees
depending on investment objective and market capitalization focus.

Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, 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.

This value discipline can sometimes prevent the Funds from investing in market
sectors which are significantly represented in broad market indexes.

EQUITY INCOME FUND

The Equity Income Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.

The Equity Income Fund invests mostly in common stocks of large U.S. companies.
Normally, the Fund invests at least 80% of its total assets in stocks that pay
dividends. It also may invest in stocks that don't pay dividends or interest,
but have growth potential unrecognized by the market or changes in business or
management that indicate growth potential.

The Equity Income Fund can invest up to 10% of its total assets in foreign
securities.

MID-CAP FUND

The Mid-Cap Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.

The Mid-Cap Fund invests at least 65% of its total assets in stocks of mid-size
U.S. companies. A "mid-size company" is one with a market capitalization of less
than $5 billion at the time of investment.

The Mid-Cap Fund can invest up to 20% of its total assets in foreign securities.

SMALL CAP FUND

The Small Cap Fund's investment objective is CAPITAL APPRECIATION.

The Small Cap Fund invests at least 65% of its total assets in stocks of small
U.S. companies. A "small company" is one with a market capitalization of less
than $2 billion at the time of investment.

The Small Cap Fund can invest up to 20% of its total assets in foreign
securities.

INTERNATIONAL FUND

The International Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.

The International Fund invests at least 65% of its total assets in stocks in at
least ten foreign markets. Ordinarily, the Fund invests in stocks of companies
located in the developed foreign markets and invests at least 80% of its total
assets in stocks that pay dividends. It also may invest in stocks that don't pay
dividends or interest, but have growth potential unrecognized by the

15
<PAGE> 17

market or changes in business or management that indicate growth potential.

The International Fund may enter into foreign currency options or forward
foreign currency exchange contracts to hedge currency fluctuations.

GLOBAL EQUITY FUND

The Global Equity Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.

The Global Equity Fund invests in stocks in at least ten different countries
with developed stock markets, including the U.S. No country other than the U.S.
will represent more than 30% of assets. Normally, the Global Equity Fund invests
at least 80% of its total assets in stocks that pay dividends. It also may
invest in stocks that don't pay dividends or interest, but have growth potential
unrecognized by the market or changes in business or management that indicate
growth potential.

The Global Equity Fund may enter into foreign currency options or forward
foreign currency exchange contracts to hedge currency fluctuations.

BOND INVESTMENTS IN STOCK FUNDS

The Stock Funds buy common stocks and securities with common stock
characteristics, like convertible preferred stocks, convertible bonds or
warrants. They also may buy bonds. Convertible securities and bonds will be
rated investment grade (the four highest grades) by a major rating agency like
Moody's Investors Service or Standard & Poor's or, if unrated, be of comparable
quality in the Advisor's opinion. In addition, the Mid-Cap and Small Cap Funds
may invest up to 5% of their total assets in convertible securities and bonds
rated below investment grade, but not below B, or, if unrated, of comparable
quality in the Advisor's opinion.

After the Stock Funds buy a bond or convertible security, it may be given a
lower rating or stop being rated. This would not require the Funds to sell the
security, but the Advisor will consider the change in rating in deciding whether
the Fund should keep the security.

BALANCED FUND

The investment objective of the Balanced Fund is to PRESERVE CAPITAL while
producing a HIGH TOTAL RETURN. The Advisor's current goal is a return at least
4% greater than the rate of inflation as measured by the Consumer Price Index.

The Balanced Fund's assets are allocated among stocks and bonds. The Advisor
uses a proprietary model to set the amount invested in each category. Generally
stocks will be at least 20% of the Fund's total assets and bonds at least 25%.
Historically, the Fund's allocation to stocks has ranged from 27% to 59%, and to
bonds from 41% to 73%.

The Balanced Fund seeks to achieve growth of capital through its investment in
stocks. It may purchase common stocks or securities with common stock
characteristics (like convertible preferred stocks, convertible bonds or
warrants).

The Balanced Fund seeks to earn income and reduce fluctuation in the value of
the Fund's shares through its investments in bonds and preferred stocks. The
Balanced Fund only purchases investment grade bonds and preferred stocks as
follows:

- - U.S. Government securities

- - preferred stocks

- - mortgage-backed and other asset-backed securities

- - corporate bonds

- - bonds that are convertible into stocks

- - bank certificates of deposit, fixed time deposits and bankers' acceptances

- - repurchase agreements, reverse repurchase agreements and dollar rolls

- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities

16
<PAGE> 18

- - obligations of international agencies or supra-national entities

- - municipal bonds

After the Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Advisor will consider
the change in rating in deciding whether to keep the security. It is expected
that the average credit quality of the Fund's bonds will be AA/Aa or higher.

Because the Balanced Fund allocates its assets among stocks and bonds, it may
not be able to achieve a total return as high as a fund with complete freedom to
invest its assets in any one type of security. Likewise, because at least 25% of
the Balanced Fund's portfolio will normally consist of bonds, the Fund may not
achieve as much capital appreciation as a portfolio investing only in stocks.
Although the Balanced Fund intends to invest in bonds to keep the price of the
Fund's shares more stable, intermediate- and long-term bonds do fluctuate in
price more than money market obligations.

The Balanced Fund can invest up to 20% of its total assets in foreign
securities.

BOND FUNDS

TOTAL RETURN BOND FUND

The Total Return Bond Fund's investment objective is to MAXIMIZE LONG-TERM TOTAL
RETURN. The Fund invests in bonds with a portfolio duration of two to eight
years. Investments are concentrated in areas of the bond market (based on
quality, sector, coupon or maturity) that the Advisor believes are relatively
undervalued.

LOW DURATION FUND

The Low Duration Fund's investment objective is to MAXIMIZE TOTAL RETURN,
consistent with CAPITAL PRESERVATION. The Fund invests in bonds with a portfolio
duration of one to three years. The total rate of return for this Fund is
expected to rise and fall less than a longer duration bond fund like the Total
Return Bond Fund.

SHORT-TERM INVESTMENT FUND

The Short-Term Investment Fund's investment objective is to MAXIMIZE TOTAL
RETURN, consistent with CAPITAL PRESERVATION. The Fund invests in bonds and
seeks to maintain a portfolio duration that will generally not exceed one year.
The Fund also seeks to maintain a dollar-weighted average portfolio maturity
that will generally not exceed three years, based on the effective maturity of
the Fund's securities.

The Bond Funds seek to achieve their objectives by investing mainly in
investment grade, interest-bearing securities of varying maturities. These
include:

- - U.S. Government securities

- - preferred stocks

- - mortgage-backed and other asset-backed securities

- - corporate bonds

- - bonds that are convertible into stocks

- - bank certificates of deposit, fixed time deposits and bankers' acceptances

- - repurchase agreements, reverse repurchase agreements and dollar rolls

- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities

- - obligations of international agencies or supra-national entities

- - municipal bonds

RATINGS LIMITATIONS

Total Return Bond Fund

- - at least 85% of total assets rated at least investment grade or, if
short-term, the second highest quality grade, by a major rating agency such as
Moody's or Standard & Poor's (S&P)

- - up to 15% of total assets rated below investment grade (below Baa by Moody's
or below BBB by S&P), but none below B

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<PAGE> 19

- - can invest in unrated securities if the Advisor believes them to be of
comparable quality

Low Duration Fund and Short-Term Investment Fund

- - at least 70% of total assets rated at least A or, if short-term, the second
highest quality grade, by a major rating agency

- - up to 30% of total assets rated Baa by Moody's or BBB by S&P

- - up to 10% of total assets rated below investment grade, but none below B

- - can invest in unrated securities if the Advisor believes them to be of
comparable quality

After a Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Advisor will consider
the change in rating in deciding whether to keep the security.

MATURITY AND DURATION

REQUIREMENTS

Maturity. The EFFECTIVE MATURITY of a bond is the weighted average period over
which principal is expected to be repaid. STATED MATURITY is the date when the
issuer is scheduled to make the final payment of principal. Effective maturity
is different than stated maturity because it estimates the effect of expected
principal prepayments and call provisions.

Duration. The Bond Funds have different portfolio "durations." Duration
measures the potential volatility of the price of a bond or a portfolio of bonds
prior to maturity. Duration is the magnitude of the change in price of a bond
relative to a given change in the market interest rate. Duration incorporates a
bond's yield, coupon interest payments, final maturity, call and put features
and prepayment exposure into one measure.

For any bond with interest payments occurring before principal is repaid,
duration is ordinarily less than maturity. Generally, the lower the stated or
coupon rate of interest of a bond, the longer the duration. The higher the
stated or coupon rate of interest of a bond, the shorter the duration. The
calculation of duration is based on estimates.

Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the durations shown below, each Bond Fund's price would
change as follows:

<TABLE>
<CAPTION>
FUND DURATION CHANGE IN INTEREST RATES
---- -------- ------------------------
<S> <C> <C>
Total Return 4.5 yrs. 1% decline > 4.5% gain
Bond in Fund price
1% rise > 4.5% decline
in Fund price
Low Duration 2 yrs. 1% decline > 2% gain in
Fund price
1% rise > 2% decline in
Fund price
Short-Term 7.5 yrs. 1% decline > .75% gain
Investment in Fund price
1% rise > .75% decline
in Fund price
</TABLE>

Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity affect the price of the Bond Funds and may correlate
with changes in interest rates. These factors can increase swings in the Funds'
share prices during periods of volatile interest rate changes.

FOREIGN BONDS

Each Bond Fund may invest in foreign bonds as follows:

- - up to 25% of total assets in foreign bonds that are denominated in U.S.
dollars

- - up to 15% of total assets in foreign bonds that are not denominated in U.S.
dollars

- - up to 15% of total assets in emerging market foreign bonds

MONEY MARKET INVESTMENTS

18
<PAGE> 20

money market instruments in response to adverse market, economic or political
conditions. Although this kind of investing would provide some income, it would
not provide capital appreciation.

TYPES OF SECURITIES

U.S. GOVERNMENT SECURITIES

Each Fund can invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, like Treasury
bills, certificates of indebtedness, notes, bonds and parts of notes or bonds.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include the Federal National Mortgage Association ("Fannie Mae"),
Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan
Mortgage Association ("Freddie Mac"), Federal Financing Bank, and Student Loan
Marketing Association ("Sallie Mae").

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 are
backed by the right of the agency to borrow from the Treasury. Others are
supported only by the credit of the agency and not by the Treasury. If the
securities are not backed by the full faith and credit of the United States, the
owner must look mainly to the agency issuing the obligation for repayment.

Each Fund can enter into REPURCHASE AGREEMENTS involving U.S. Government
securities with commercial banks or broker-dealers. This is a method of
short-term investment of cash where the Fund would buy securities from a bank or
broker-dealer and sell them back a short time later (usually overnight) for a
slightly higher price. Each Fund intends to be fully "collateralized" as to such
agreements, and the collateral will be marked-to-market daily. But if the person
obligated to repurchase from the Fund defaults, there may be possible delays and
expenses in liquidating the securities, a decline in their value and loss of
interest income.

CORPORATE BONDS

Each Fund can invest in corporate bonds. These include variable and floating
rate bonds and corporate commercial paper.

The Bond Funds and the Balanced Fund can invest in structured debentures and
structured notes, which are hybrid instruments with characteristics of both
bonds and swap agreements. The prices of structured debentures and structured
notes can be more volatile than and are often not correlated to other bonds.

The Bond Funds and the Balanced Fund can invest in inverse floaters and tiered
index bonds. In general, the interest rates on tiered index bonds and inverse
floaters move in the opposite direction of prevailing interest rates.

MUNICIPAL BONDS

The Bond Funds and the Balanced Fund can invest in municipal bonds issued by or
on behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their agencies and instrumentalities. These
include general obligation bonds, revenue bonds and private activity bonds.

REAL ESTATE INVESTMENT TRUSTS

The Funds can invest in securities of real estate investment trusts or REITs.

ASSET-BACKED SECURITIES

The Bond Funds and the Balanced Fund can invest in securities whose principal
and interest payments are backed by various types of assets, including
automobile loans, credit card loans, and home equity loans.

MORTGAGE-BACKED SECURITIES

The Bond Funds and the Balanced Fund can invest in mortgage-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations ("CMOs").

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<PAGE> 21

OTHER DERIVATIVES

The Funds may use other "derivatives," whose performance is derived from the
performance of an underlying asset. The Funds may use derivatives to hedge
against changes in interest rates, foreign currency exchange rates or securities
prices; for liquidity; or as part of their overall investment strategies. Each
Fund will segregate liquid assets or enter offsetting positions to cover its
obligations, if any, under options, futures contracts and swap agreements to
avoid leveraging the Fund.

OTHER STRATEGIES

The Funds also follow certain policies when they:

- - BORROW MONEY: each Fund can borrow up to 10% of the value of its total assets.
The Bond Funds and the Balanced Fund can enter into reverse repurchase
agreements in which they sell securities and agree to buy them back for a
fixed price at a later date. They also can use dollar rolls in which they sell
securities for delivery in the current month while agreeing to buy very
similar securities at a later date from the same party. Reverse repurchase
agreements and dollar rolls involve leverage and are treated as borrowings by
the Funds.

- - LEND SECURITIES: each Bond Fund can lend up to 33 1/3% of the value of its
total assets.

- - make SHORT SALES AGAINST-THE-BOX: each Fund may borrow and sell "short"
securities when it also owns an equal amount of those securities (or their
equivalent). No more than 25% of a Fund's total assets can be held as
collateral for short sales at any one time.

- - buy securities on a WHEN-ISSUED or DELAYED DELIVERY basis (for each Fund
except the Mid-Cap and Small Cap Funds). The Funds will mark assets as
segregated in an amount equal to the when-issued securities.

PORTFOLIO TURNOVER

As a result of the strategies described above, the Balanced Fund and the Bond
Funds may have an annual portfolio turnover rate above 100%. Portfolio turnover
is generally the percentage found by dividing the lesser of portfolio purchases
or sales by the monthly average value of the portfolio. High portfolio turnover
(100% or more) results in higher brokerage commissions and other transaction
costs and can affect these Funds' performance. It also can result in a greater
amount of distributions as ordinary income rather than long-term capital gains.

INVESTMENT RISKS

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

This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.

MARKET AND SELECTION RISK

Market risk is the risk that the stock or bond market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the market or other funds with similar
investment objectives and investment strategies.

RISKS OF INVESTING IN SMALL AND MID-SIZE COMPANIES

The Mid-Cap Fund and Small Cap Fund invest in the securities of small and
medium-size companies. Investment in small and medium-size companies involves
more risk than investing in larger, more established companies. Small and
medium-size companies may have limited product lines or markets. They may be
less financially secure than larger, more established compa-

20
<PAGE> 22

nies. They may depend on a small number of key personnel. If a product fails, or
if management changes, or there are other adverse developments, the Fund's
investment in a small cap or mid-cap company may lose substantial value.

Securities of small and medium-size companies generally trade in lower volumes
and are subject to greater and more unpredictable price changes than larger cap
securities or the stock market as a whole. Investing in securities of small and
medium-size companies requires a long-term view.

FOREIGN MARKET RISK

Since the Funds may invest in foreign securities, they offer the potential for
more diversification than an investment only in the United States. This is
because stocks traded on foreign markets have often (though not always)
performed differently than stocks in the United States. However, such
investments involve special risks not present in U.S. investments that can
increase the chances that a Fund will lose money. In particular, investments in
foreign securities involve the following risks, which are generally greater for
investments in emerging markets:

- - The economies of some foreign markets often do not compare favorably with that
of the United States in areas such as growth of gross national product,
reinvestment of capital, resources, and balance of payments. Some of these
economics may rely heavily on particular industries or foreign capital. They
may be more vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries, changes in
international trading patterns, trade barriers, and other protectionist or
retaliatory measures.

- - Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets, or the imposition of
punitive taxes.

- - The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices. They
could also impair a Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or otherwise
adversely affect a Fund's operations.

- - Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and
social instability. Legal remedies available to investors in some foreign
countries may be less extensive than those available to investors in the
United States.

- - Because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may be difficult for a Fund to buy and
sell securities on those exchanges. In addition, prices of foreign securities
may go up and down more than prices of securities traded in the United States.

- - Foreign markets may have different clearance and settlement procedures. In
certain markets, settlements may be unable to keep pace with the volume of
securities transactions. If this occurs, settlement may be delayed and a
Fund's assets may be uninvested and not earning returns. A Fund also may miss
investment opportunities or be unable to sell an investment because of these
delays.

- - The value of a Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.

- - The costs of non-U.S. securities transactions tend to be higher than those of
U.S. transactions.

- - International trade barriers or economic sanctions against certain non-U.S.
countries may adversely affect a Fund's non-U.S. holdings.

- - If a Fund purchases a bond issued by a foreign government, the government may
be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund

21
<PAGE> 23

would be able to collect amounts owed by a foreign government.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

A number of European countries have agreed to enter into EMU in an effort to
reduce trade barriers between themselves and eliminate fluctuations in their
currencies. EMU establishes a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) will be redenominated in the
euro. Thereafter, these securities will trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including the companies in which the Funds invest, a Fund could
be adversely affected:

- - If the euro, or EMU as a whole, does not take effect as planned.

- - If a participating country withdraws from EMU.

- - If the computing, accounting and trading systems used by a Fund's service
providers, or by other entities with which a Fund or its service providers do
business, are not capable of recognizing the euro as a distinct currency
beginning with euro conversion.

RISKS OF CONVERTIBLE SECURITIES

Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.

ADDITIONAL BOND RISKS

- - MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage-backed securities will
be paid off more quickly than originally anticipated. Prepayment reduces the
yield to maturity and average life of the mortgage-backed securities. In
addition, when a Fund reinvests the proceeds of a prepayment, it may receive a
lower interest rate than the rate on the security that was prepaid. This risk
is known as "prepayment risk." When interest rates rise, certain types of
mortgage-backed securities will be paid off more slowly than originally
anticipated and the value of these securities will fall. This risk is known as
extension risk.

Because of prepayment risk and extension risk, mortgage-backed securities
react differently to changes in interest rates than other bonds. Small
movements in interest rates (both up and down) may quickly and significantly
reduce the value of certain mortgage-backed securities.

Mortgage-backed securities are issued by Federal government agencies like
Ginnie Mae, Freddie Mac or Fannie Mae. Principal and interest payments on
mortgage-backed securities issued by Federal government agencies are
guaranteed by either the Federal government or the government agency. This
means that such securities have very little credit risk. Other mortgage-backed
securities are issued by private corporations rather than Federal agencies.
Private mortgage-backed securities have credit risk as well as prepayment risk
and extension risk.

22
<PAGE> 24

through to security holders (less servicing costs). CMOs are created by
dividing the principal and interest payments collected on a pool of mortgages
into several revenue streams (tranches) with different priority rights to
portions of the underlying mortgage payments. Certain CMO tranches may
represent a right to receive interest only (IOs), principal only (POs) or an
amount that remains after other floating-rate tranches are paid (an inverse
floater). These securities are frequently referred to as "mortgage
derivatives" and may be extremely sensitive to changes in interest rates. If a
Fund invests in CMO tranches (including CMO tranches issued by government
agencies) and interest rates move in a manner not anticipated by Fund
management, it is possible that the Fund could lose all or substantially all
of its investment.

- - ASSET-BACKED SECURITIES -- Like traditional bonds, the value of asset-backed
securities typically increases when interest rates fall and decreases when
interest rates rise. Certain asset-backed securities may also be subject to
the risk of prepayment. In a period of declining interest rates, borrowers may
pay what they owe on the underlying assets more quickly than anticipated.
Prepayment reduces the yield to maturity and the average life of the
asset-backed securities. In addition, when a Fund reinvests the proceeds of a
prepayment, it may receive a lower interest rate than the rate on the security
that was prepaid. In a period of rising interest rates, prepayments may occur
at a slower rate than expected. As a result, the average maturity of the
Fund's portfolio will increase. The value of long-term securities changes more
widely in response to changes in interest rates than shorter-term securities.

- - CREDIT RISK -- Credit risk is the risk that the issuer of bonds will be unable
to pay the interest or principal when due. The degree of credit risk depends
on both the financial condition of the issuer and on the terms of the specific
bonds.

- - INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than do prices of shorter term securities.

- - CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a bond's
issuer will call the bond for redemption prior to the bond's maturity. If
there is an early call of a bond, a Fund may lose income and may have to
invest the proceeds of the redemption in bonds with lower yields than the
called bond.

- - JUNK BONDS -- Junk bonds are bonds that are rated below investment grade by
the major rating agencies or are unrated securities that the Funds' Advisor
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for a Fund. Junk bonds generally
are less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer's bankruptcy, claims of other creditors may have priority
over the claims of junk bond holders, leaving few or no assets available to
repay junk bond holders. Junk bonds may be subject to greater call and
redemption risk than higher rated debt securities.

- - WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued, delayed-delivery securities and forward
commitments involve the risk that the security a Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security
will not be issued or that the other party will not meet its obligation, in
which case the Fund loses the investment opportunity of the assets it has set
aside to pay for the security and any gain in the security's price.

23
<PAGE> 25

bond's maturity from a bank or other financial institution. If the bank or
other financial institution is unable to pay on demand, a Fund may be
adversely affected. In addition, these securities are subject to credit risk.

- - INDEXED AND INVERSE FLOATING RATE SECURITIES -- A Bond Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. A Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, inverse floaters change in value in a manner
that is opposite to most bonds -- that is, interest rates on inverse floaters
will decrease when short-term rates increase and increase when short-term
rates decrease. Investments in indexed securities and inverse floaters may
subject a Fund to the risks of reduced or eliminated interest payments.
Investments in indexed securities also may subject a Fund to loss of
principal. In addition, certain indexed securities and inverse floaters may
increase or decrease in value at a greater rate than the underlying interest
rate, which effectively leverages a Fund's investment. As a result, the market
value of such securities will generally be more volatile than that of fixed
rate securities. Both indexed securities and inverse floaters can be
derivative securities and can be considered speculative.

- - SOVEREIGN DEBT -- The Bond Funds may invest in sovereign debt securities.
These securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt subject the Funds to the risk that a government
entity may delay or refuse to pay interest or repayment of principal on its
sovereign debt. Some of these reasons may include cash flow problems,
insufficient foreign currency reserves, political considerations, the relative
size of its debt position to its economy or its failure to put in place
economic reforms required by the International Monetary Fund or other
multilateral agencies. If a government entity defaults, it may ask for more
time in which to pay or for further loans. There is no legal process for
collecting sovereign debts that a government does not pay.

- - CORPORATE LOANS -- Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure.
Borrowers generally pay interest on corporate loans at rates that change in
response to changes in market interest rates such as the London Interbank
Offered Rate ("LIBOR") or the prime rates of U.S. banks. As a result, the
value of corporate loan investments is generally less responsive to shifts in
market interest rates. Because the trading market for corporate loans is less
developed than the secondary market for bonds and notes, the Fund may
experience difficulties from time to time in selling its corporate loans.
Borrowers frequently provide collateral to secure repayment of these
obligations. Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a "syndicate". The syndicate's
agent arranges the corporate loans, holds collateral and accepts payments of
principal and interest. If the agent developed financial problems, a Fund may
not recover its investment, or there might be a delay in the Fund's recovery.
By investing in a corporate loan, a Fund becomes a member of the syndicate.

Corporate loans are subject to the risk of loss of principal and income.
Borrowers do not always provide collateral for corporate loans and the value
of the collateral may not completely cover the borrower's obligations at the
time of a default. If a borrower files for protection from its creditors under
the U.S. bankruptcy laws, these laws may limit a Fund's rights to its
collateral. In addition, the value of collateral may erode during a bankruptcy
case. In the event of a bankruptcy, the holder of a corporate loan may not
recover its principal, may experience a long delay in recovering its
investment and may not receive interest during the delay.

24
<PAGE> 26

RISKS OF ILLIQUID INVESTMENTS

Each Fund may invest up to 15% of its assets in illiquid securities that it
cannot easily resell within seven days at current value or that have contractual
or legal restrictions on resale. If a Fund buys illiquid securities it may be
unable to quickly resell them or may be able to sell them only at a price below
current value.

- - RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that a
Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.

Restricted securities may be illiquid. A Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
A Fund may get only limited information about the issuer, so may be less able
to predict a loss. In addition, if Fund management receives material adverse
non public information about the issuer, the Fund will not be able to sell the
security.

- - 144A -- Rule 144A securities are restricted securities that can be resold to
qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are deemed to be
liquid.

RISKS OF DERIVATIVES

The Funds may use instruments referred to as "derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the S&P 500 or the prime lending rate). Types of derivatives that the Funds
may use include futures (Bond Funds only), forwards and options.

Derivatives allow a Fund to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Derivatives, however, are volatile and involve significant risks,
including credit risk, currency risk, leverage risk, liquidity risk and index
risk.

- - CREDIT RISK -- Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to a Fund.

- - CURRENCY RISK -- Currency risk is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar terms)
of an investment.

- - LEVERAGE RISK -- Leverage risk is the risk associated with certain types of
investments or trading strategies that relatively small market movements may
result in large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.

- - LIQUIDITY RISK -- Liquidity risk is the risk that certain securities may be
difficult or impossible to sell at the time that the seller would like or at
the price that the seller believes the security is currently worth.

- - INDEX RISK -- If the derivative is linked to the performance of an index, it
will be subject to the risks associated with changes in that index. If the
index changes, a Fund could receive lower interest payments or experience a
reduction in the value of the derivative to below what the Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite
direction to the index), may create leverage, to the extent that they increase
or decrease in value at a rate that is a multiple of the changes in the
applicable index.

Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Funds and
the risks associated with these instruments.

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<PAGE> 27

THE ADVISOR AND PORTFOLIO MANAGERS

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

THE ADVISOR

Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017-5400, has been the Funds' investment advisor since 1984. The
Advisor is a division of Merrill Lynch Asset Management, L.P., a Delaware
limited partnership. The Advisor supervises and arranges the purchase and sale
of securities held in the Funds' portfolios and administers the Funds. The
Advisor also manages separate investment advisory accounts.

The table below shows the fees paid to the Advisor for the Funds' fiscal year
ended June 30, 1998 as a percentage of average net assets.

<TABLE>
<CAPTION>
FUND %
---- ---
<S> <C>
Equity Income.............................. .75
Mid-Cap.................................... .75
Small Cap.................................. .75
International.............................. .75
Global Equity.............................. .75
Balanced................................... .75
Total Return Bond.......................... .55
Low Duration............................... .46
Short-Term Investment...................... .40
</TABLE>

Although not required to do so, the Advisor has agreed to make reimbursements so
that the regular annual operating expenses of each Fund except the Small Cap and
International Funds will be limited as follows:

<TABLE>
<CAPTION>
EXPENSE LIMITS
(AS A PERCENTAGE OF
FUND AVERAGE NET ASSETS)
---- -------------------
<S> <C>
Equity Income................ .95%
Mid-Cap...................... 1.15
Global Equity................ 1.25
Balanced..................... .95
Total Return Bond............ .65
Low Duration................. .58
Short-Term Investment........ .48
</TABLE>

The Advisor has agreed to these expense limits for one year, and will thereafter
give shareholders at least 30 days' notice if this reimbursement policy will
change.

The Advisor is allowed to allocate brokerage based on sales of shares of funds
managed by the Advisor but has not done so.

SUBADVISORS

The Advisor has entered into subadvisory agreements with Mercury Asset
Management International and Merrill Lynch Asset Management U.K. Limited,
affiliated investment advisors that are indirect subsidiaries of Merrill Lynch &
Co., Inc. The subadvisory arrangements are for investment research,
recommendations and other investment related services to be provided to the
International and Global Equity Funds. There is no increase in the aggregate
fees paid by the Funds for these services.

PORTFOLIO MANAGERS

The portfolio managers who have responsibility for the day-to-day management of
the Funds' portfolios are listed below.

EQUITY INCOME FUND

The portfolio managers of the Equity Income Fund are Gail Bardin and Sheldon
Lieberman. Ms. Bardin is a managing director of the Advisor and began co-
managing the Fund in April 1994. She has been a portfolio manager of the Advisor
since 1988. Mr. Lieberman joined the Advisor in 1994 and began co-managing the
Fund in August 1997. Before joining the Advisor, Mr. Lieberman was the Chief
Investment Officer for the Los Angeles County Employees Retirement Association.

MID-CAP FUND

The portfolio managers of the Mid-Cap Fund are Jim Miles and Stan Majcher. Mr.
Miles joined the Advisor in 1995, and has served as a portfolio manager of the
Fund since it began in January 1997. Before joining the Advisor, Mr. Miles was
with BT Securities Corporation (an affiliate of Bankers Trust New York
Corporation) as

26
<PAGE> 28

vice president in the BT Securities Finance Group from 1988 to 1995. Mr. Majcher
has been a portfolio manager of the Mid-Cap Fund since January 1999. Mr. Majcher
joined the Advisor in August 1996 as a domestic equity analyst. From 1994 to
1996, he was an investment banking analyst at Merrill Lynch & Co. Inc.

SMALL CAP FUND

The portfolio managers of the Small Cap Fund are Jim Miles and David Green. 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. Mr. Green joined the
Advisor in 1997. Before that, Mr. Green was associated with Goldman Sachs Asset
Management, where he worked as an investment analyst from November 1995. Before
that, he was an investment manager and analyst with Prudential Investment
Advisors.

INTERNATIONAL FUND

The portfolio managers of the International Fund are Sarah Ketterer, Harry
Hartford and David Chambers. Ms. Ketterer is a managing director of the Advisor
and has served as portfolio manager of the Fund since it began in October 1990.
Before 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. Before joining the Advisor, Mr. Hartford was with the Investment
Bank of Ireland (now Bank of Ireland Asset Management) 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. He has been associated with
Mercury Asset Management International in London since July 1998. Before 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 portfolio managers of the Global Equity Fund are Sarah Ketterer and Patricia
McKenna. They have served as portfolio managers of the Fund since its inception
in January 1997. Ms. Ketterer's background is under "International Fund" above.
Before joining the Advisor in July 1995, 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 FUND

The portfolio managers of the Balanced 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 and the asset allocation strategy. Mr.
DeBard is a managing director of the Advisor and has served as portfolio manager
of the Fund since it began in August 1985. Mr. DeBard and Mr. Sanchez have
responsibility for the day-to-day management of the bond portion of the Fund's
portfolio. Mr. Sanchez has served as portfolio manager of the Fund since joining
the Advisor in August 1996. Before 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.

BOND FUNDS

The portfolio managers of the Bond Funds are Roger DeBard, Michael Sanchez and
John Queen. Mr. DeBard and Mr. Sanchez have served as portfolio managers for the
Funds since August 1996 and their backgrounds are under "Balanced Fund." Mr.
Queen joined the Advisor in 1997. Before joining the Advisor, Mr. Queen was
associated with The Capital Group as a member of an analyst team responsible for
$8 billion in fixed-income assets.

27
<PAGE> 29

A NOTE ABOUT YEAR 2000

Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). A Fund could be adversely affected
if the computer systems used by the Fund's management or other Fund service
providers do not properly address this problem before January 1, 2000. The
Funds' management expects to have addressed this problem before then, and does
not anticipate that the services it provides will be adversely affected. The
Funds' other service providers have told the Funds' management that they also
expect to resolve the Year 2000 Problem, and the Funds' management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Funds could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Funds invest, and this could hurt the Funds' investment returns.

HOW TO BUY SHARES

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

Five of the Funds (the Small Cap, International, Balanced, Total Return Bond and
Low Duration Funds) offer two classes of shares, Investor Class and Distributor
Class. The other Funds offer only Investor Class shares. Investor Class shares,
to which this Prospectus relates, are purchased directly from the Funds.
Purchasers of Investor Class shares do not pay a sales charge or a 12b-1 fee.
(They do pay advisory fees and other expenses, like custody and brokerage fees.)

MINIMUM INVESTMENT

The minimum initial investment in each Fund is $10,000. There is no minimum
subsequent investment. The Funds reserve the right to waive the minimum
investment.

WIRE

Before you wire money, call 800-236-4479 for your shareholder account number.
Instruct your bank to send the wire to the Transfer Agent to:

Firstar Bank Milwaukee

ABA #0750-00022

For credit to Firstar Mutual Fund Services

Account #112-952-137

For further credit to HOTCHKIS AND WILEY FUNDS

[Name of Fund]

Account # [Your account number]

Wires received by the Transfer Agent before the New York Stock Exchange closes
(currently 4:00 p.m., Eastern Time) receive that day's net asset value price.

For initial investments, you should also mail an application form to:

Firstar Mutual Fund Services, LLC

615 E. Michigan Avenue, 3rd Floor

P.O. Box 701

Milwaukee, Wisconsin 53201-0701

MAIL

You also can invest by sending a check or money order payable to HOTCHKIS AND
WILEY FUNDS with the application form to Firstar's address above.

Checks must be drawn on a U.S. bank in U.S. dollars. You will receive the net
asset value price next determined after Firstar receives your check or money
order and completed account application. Firstar does not accept cash, drafts or
third party checks. If your check doesn't clear, you will be charged for any
loss sustained by the relevant Fund and a $20 service charge. Forms for
additional contributions by check or change of address are included with account
statements, or you can request them by calling 800-236-4479.

28
<PAGE> 30

AUTOMATIC INVESTMENT PLAN (AIP)

The Automatic Investment Plan lets you automatically purchase shares by debiting
your bank account for a pre-authorized amount. There is a $50 minimum per
transaction and a maximum of 4 transactions a month. Your bank must be a member
of the ACH network. We don't charge a fee for this service, but you will be
charged $20 if there are insufficient funds in the account at the time of the
scheduled transaction.

GENERAL

The Funds may also accept orders from certain qualified institutions, with
payment made to the Fund at a later time. The Advisor is responsible for
ensuring that such payment is made on a timely basis. An institution which makes
such a purchase for an investor may charge the investor a reasonable service
fee.

The Advisor may pay out of its own resources brokers and other persons who sell
shares of the Funds.

The Funds reserve the right to suspend the offering of shares at any time, and
to reject a purchase order.

PRICING OF FUND SHARES

The net asset value per share of each class of each Fund is calculated every day
that the New York Stock Exchange is open for trading, at the close of regular
trading (currently 4:00 p.m., Eastern time). The net asset value per share is
the value of all a Fund's assets, minus its liabilities, divided by the number
of Fund shares outstanding. The value of portfolio securities is determined on
the basis of the market value of such securities or, when market prices are not
available, at fair value. The Funds will price purchase orders at the net asset
value next determined after the request is received in good order by the
Transfer Agent or an authorized financial institution or its sub-delegate.

HOW TO REDEEM SHARES

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

MAIL

You can redeem shares (sell them back to the Funds) by sending us a letter that
includes:

- - the Fund's name

- - your account name

- - your account number

- - the number of shares or dollar amount you want to redeem

- - signatures of all registered owners exactly as the account is registered.

Send your request to:

Firstar Mutual Fund Services, LLC

615 East Michigan Avenue, 3rd Floor

P.O. Box 701

Milwaukee, Wisconsin 53201-0701

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 sold at the net asset value next determined after the
Transfer Agent or an authorized financial institution or its sub-delegate
receives the request.

TELEPHONE

Call 800-236-4479 and tell us:

- - your account name

- - your account number

- - dollar amount or number of shares you want to redeem ($1,000 minimum).

We will then either send you a check to the address in our records or wire the
amount to your U.S. commercial bank. To redeem shares by telephone, you must

29
<PAGE> 31

have notified us ahead of time that you want this privilege.

If you can't get through to us by phone, which might be when the market is
volatile, you should use the procedures above for "Mail."

PROPER FORM

Share Certificates

If you have share certificates, you can't redeem shares until you return them.
The certificates must either be endorsed or accompanied by a stock power signed
by the registered owners, exactly as the certificates are registered.

Signature Guarantee

You may need a signature guarantee for your request if your redemption proceeds

- - are more than $50,000

- - are paid to a person other than the owner shown on our records

- - are sent to an address or bank account that is different from our records or
has changed within 15 days

- - are paid to a corporation, partnership, trust or fiduciary.

You can get a signature guarantee from:

- - a bank which is a member of the FDIC

- - a trust company

- - a member firm of a national securities exchange

- - another eligible guarantor institution.

Guarantees must be signed by an authorized signatory of the guarantor
institution and include the words "Signature Guaranteed." We will not accept
signature guarantees from notaries public. Additional documents may be needed
from corporations or other organizations, fiduciaries or anyone other than the
shareholder of record.

DELAYS IN REDEEMING SHARES

At certain times when allowed by the SEC, we may delay sending your check or
wiring your redemption proceeds.

PAYMENTS

Payment also may be delayed up to 12 days if you bought shares with a check.

CHANGES TO THE REDEMPTION PRIVILEGE

The redemption privilege may be modified or terminated at any time on 30 days'
notice to shareholders.

REDEMPTION IN KIND

The Funds reserve the right to pay shareholders with large accounts securities
instead of cash in certain circumstances.

LIQUIDATING SMALL ACCOUNTS

We may liquidate your account if its value falls below $1,000 because of
redeeming shares, but we will give you 60 days' written notice so that you can
buy more shares to increase the account size.

REPURCHASES

The Funds may accept orders for the repurchase of its shares from certain
qualified institutions. These institutions may charge shareholders a fee for
their services. The Funds may also waive or modify the requirements as to proper
form for such institutions.

30
<PAGE> 32

HOW TO EXCHANGE SHARES

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

You can exchange shares in a Fund for shares of another Fund subject to a $1,000
minimum. For tax purposes, exchanges are a sale and purchase.

MAIL

You can exchange shares by sending us a letter that includes:

- - your account name

- - your account number

- - the dollar amount or number of shares you want to exchange

- - the Fund you want to sell and the Fund you want to buy

- - signatures of all account owners.

Send your request to:

Firstar Mutual Fund Services, LLC

615 East Michigan Avenue

P.O. Box 701

Milwaukee, Wisconsin 53201-0701

TELEPHONE

You can exchange shares by calling us at 800-236-4479 as long as you have
notified us ahead of time that you want this privilege. If you have share
certificates, you must return them first.

CHANGES TO THE EXCHANGE PRIVILEGE

The Funds reserve the right to reject any exchange request. The exchange
privilege can be modified or terminated at any time on 30 days' notice to
shareholders.

31
<PAGE> 33

DIVIDENDS AND TAXES

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

DIVIDENDS AND DISTRIBUTIONS

The Funds pay income dividends, if any, as follows:

<TABLE>
<S> <C>
Monthly Total Return Bond Fund
Low Duration Fund
Short-Term Investment Fund
Quarterly Equity Income Fund
Balanced Fund
Twice Yearly Mid-Cap Fund
International Fund
Global Equity Fund
Yearly Small Cap Fund
</TABLE>

The Funds pay distributions of any net realized short-term gains and any net
capital gains every year.

TAXES

Dividends

If you do not hold your shares in an IRA, 401(k) plan or another qualified
tax-deferred retirement plan, dividends are taxable to you whether you receive
them in cash or reinvest in additional shares. Income dividends and
distributions of short-term capital gains are taxed as ordinary income, at rates
up to 39.6% for individuals. Long-term capital gains distributed by a Fund are
taxable at capital gains tax rates no matter how long you have held your shares.
The long-term capital gains rate for individuals currently is 20%.

Selling/Exchanging Shares

You may need to pay income tax when you sell or exchange shares in the Funds.
Unless you are a dealer in securities, any gain or loss realized upon the sale
or redemption of shares in any of the Funds will be treated as long-term capital
gain or loss if you held the shares for more than one year, and as short-term
capital gain or loss if you held the shares for one year or less. However, any
loss on shares you held for six months or less will be treated as long-term
capital loss to the extent of any capital gain distributions you received.

Corporations

Corporations investing in the Funds may be eligible for a dividends-received
deduction. See "Dividends and Tax Status" in the SAI for additional information
about the deduction.

Please consult your own tax advisor for advice about your tax situation.

32
<PAGE> 34

FINANCIAL HIGHLIGHTS

(for a share outstanding throughout each period)

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

These financial highlights were audited by PricewaterhouseCoopers LLP. The
accountants' report and the Funds' financial statements are included in the SAI
and the Funds' annual report, which are available upon request. Further
performance information is contained in the annual report.

<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
EQUITY INCOME FUND 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $21.25 $18.91 $17.24 $15.07 $15.50
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.46 0.49 0.45(1) 0.49 0.46
Net realized and unrealized gain on investments......... 4.02 4.15 2.89 2.48 0.10
------ ------ ------ ------ ------
Total from investment operations........................ 4.48 4.64 3.34 2.97 0.56
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.46) (0.48) (0.57) (0.44) (0.46)
Distributions (from realized gains)..................... (3.25) (1.82) (1.10) (0.36) (0.53)
------ ------ ------ ------ ------
Total distributions..................................... (3.71) (2.30) (1.67) (0.80) (0.99)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $22.02 $21.25 $18.91 $17.24 $15.07
====== ====== ====== ====== ======
TOTAL RETURN................................................ 22.60% 26.15% 20.04% 20.49% 3.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $175.3 $185.9 $182.5 $127.1 $ 87.2
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.87% 0.88% 0.98% 1.02% 1.05%
After expense reimbursement............................... 0.87% 0.88% 0.98% 1.00% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 1.99% 2.49% 2.56% 3.11% 2.85%
After expense reimbursement............................. 1.99% 2.49% 2.56% 3.14% 2.90%
Portfolio turnover rate..................................... 23% 44% 24% 50% 36%
</TABLE>

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

33
<PAGE> 35

<TABLE>
<CAPTION>
January 2,
1997*
Year Ended through
June 30, June 30,
MID-CAP FUND 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $11.65 $10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.13 0.07
Net realized and unrealized gain on investments......... 1.60 1.64
------ ------
Total from investment operations........................ 1.73 1.71
------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.14) (0.06)
Distributions (from realized gains)..................... (0.32) --
------ ------
Total distributions..................................... (0.46) (0.06)
------ ------
Net Asset Value, End of Period.............................. $12.92 $11.65
====== ======
TOTAL RETURN................................................ 15.00% 17.15%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $7.5 $2.0
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 2.72% 8.26%+
After expense reimbursement............................... 1.00% 1.00%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement.............................. (0.52)% (5.39)%+
After expense reimbursement............................... 1.20% 1.87%+
Portfolio turnover rate..................................... 71% 23%++
</TABLE>

* Commencement of operations.

+ Annualized.

++ Not annualized.

34
<PAGE> 36

<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
SMALL CAP FUND 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $23.83 $21.33 $21.53 $19.53 $19.88
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............................ (0.06)(1) 0.03 0.05(1) (0.06) (0.01)
Net realized and unrealized gain on investments......... 5.13 5.62 2.80 2.84 0.78
------ ------ ------ ------ ------
Total from investment operations........................ 5.07 5.65 2.85 2.78 0.77
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.05) (0.09) -- -- (0.20)
Distributions (from realized gains)..................... (2.37) (3.06) (3.05) (0.78) (0.92)
------ ------ ------ ------ ------
Total distributions..................................... (2.42) (3.15) (3.05) (0.78) (1.12)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $26.48 $23.83 $21.33 $21.53 $19.53
====== ====== ====== ====== ======
TOTAL RETURN................................................ 22.24% 29.74% 14.24% 14.79% 3.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $94.9 $27.5 $16.5 $20.5 $13.1
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.94% 1.30% 1.21% 1.49% 1.65%
After expense reimbursement............................... 0.94% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement.............................. (0.23)% (0.20)% 0.03% (0.82)% (0.71)%
After expense reimbursement............................... (0.23)% 0.10% 0.24% (0.34)% (0.06)%
Portfolio turnover rate..................................... 85% 88% 119% 81% 44%
</TABLE>

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

35
<PAGE> 37

<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
INTERNATIONAL FUND 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $ 24.17 $20.44 $ 17.70 $16.79 $14.63
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.59 0.59(1) 0.56(1) 0.28 0.26
Net realized and unrealized gain on investments......... 1.23 3.78 2.51 1.52 2.19
--------- ------ ------- ------ ------
Total from investment operations.................... 1.82 4.37 3.07 1.80 2.45
--------- ------ ------- ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.66) (0.48) (0.14) (0.44) (0.14)
Distributions (from realized gains)..................... -- (0.16) (0.19) (0.45) (0.15)
--------- ------ ------- ------ ------
Total distributions..................................... (0.66) (0.64) (0.33) (0.89) (0.29)
--------- ------ ------- ------ ------
Net Asset Value, End of Year................................ $ 25.33 $24.17 $ 20.44 $17.70 $16.79
========= ====== ======= ====== ======
TOTAL RETURN................................................ 7.77% 21.59% 18.61% 11.08% 16.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $ 1,476.8 $888.5 $ 331.0 $ 51.5 $ 26.0
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.89% 1.07% 1.11% 1.39% 1.61%
After expense reimbursement............................... 0.89% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 2.32% 2.59% 2.67% 2.45% 2.01%
After expense reimbursement............................... 2.32% 2.66% 2.78% 2.83% 2.62%
Portfolio turnover rate..................................... 20% 18% 12% 24% 23%
</TABLE>

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

36
<PAGE> 38

<TABLE>
<CAPTION>
January 2,
1997*
Year Ended through
June 30, June 30,
GLOBAL EQUITY FUND 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $11.09 $10.00
------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.28 0.14
Net realized and unrealized gain on investments......... 0.51 1.09
------ -------
Total from investment operations........................ 0.79 1.23
------ -------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.32) (0.14)
Distributions (from realized gains)..................... (0.18) --
------ -------
Total distributions..................................... (0.50) (0.14)
------ -------
Net Asset Value, End of Period.............................. $11.38 $11.09
====== =======
TOTAL RETURN................................................ 7.61% 12.32%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $7.3 $3.7
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 2.88% 4.43%+
After expense reimbursement............................... 1.00% 1.00%+
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 0.00% 0.07%+
After expense reimbursement............................... 1.88% 3.50%+
Portfolio turnover rate..................................... 54% 18%++
</TABLE>

* Commencement of operations.

+ Annualized.

++ Not annualized.

37
<PAGE> 39

<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
BALANCED FUND 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $19.38 $18.27 $16.74 $15.71 $16.69
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.89 0.90(1) 0.94 0.89 0.89
Net realized and unrealized gain (loss) on
investments........................................... 1.58 1.86 1.53 1.53 (0.27)
------ ------ ------ ------ ------
Total from investment operations........................ 2.47 2.76 2.47 2.42 0.62
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.90) (0.99) (0.92) (0.80) (0.94)
Distributions (from realized gains)..................... (1.11) (0.66) (0.02) (0.57) (0.66)
Return of capital....................................... -- -- -- (0.02) --
------ ------ ------ ------ ------
Total distributions..................................... (2.01) (1.65) (0.94) (1.39) (1.60)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $19.84 $19.38 $18.27 $16.74 $15.71
====== ====== ====== ====== ======
TOTAL RETURN................................................ 13.29% 15.75% 15.04% 16.40% 3.60%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of year (millions).......................... $104.6 $ 90.2 $70.6 $32.1 $36.0
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.93% 0.98% 1.06% 1.19% 1.20%
After expense reimbursement............................... 0.93% 0.98% 1.00% 1.00% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 4.49% 4.77% 5.20% 5.44% 5.04%
After expense reimbursement............................... 4.49% 4.77% 5.26% 5.63% 5.24%
Portfolio turnover rate..................................... 121% 117% 92% 51% 97%
</TABLE>

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

38
<PAGE> 40

<TABLE>
<CAPTION>
December 6,
1994*
Year Ended June 30, through
-------------------------- June 30,
TOTAL RETURN BOND FUND 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $13.04 $12.78 $12.94 $12.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.89 0.99 0.84(1) 0.46
Net realized and unrealized gain on investments......... 0.50 0.30 0.06 0.94
------ ------ ------ ------
Total from investment operations........................ 1.39 1.29 0.90 1.40
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.97) (0.92) (0.93) (0.46)
Distributions (from realized gains)..................... -- (0.11) (0.13) --
------ ------ ------ ------
Total distributions..................................... (0.97) (1.03) (1.06) (0.46)
------ ------ ------ ------
Net Asset Value, End of Period.............................. $13.46 $13.04 $12.78 $12.94
====== ====== ====== ======
TOTAL RETURN................................................ 11.04% 10.48% 7.05% 11.88%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $45.2 $14.3 $43.4 $15.3
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 1.02% 0.95% 0.98% 2.93%+
After expense reimbursement............................... 0.65% 0.65% 0.68% 0.80%+
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 6.28% 6.78% 6.86% 4.92%+
After expense reimbursement............................... 6.65% 7.08% 7.16% 7.05%+
Portfolio turnover rate..................................... 195% 173% 51% 68%++
</TABLE>

* Commencement of operations.

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

+ Annualized.

++ Not annualized.

39
<PAGE> 41

<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
LOW DURATION FUND 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year....................... $10.23 $10.12 $10.15 $ 9.93 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................ 0.66 0.66 0.68 0.75 0.77
Net realized and unrealized gain on investments...... 0.05 0.10 0.06 0.23 0.11
------ ------ ------ ------ ------
Total from investment operations..................... 0.71 0.76 0.74 0.98 0.88
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)............... (0.68) (0.64) (0.72) (0.75) (0.77)
Dividends (from realized gains)...................... (0.06) (0.01) (0.05) (0.01) (0.18)
------ ------ ------ ------ ------
Total distributions.................................. (0.74) (0.65) (0.77) (0.76) (0.95)
------ ------ ------ ------ ------
Net Asset Value, End of Year............................. $10.20 $10.23 $10.12 $10.15 $ 9.93
====== ====== ====== ====== ======
TOTAL RETURN............................................. 7.19% 7.79% 7.47% 10.23% 9.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)....................... $253.2 $171.2 $189.2 $123.3 $36.5
Ratio of expenses to average net assets:
Before expense reimbursement........................... 0.65% 0.66% 0.60% 0.75% 1.10%
After expense reimbursement............................ 0.58% 0.58% 0.58% 0.58% 0.58%
Ratio of net investment income to average net assets:
Before expense reimbursement........................... 6.39% 6.26% 7.07% 7.43% 6.82%
After expense reimbursement............................ 6.46% 6.34% 7.09% 7.61% 7.34%
Portfolio turnover rate.................................. 119% 202% 50% 71% 254%
</TABLE>

40
<PAGE> 42

<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $10.15 $10.17 $10.12 $10.21 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.63 0.58 0.66 0.66 0.53
Net realized and unrealized gain (loss) on
investments........................................... 0.00 (0.01) 0.05 (0.09) 0.21
------ ------ ------ ------ ------
Total from investment operations........................ 0.63 0.57 0.71 0.57 0.74
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.65) (0.59) (0.66) (0.66) (0.53)
Return of capital....................................... -- -- (0.00) -- --
------ ------ ------ ------ ------
Total distributions..................................... (0.65) (0.59) (0.66) (0.66) (0.53)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $10.13 $10.15 $10.17 $10.12 $10.21
====== ====== ====== ====== ======
TOTAL RETURN................................................ 6.37% 5.77% 7.23% 5.78% 7.47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $28.0 $21.7 $18.7 $19.8 $10.5
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.92% 0.96% 0.88% 1.26% 2.06%
After expense reimbursement............................... 0.48% 0.48% 0.48% 0.48% 0.48%
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 5.92% 5.34% 6.15% 5.74% 4.16%
After expense reimbursement............................... 6.36% 5.82% 6.55% 6.52% 5.74%
Portfolio turnover rate..................................... 121% 154% 60% 81% 135%
</TABLE>

41
<PAGE> 43

INFORMATION ABOUT THE FUNDS

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

Please read this Prospectus before you invest in the Funds. Keep the Prospectus
for future reference. You can get additional information about the Funds in:

- - Statement of Additional Information (SAI)

(incorporated by reference into -- legally a part of -- this Prospectus)

- - Annual Report (contains a discussion of Fund performance)

- - Semi-annual Report

To get this information free of charge or for shareholder questions, contact:

Firstar Mutual Fund Services, LLC

615 East Michigan Avenue, 3rd Floor

P.O. Box 701

Milwaukee, Wisconsin 53201-0701

(800) 236-4479

Securities and Exchange Commission

Public Reference Section

Washington, DC 20549-6009

- - call 1-800-SEC-0330 for information on the Commission's Public Reference Room,
where documents can be copied for a fee

- - the information is available at the SEC's Internet site at http://www.sec.gov

You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.

Investment Company Act File No. 811-4182

42
<PAGE> 44

PROSPECTUS

APRIL 1, 1999

[HOTCHKIS AND WILEY FUNDS LOGO]

DISTRIBUTOR CLASS SHARES

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

SMALL CAP FUND

Seeks capital appreciation. The Fund invests primarily in stocks of U.S.
companies with market capitalizations of less than $2 billion.

INTERNATIONAL FUND

Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.

BALANCED FUND

Seeks to preserve capital while producing a high total return. The Fund's assets
are allocated between stocks and bonds.

TOTAL RETURN BOND FUND

Seeks to maximize long-term total return. The Fund invests in bonds of varying
maturities with a portfolio duration of two to eight years.

LOW DURATION FUND

Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in bonds of varying maturities with a portfolio duration of one to
three years.

The Securities and Exchange Commission has not approved or disapproved these
securities or the accuracy of this Prospectus. It is a criminal offense to state
otherwise.

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

<PAGE> 45

TABLE OF CONTENTS

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

<TABLE>
<S> <C>
KEY FACTS.............................................. 3
FEES AND EXPENSES...................................... 9
INVESTMENT OBJECTIVES AND POLICIES..................... 10
INVESTMENT RISKS....................................... 14
THE ADVISOR AND PORTFOLIO MANAGERS..................... 20
HOW TO BUY SHARES...................................... 21
HOW TO REDEEM SHARES................................... 22
HOW TO EXCHANGE SHARES................................. 22
DIVIDENDS AND TAXES.................................... 23
FINANCIAL HIGHLIGHTS................................... 24
INFORMATION ABOUT THE FUNDS........................back cover
</TABLE>

[HOTCHKIS AND WILEY FUNDS LOGO]

IMPORTANT TELEPHONE NUMBER

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

CLIENT SERVICES AND SHAREHOLDER INQUIRIES 800-236-4479

<PAGE> 46

KEY FACTS

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

INVESTMENT OBJECTIVES AND MAIN STRATEGIES

This section highlights important information about each Fund. Use this summary
to compare the Funds to other mutual funds. More detailed information follows
the summary.

STOCK FUNDS

<TABLE>
<CAPTION>
SMALL CAP FUND INTERNATIONAL FUND BALANCED FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OBJECTIVE - capital appreciation - current income - preserve capital
- long-term growth of while producing a high
income total return
- growth of capital

MAIN INVESTMENTS - stocks of U.S. - international stocks - U.S. stocks and
companies with market investment grade
capitalizations of bonds
less than $2 billion
</TABLE>

BOND FUNDS

<TABLE>
<CAPTION>
TOTAL RETURN
BOND FUND LOW DURATION FUND
- ------------------------------------------------------------------------------------
<S> <C> <C>
OBJECTIVE - maximize long-term - maximize total return
total return - preserve capital

CREDIT QUALITY - at least 85% - at least 70% in A
investment grade; up to rated or better; up to
15% rated below 30% rated BBB/Baa; up
investment grade, none to 10% rated below
below B investment grade, none
below B
DURATION 2-8 years 1-3 years
MORE VOLATILE LESS VOLATILE
</TABLE>

MAIN RISKS

3
<PAGE> 47

when interest rates go up, the value of bonds goes down. The value of the Bond
Funds' shares also may be affected by market conditions and economic or
political developments. If the value of the Funds' investments goes down, you
may lose money.

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

THE FUNDS' PERFORMANCE

A number of factors -- including risk -- can affect how each Fund performs. The
charts below show how each Fund's Investor Class shares have performed for each
calendar year since the Fund began and how returns vary from year to year. They
do not reflect the expense of sub-transfer agency fees that began to be paid on
March 1, 1999 or 12b-1 fees paid by the Distributor Class shares. How a Fund has
performed in the past is not necessarily an indication of how the Fund will
perform in the future.

SMALL CAP FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1989 20.55%
1990 -9.01%
1991 48.24%
1992 13.73%
1993 12.59%
1994 1.12%
1995 18.43%
1996 14.26%
1997 39.52%
1998 -15.56%
</TABLE>

Best Quarter: 27.49% (1st Quarter of 1987).

Worst Quarter: -27.51% (3rd Quarter of 1990).

<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10 YEARS 9/20/85
- ------------------------------------------------------------------------------------------------------
Small Cap Fund -15.56% 10.02% 12.87% 11.98%
- ------------------------------------------------------------------------------------------------------
Russell 2000 Index -2.55% 11.86% 12.92% 12.27%
- ------------------------------------------------------------------------------------------------------
</TABLE>

4
<PAGE> 48

INTERNATIONAL FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1991 20.35%
1992 -2.66%
1993 45.76%
1994 -2.93%
1995 19.89%
1996 18.29%
1997 5.33%
1998 6.41%
</TABLE>

Best Quarter: 15.50% (4th Quarter of 1998).

Worst Quarter: - 18.36% (3rd Quarter of 1998).

<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10/1/90
- ------------------------------------------------------------------------------------------------
International Fund 6.41% 9.05% 12.52%
- ------------------------------------------------------------------------------------------------
MSCI EAFE Index 20.33% 9.50% 10.60%
- ------------------------------------------------------------------------------------------------
</TABLE>

5
<PAGE> 49

BALANCED FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1989 17.88%
1990 -0.45%
1991 20.53%
1992 9.41%
1993 12.59%
1994 0.82%
1995 24.80%
1996 11.71%
1997 16.75%
1998 5.20%
</TABLE>

Best Quarter: 10.33% (4th Quarter of 1985).

Worst Quarter: - 8.32% (3rd Quarter of 1990).

<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10 YEARS 8/13/85
- --------------------------------------------------------------------------------------------------------
Balanced Fund 5.20% 11.54% 11.64% 11.89%
- --------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index 28.76% 24.15% 19.22% 18.36%
- --------------------------------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Index 9.47% 7.30% 9.33% N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>

6
<PAGE> 50

TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1995 21.32%
1996 4.34%
1997 10.76%
1998 8.79%
</TABLE>

Best Quarter: 6.57% (2nd Quarter of 1995).

Worst Quarter: -2.38% (1st Quarter of 1996).

<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 12/6/94
- --------------------------------------------------------------------------------------
Total Return Bond Fund 8.79% 11.03%
- --------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.69% 9.82%
- --------------------------------------------------------------------------------------
</TABLE>

7
<PAGE> 51

LOW DURATION FUND

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1994 5.23%
1995 12.75%
1996 6.23%
1997 7.59%
1998 5.65%
</TABLE>

Best Quarter: 5.24% (3rd Quarter of 1993).

Worst Quarter: - 0.09% (4th Quarter of 1998).

<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS 5 LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR YEARS 5/18/93
- ------------------------------------------------------------------------------------------------
Low Duration Fund 5.64% 7.45% 7.92%
- ------------------------------------------------------------------------------------------------
Merrill Lynch 1-3 Year U.S. Treasury Index 7.00% 5.99% 5.79%
- ------------------------------------------------------------------------------------------------
</TABLE>

8
<PAGE> 52

FEES AND EXPENSES

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

This table shows the expenses paid by the Distributor Class shares of the Funds.
No sales load, exchange fee or redemption fee is charged on the purchase or sale
of Fund shares.

Investment dealers and other firms may charge you additional fees for buying and
selling Fund shares or for advisory services. See their materials for details.

<TABLE>
<CAPTION>
ANNUAL FUND Small Inter- Total Low
OPERATING EXPENSES Cap national Balanced Return Duration
(expenses that are deducted from Fund assets) Fund Fund Fund Bond Fund Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fees...................................... .75% .75% .75% .55% .46%
Distribution fees.................................... .25% .25% .25% .25% .25%
Other expenses....................................... .31% .25% .23% .53% .26%
---- ---- ---- ---- ---
Total Fund operating expenses........................ 1.31% 1.25% 1.23% 1.33% .97%
==== ==== ==== ==== ===
Expense reimbursement................................ 0% 0% .03% .43% .14%
---- ---- ---- ---- ---
Net Fund operating expenses.......................... 1.31% 1.25% 1.20% .90% .83%
==== ==== ==== ==== ===
</TABLE>

Although not required to do so, Hotchkis and Wiley (the "Advisor") has agreed to
limit the annual operating expenses of each Fund, except the Small Cap and the
International Fund, as follows:

<TABLE>
<CAPTION>
Expense Limits
(as a percentage of
Fund average net assets)
- --------------------------------------------------------------------------------
<S> <C>
Balanced............................................... 1.20
Total Return Bond...................................... .90
Low Duration........................................... .83
</TABLE>

Distributor Class shares have not previously been offered. On March 1, 1999, the
Funds began paying sub-transfer agency fees. The table above has been restated
to reflect the 12b-1 fees payable by the Distributor Class and the sub-transfer
agency fees as if they had been in effect for the Funds' fiscal year ended June
30, 1998. The Advisor has contractually agreed to keep the expense limits in
place for one year.

EXAMPLE

<TABLE>
<CAPTION>
Total
Small Inter- Return Low
Cap national Balanced Bond Duration
Fund Fund Fund Fund Fund
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One Year.............................................. $ 133 $ 127 $ 122 $ 92 $ 85
Three Years........................................... $ 415 $ 397 $ 381 $ 287 $ 265
Five Years............................................ $ 718 $ 686 $ 660 $ 498 $ 460
Ten Years............................................. $1,579 $1,511 $1,455 $1,108 $1,025
</TABLE>

9
<PAGE> 53

INVESTMENT OBJECTIVES AND POLICIES

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

STOCK FUNDS

VALUE INVESTING

- - low price-to-earnings ratio relative to the market

- - high dividend yield relative to the market

- - low price-to-book value ratio relative to the market

- - financial strength

The different Stock Funds emphasize these characteristics in different degrees
depending on investment objective and market capitalization focus.

This value discipline can sometimes prevent the Funds from investing in market
sectors which are significantly represented in broad market indexes.

SMALL CAP FUND

The Small Cap Fund's investment objective is CAPITAL APPRECIATION.

The Small Cap Fund invests at least 65% of its total assets in stocks of small
U.S. companies. A "small company" is one with a market capitalization of less
than $2 billion at the time of investment.

The Small Cap Fund can invest up to 20% of its total assets in foreign
securities.

INTERNATIONAL FUND

The International Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.

The International Fund may enter into foreign currency options or forward
foreign currency exchange contracts to hedge currency fluctuations.

BOND INVESTMENTS IN STOCK FUNDS

The Stock Funds buy common stocks and securities with common stock
characteristics, like convertible preferred stocks, convertible bonds or
warrants. They also may buy bonds. Convertible securities and bonds will be
rated investment grade (the four highest grades) by a major rating agency like
Moody's Investors Service or Standard & Poor's or, if unrated, be of comparable
quality in the Advisor's opinion. In addition, the Small Cap Fund may invest up
to 5% of its total assets in convertible securities and bonds rated below
investment grade, but not below B, or, if unrated, of comparable quality in the
Advisor's opinion.

10
<PAGE> 54

BALANCED FUND

- - U.S. Government securities

- - preferred stocks

- - mortgage-backed and other asset-backed securities

- - corporate bonds

- - bonds that are convertible into stocks

- - bank certificates of deposit, fixed time deposits and bankers' acceptances

- - repurchase agreements, reverse repurchase agreements and dollar rolls

- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities

- - obligations of international agencies or supra-national entities

- - municipal bonds

The Balanced Fund can invest up to 20% of its total assets in foreign
securities.

BOND FUNDS

TOTAL RETURN BOND FUND

LOW DURATION FUND

The Bond Funds seek to achieve their objectives by investing mainly in
investment grade, interest-bearing securities of varying maturities. These
include:

- - U.S. Government securities

- - preferred stocks

- - mortgage-backed and other asset-backed securities

- - corporate bonds

11
<PAGE> 55

- - bonds that are convertible into stocks

- - bank certificates of deposit, fixed time deposits and bankers' acceptances

- - repurchase agreements, reverse repurchase agreements and dollar rolls

- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities

- - obligations of international agencies or supra-national entities

- - municipal bonds

RATINGS LIMITATIONS

Total Return Bond Fund

- - at least 85% of total assets rated at least investment grade or, if
short-term, the second highest quality grade, by a major rating agency such as
Moody's or Standard & Poor's (S&P)

- - up to 15% of total assets rated below investment grade (below Baa by Moody's
or below BBB by S&P), but none below B

- - can invest in unrated securities if the Advisor believes them to be of
comparable quality

Low Duration Fund

- - at least 70% of total assets rated at least A or, if short-term, the second
highest quality grade, by a major rating agency

- - up to 30% of total assets rated Baa by Moody's or BBB by S&P

- - up to 10% of total assets rated below investment grade, but none below B

- - can invest in unrated securities if the Advisor believes them to be of
comparable quality

MATURITY AND DURATION

REQUIREMENTS

MATURITY. The EFFECTIVE MATURITY of a bond is the weighted average period over
which principal is expected to be repaid. STATED MATURITY is the date when the
issuer is scheduled to make the final payment of principal. Effective maturity
is different than stated maturity because it estimates the effect of expected
principal prepayments and call provisions.

DURATION. The Bond Funds have different portfolio "durations." Duration measures
the potential volatility of the price of a bond or a portfolio of bonds prior to
maturity. Duration is the magnitude of the change in price of a bond relative to
a given change in the market interest rate. Duration incorporates a bond's
yield, coupon interest payments, final maturity, call and put features and
prepayment exposure into one measure.

Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the durations shown below, each Bond Fund's price would
change as follows:

Low Duration 2 yrs. 1% decline > 2% gain in
Fund price
1% rise > 2% decline in
Fund price
</TABLE>

12
<PAGE> 56

FOREIGN BONDS

Each Bond Fund may invest in foreign bonds as follows:

- - up to 25% of total assets in foreign bonds that are denominated in U.S.
dollars

- - up to 15% of total assets in foreign bonds that are not denominated in U.S.
dollars

- - up to 15% of total assets in emerging market foreign bonds

MONEY MARKET INVESTMENTS

To meet redemptions and when waiting to invest cash receipts, the Funds may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Funds temporarily can invest up to 100% of their assets in short-term,
investment grade bonds and other money market instruments in response to adverse
market, economic or political conditions. Although this kind of investing would
provide some income, it would not provide capital appreciation.

TYPES OF SECURITIES

U.S. GOVERNMENT SECURITIES

CORPORATE BONDS

Each Fund can invest in corporate bonds. These include variable and floating
rate bonds and corporate commercial paper.

MUNICIPAL BONDS

13
<PAGE> 57

REAL ESTATE INVESTMENT TRUSTS

The Funds can invest in securities of real estate investment trusts or REITs.

ASSET-BACKED SECURITIES

MORTGAGE-BACKED SECURITIES

The Bond Funds and the Balanced Fund can invest in mortgage-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations ("CMOs").

OTHER DERIVATIVES

OTHER STRATEGIES

The Funds also follow certain policies when they:

- - LEND SECURITIES: each Bond Fund can lend up to 33 1/3% of the value of its
total assets.

- - buy securities on a WHEN-ISSUED or DELAYED DELIVERY basis (for each Fund
except the Small Cap Fund). The Funds will mark assets as segregated in an
amount equal to the when-issued securities.

PORTFOLIO TURNOVER

INVESTMENT RISKS

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

MARKET AND SELECTION RISK

14
<PAGE> 58

management selects will underperform the market or other funds with similar
investment objectives and investment strategies.

RISKS OF INVESTING IN SMALL

COMPANIES

The Small Cap Fund invests in the securities of small companies. Investment in
small companies involves more risk than investing in larger, more established
companies. Small companies may have limited product lines or markets. They may
be less financially secure than larger, more established companies. They may
depend on a small number of key personnel. If a product fails, or if management
changes, or there are other adverse developments, the Fund's investment in a
small cap company may lose substantial value.

Securities of small companies generally trade in lower volumes and are subject
to greater and more unpredictable price changes than larger cap securities or
the stock market as a whole. Investing in securities of small companies requires
a long-term view.

FOREIGN MARKET RISK

- - The value of a Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.

15
<PAGE> 59

- - The costs of non-U.S. securities transactions tend to be higher than those of
U.S. transactions.

- - International trade barriers or economic sanctions against certain non-U.S.
countries may adversely affect a Fund's non-U.S. holdings.

- - If a Fund purchases a bond issued by a foreign government, the government may
be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund would be able to collect amounts owed
by a foreign government.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

- - If the euro, or EMU as a whole, does not take effect as planned.

- - If a participating country withdraws from EMU.

RISKS OF CONVERTIBLE SECURITIES

ADDITIONAL BOND RISKS

16
<PAGE> 60

mortgage-backed securities are issued by private corporations rather than
Federal agencies. Private mortgage-backed securities have credit risk as well
as prepayment risk and extension risk.

Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations (CMOs). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing
costs). CMOs are created by dividing the principal and interest payments
collected on a pool of mortgages into several revenue streams (tranches) with
different priority rights to portions of the underlying mortgage payments.
Certain CMO tranches may represent a right to receive interest only (IOs),
principal only (POs) or an amount that remains after other floating-rate
tranches are paid (an inverse floater). These securities are frequently
referred to as "mortgage derivatives" and may be extremely sensitive to
changes in interest rates. If a Fund invests in CMO tranches (including CMO
tranches issued by government agencies) and interest rates move in a manner
not anticipated by Fund management, it is possible that the Fund could lose
all or substantially all of its investment.

17
<PAGE> 61

which case the Fund loses the investment opportunity of the assets it has set
aside to pay for the security and any gain in the security's price.

- - VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations are
floating rate securities that consist of an interest in a long-term bond and
the conditional right to demand payment prior to the bond's maturity from a
bank or other financial institution. If the bank or other financial
institution is unable to pay on demand, a Fund may be adversely affected. In
addition, these securities are subject to credit risk.

- - CORPORATE LOANS -- Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure.
Borrowers generally pay interest on corporate loans at rates that change in
response to changes in market interest rates such as the London Interbank
Offered Rate ("LIBOR") or the prime rates of U.S. banks. As a result, the
value of corporate loan investments is generally less responsive to shifts in
market interest rates. Because the trading market for corporate loans is less
developed than the secondary market for bonds and notes, the Fund may
experience difficulties from time to time in selling its corporate loans.
Borrowers frequently provide collateral to secure repayment of these
obligations. Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a "syndicate." The syndicate's
agent arranges the corporate loans, holds collateral and accepts payments of
principal and interest. If the agent developed financial problems, a Fund may
not recover its investment, or there might be a delay in the Fund's recovery.
By investing in a corporate loan, a Fund becomes a member of the syndicate.

18
<PAGE> 62

to its collateral. In addition, the value of collateral may erode during a
bankruptcy case. In the event of a bankruptcy, the holder of a corporate loan
may not recover its principal, may experience a long delay in recovering its
investment and may not receive interest during the delay.

RISKS OF ILLIQUID INVESTMENTS

- - 144A: -- Rule 144A securities are restricted securities that can be resold to
qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are deemed to be
liquid.

RISKS OF DERIVATIVES

- - CREDIT RISK -- Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to a Fund.

- - CURRENCY RISK -- Currency risk is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar terms)
of an investment.

Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Funds and
the risks associated with these instruments.

19
<PAGE> 63

THE ADVISOR AND PORTFOLIO MANAGERS

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

THE ADVISOR

The table below shows the fees paid to the Advisor for the Funds' fiscal year
ended June 30, 1998 as a percentage of average net assets.

<TABLE>
<CAPTION>
FUND %
---- ---
<S> <C>
Small Cap.................................. .75
International.............................. .75
Balanced................................... .75
Total Return Bond.......................... .55
Low Duration............................... .46
</TABLE>

Although not required to do so, the Advisor has agreed to make reimbursements so
that the regular annual operating expenses of the Distributor Class of each Fund
except the Small Cap and International Funds will be limited as follows:

<TABLE>
<CAPTION>
EXPENSE LIMITS
(AS A
PERCENTAGE OF
AVERAGE NET
FUND ASSETS)
---- -------------------
<S> <C>
Balanced........................ 1.20
Total Return Bond............... .90
Low Duration.................... .83
</TABLE>

The Advisor has agreed to these expense limits for one year, and will thereafter
give shareholders at least 30 days' notice if this reimbursement policy will
change.

The Advisor is allowed to allocate brokerage based on sales of shares of funds
managed by the Advisor but has not done so yet.

SUBADVISORS

The Advisor has entered into subadvisory agreements with Mercury Asset
Management International and Merrill Lynch Asset Management U.K. Limited,
affiliated investment advisors that are indirect subsidiaries of Merrill Lynch &
Co., Inc. The subadvisory arrangements are for investment research,
recommendations and other investment related services to be provided to the
International Fund. There is no increase in the aggregate fees paid by the
International Fund for these services.

PORTFOLIO MANAGERS

The portfolio managers who have responsibility for the day-to-day management of
the Funds' portfolios are listed below.

SMALL CAP FUND

The portfolio managers of the Small Cap Fund are Jim Miles and David Green. Mr.
Miles began co-managing the Fund in May 1995 when he joined the Advisor. Before
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. Mr. Green joined the Advisor in 1997. Before
that, Mr. Green was associated with Goldman Sachs Asset Management, where he
worked as an investment analyst from November 1995. Before that, he was an
investment manager and analyst with Prudential Investment Advisors.

INTERNATIONAL FUND

20
<PAGE> 64

Mr. Hartford was with the Investment Bank of Ireland (now Bank of Ireland Asset
Management) 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. He has been associated with Mercury Asset Management International in
London since July 1998. Before 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.

BALANCED FUND

BOND FUNDS

A NOTE ABOUT YEAR 2000

HOW TO BUY SHARES

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

The Small Cap, International, Balanced, Total Return Bond and Low Duration Funds
offer two classes of shares, Investor Class and Distributor Class. The Equity
Income, Mid-Cap, Global Equity and Short-Term Investment Funds and the Equity
Fund for Insurance Companies, other series of the Hotchkis and Wiley Funds,
offer only Investor Class shares. Distributor Class shares, to which this
Prospectus relates, are purchased from administrators, broker-dealers and other
institutions that provide accounting, recordkeeping or other services to
investors and that have an administrative services agreement with the Trust or
the Advisor

21
<PAGE> 65

("Distributors"). Distributor Class shares are subject to an annual Rule 12b-1
fee of .25% of average net assets and no sales charge. Purchasers of Investor
Class shares do not pay a sales charge or a 12b-1 fee. Both classes pay advisory
fees and other expenses, like custody and brokerage fees.

You can buy and own Distributor Class shares only through an account with a
Distributor. Each Distributor will establish its own procedures for the purchase
of Distributor Class shares, including minimum initial and additional
investments for shares of each Fund and the acceptable methods of payments for
shares.

The Funds have adopted a Rule 12b-1 Plan that permits the Distributor Class
shares to make payments to Distributors for distribution services they provide.
Because these fees are paid out of the Funds' assets on an on-going basis, over
time these fees will increase your cost of investment and may cost you more than
paying other types of sales charges.

PRICING OF FUND SHARES

HOW TO REDEEM SHARES

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

You can redeem shares (sell them back to the Funds) only through an account with
a Distributor. Each Distributor will establish its own procedures for the sale
of Distributor Class shares and the payment of redemption proceeds.

If the redemption request is in PROPER FORM, the shares will be sold at the net
asset value next determined after the Distributor receives and accepts the
request. The Funds value their shares as of the close of regular trading on the
New York Stock Exchange. If your Distributor is closed on one of those days, you
may not be able to sell back your shares and their price could be affected.

DELAYS IN REDEEMING SHARES

At certain times when allowed by the SEC, we may delay sending your redemption
proceeds.

PAYMENTS

Redemption proceeds will be paid to Distributors within three business days,
although payment may be delayed up to 12 days if shares were bought with a
check.

CHANGES TO THE REDEMPTION

PRIVILEGE

The redemption privilege may be modified or terminated at any time on 30 days'
notice to shareholders.

REDEMPTION IN KIND

The Funds reserve the right to pay shareholders with large accounts securities
instead of cash in certain circumstances.

22
<PAGE> 66

HOW TO EXCHANGE SHARES

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

You can exchange Distributor Class shares in a Fund for Distributor Class shares
of another Fund subject to the policies and procedures adopted by the
Distributors. Shares are exchanged at the next price calculated on a day the New
York Stock Exchange is open, after an exchange is received and accepted by your
Distributor. For tax purposes, exchanges are a sale and purchase.

CHANGES TO THE EXCHANGE PRIVILEGE

The Funds reserve the right to reject any exchange request. The exchange
privilege can be modified or terminated at any time on 30 days' notice to
shareholders.

DIVIDENDS AND TAXES

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

DIVIDENDS AND DISTRIBUTIONS

The Funds pay income dividends, if any, as follows:

<TABLE>
<S> <C>
Monthly Total Return Bond Fund
Low Duration Fund
Quarterly Balanced Fund
Twice Yearly International Fund
Yearly Small Cap Fund
</TABLE>

The Funds pay distributions of any net realized short-term gains and any net
capital gains every year.

TAXES

Dividends

Selling/Exchanging Shares

Corporations

Corporations investing in the Funds may be eligible for a dividends-received
deduction. See "Dividends and Tax Status" in the SAI for additional information
about the deduction.

Please consult your own tax advisor for advice about your tax situation.

23
<PAGE> 67

FINANCIAL HIGHLIGHTS

(for an Investor Class share outstanding throughout each period)

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

Shares of the Distributor Class have not previously been offered. The financial
highlights are for the Investor Class shares, which are not subject to an annual
distribution fee of .25% of average net assets. These financial highlights were
audited by PricewaterhouseCoopers LLP. The accountants' report and the Funds'
financial statements are included in the SAI and the Funds' annual report, which
are available upon request. Further performance information is contained in the
annual report.

<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
SMALL CAP FUND 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $23.83 $21.33 $21.53 $19.53 $19.88
------ ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............................ (0.06)(1) 0.03 0.05(1) (0.06) (0.01)
Net realized and unrealized gain on investments......... 5.13 5.62 2.80 2.84 0.78
------ ------- ------ ------ ------
Total from investment operations........................ 5.07 5.65 2.85 2.78 0.77
------ ------- ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.05) (0.09) -- -- (0.20)
Distributions (from realized gains)..................... (2.37) (3.06) (3.05) (0.78) (0.92)
------ ------- ------ ------ ------
Total distributions..................................... (2.42) (3.15) (3.05) (0.78) (1.12)
------ ------- ------ ------ ------
Net Asset Value, End of Year................................ $26.48 $23.83 $21.33 $21.53 $19.53
====== ======= ====== ====== ======
TOTAL RETURN................................................ 22.24% 29.74% 14.24% 14.79% 3.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $94.9 $27.5 $16.5 $20.5 $13.1
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.94% 1.30% 1.21% 1.49% 1.65%
After expense reimbursement............................... 0.94% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement.............................. (0.23)% (0.20)% 0.03% (0.82)% (0.71)%
After expense reimbursement............................... (0.23)% 0.10% 0.24% (0.34)% (0.06)%
Portfolio turnover rate..................................... 85% 88% 119% 81% 44%
</TABLE>

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

24
<PAGE> 68

<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
INTERNATIONAL FUND 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............... $ 24.17 $ 20.44 $17.70 $16.79 $14.63
-------- ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................... 0.59 0.59(1) 0.56(1) 0.28 0.26
Net realized and unrealized gain on
investments............................... 1.23 3.78 2.51 1.52 2.19
-------- ------- ------ ------ ------
Total from investment operations............ 1.82 4.37 3.07 1.80 2.45
-------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)...... (0.66) (0.48) (0.14) (0.44) (0.14)
Distributions (from realized gains)......... -- (0.16) (0.19) (0.45) (0.15)
-------- ------- ------ ------ ------
Total distributions......................... (0.66) (0.64) (0.33) (0.89) (0.29)
-------- ------- ------ ------ ------
Net Asset Value, End of Year..................... $ 25.33 $ 24.17 $20.44 $17.70 $16.79
======== ======= ====== ====== ======
TOTAL RETURN..................................... 7.77% 21.59% 18.61% 11.08% 16.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)............... $1,476.8 $888.5 $331.0 $51.5 $26.0
Ratio of expenses to average net assets:
Before expense reimbursement................... 0.89% 1.07% 1.11% 1.39% 1.61%
After expense reimbursement.................... 0.89% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement................... 2.32% 2.59% 2.67% 2.45% 2.01%
After expense reimbursement.................... 2.32% 2.66% 2.78% 2.83% 2.62%
Portfolio turnover rate.......................... 20% 18% 12% 24% 23%
</TABLE>

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

25
<PAGE> 69

<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1998 1997 1996 1995 1994
BALANCED FUND ------ ------ ------ ------ ------
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year................. $19.38 $18.27 $16.74 $15.71 $16.69
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................... 0.89 0.90(1) 0.94 0.89 0.89
Net realized and unrealized gain (loss) on
investments................................. 1.58 1.86 1.53 1.53 (0.27)
------ ------ ------ ------ ------
Total from investment operations.............. 2.47 2.76 2.47 2.42 0.62
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)........ (0.90) (0.99) (0.92) (0.80) (0.94)
Distributions (from realized gains)........... (1.11) (0.66) (0.02) (0.57) (0.66)
Return of capital............................. -- -- -- (0.02) --
------ ------ ------ ------ ------
Total distributions........................... (2.01) (1.65) (0.94) (1.39) (1.60)
------ ------ ------ ------ ------
Net Asset Value, End of Year....................... $19.84 $19.38 $18.27 $16.74 $15.71
====== ====== ====== ====== ======
TOTAL RETURN....................................... 13.29% 15.75% 15.04% 16.40% 3.60%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of year (millions)................. $104.6 $ 90.2 $ 70.6 $ 32.1 $ 36.0
Ratio of expenses to average net assets:
Before expense reimbursement..................... 0.93% 0.98% 1.06% 1.19% 1.20%
After expense reimbursement...................... 0.93% 0.98% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement..................... 4.49% 4.77% 5.20% 5.44% 5.04%
After expense reimbursement...................... 4.49% 4.77% 5.26% 5.63% 5.24%
Portfolio turnover rate............................ 121% 117% 92% 51% 97%
</TABLE>

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

26
<PAGE> 70

<TABLE>
<CAPTION>
December 6,
1994*
Year Ended June 30, through
-------------------------- June 30,
TOTAL RETURN BOND FUND 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...................... $13.04 $12.78 $12.94 $12.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................ 0.89 0.99 0.84(1) 0.46
Net realized and unrealized gain on investments...... 0.50 0.30 0.06 0.94
------ ------ ------ ------
Total from investment operations..................... 1.39 1.29 0.90 1.40
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)............... (0.97) (0.92) (0.93) (0.46)
Distributions (from realized gains).................. -- (0.11) (0.13) --
------ ------ ------ ------
Total distributions.................................. (0.97) (1.03) (1.06) (0.46)
------ ------ ------ ------
Net Asset Value, End of Period............................ $13.46 $13.04 $12.78 $12.94
====== ====== ====== ======
TOTAL RETURN.............................................. 11.04% 10.48% 7.05% 11.88%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)...................... $ 45.2 $ 14.3 $ 43.4 $ 15.3
Ratio of expenses to average net assets:
Before expense reimbursement............................ 1.02% 0.95% 0.98% 2.93%+
After expense reimbursement............................. 0.65% 0.65% 0.68% 0.80%+
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 6.28% 6.78% 6.86% 4.92%+
After expense reimbursement............................. 6.65% 7.08% 7.16% 7.05%+
Portfolio turnover rate................................... 195% 173% 51% 68%++
</TABLE>

* Commencement of operations.

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

+ Annualized.

++ Not annualized.

27
<PAGE> 71

<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
LOW DURATION FUND 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $10.23 $10.12 $10.15 $ 9.93 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.66 0.66 0.68 0.75 0.77
Net realized and unrealized gain on
investments........................................... 0.05 0.10 0.06 0.23 0.11
------ ------ ------ ------ ------
Total from investment operations........................ 0.71 0.76 0.74 0.98 0.88
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.68) (0.64) (0.72) (0.75) (0.77)
Dividends (from realized gains)......................... (0.06) (0.01) (0.05) (0.01) (0.18)
------ ------ ------ ------ ------
Total distributions..................................... (0.74) (0.65) (0.77) (0.76) (0.95)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $10.20 $10.23 $10.12 $10.15 $ 9.93
====== ====== ====== ====== ======
TOTAL RETURN................................................ 7.19% 7.79% 7.47% 10.23% 9.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $253.2 $171.2 $189.2 $123.3 $36.5
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.65% 0.66% 0.60% 0.75% 1.10%
After expense reimbursement............................... 0.58% 0.58% 0.58% 0.58% 0.58%
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 6.39% 6.26% 7.07% 7.43% 6.82%
After expense reimbursement............................... 6.46% 6.34% 7.09% 7.61% 7.34%
Portfolio turnover rate..................................... 119% 202% 50% 71% 254%
</TABLE>

28
<PAGE> 72

INFORMATION ABOUT THE FUNDS

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

Please read this Prospectus before you invest in the Funds. Keep the Prospectus
for future reference. You can get additional information about the Funds in:

- - Statement of Additional Information (SAI)

(incorporated by reference into -- legally a part of -- this Prospectus)

- - Annual Report (contains a discussion of Fund performance)

- - Semi-annual Report

To get this information free of charge or for shareholder questions, contact:

Firstar Mutual Fund Services, LLC

615 East Michigan Avenue, 3rd Floor

P.O. Box 701

Milwaukee, Wisconsin 53201-0701

(800) 236-4479

Securities and Exchange Commission

Public Reference Section

Washington, D.C. 20549-6009

- - call 1-800-SEC-0330 for information on the Commission's Public Reference Room,
where documents can be copied for a fee

- - the information is available at the SEC's Internet site at http://www.sec.gov

You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.

Investment Company Act File No. 811-4182

29
<PAGE> 73

HOTCHKIS AND
WILEY FUNDS

EQUITY FUND FOR INSURANCE COMPANIES

THE FUND SEEKS

- CURRENT INCOME

- LONG-TERM GROWTH OF INCOME

- GROWTH OF CAPITAL

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR THE ACCURACY OF THIS PROSPECTUS. IT IS A CRIMINAL
OFFENSE TO STATE OTHERWISE.

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

PROSPECTUS

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

APRIL 1, 1999

<PAGE> 74

TABLE OF CONTENTS

<TABLE>
<S> <C>
Key Facts................................................... 2
Investment Objective and Policies........................... 4
Investment Risks............................................ 5
How the Fund is Managed..................................... 9
How to Purchase Shares...................................... 9
How to Redeem Shares........................................ 10
Dividends and Taxes......................................... 10
Financial Highlights........................................ 11
Information About the Fund.............................back cover
</TABLE>

KEY FACTS

This section highlights important information about the Fund. Use this
summary to compare the Fund to other mutual funds. More detailed information
follows the summary.

INVESTMENT OBJECTIVE AND MAIN STRATEGIES

The Fund's objective is

- current income

- long-term growth of income

- growth of capital

The Fund invests mainly in stocks that provide dividends or interest over
the short- and long-term and increase in value. The Fund invests mostly in the
common stocks of large U.S. companies.

MAIN RISKS

As with any mutual fund, the value of the Fund's investments, and therefore
the value of Fund shares, may go up or down. These changes may occur because the
stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the Fund's
investments goes down, you may lose money.

If the Fund invests in foreign stocks it will have additional risks. For
example, the securities may go up or down in value depending on foreign exchange
rates, foreign political and economic developments and U.S. and foreign laws
relating to foreign investment. Foreign securities may also be less liquid, more
volatile and harder to value than U.S. securities.

THE FUND'S PERFORMANCE

A number of factors -- including risk -- can affect how the Fund performs.
This chart shows how the Fund has performed for each calendar year since it
began and shows how returns vary from year to year. How the Fund has performed
in the past is not necessarily an indication of how the Fund will perform in the
future.

2
<PAGE> 75

<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1994 -2.06%
1995 34.36%
1996 19.07%
1997 32.33%
1998 6.45%
</TABLE>

Since the Fund began, its best performance for a single quarter was 10.24% (3rd
quarter of 1997) and its worst single quarter performance was -10.47% (3rd
quarter of 1998).

<TABLE>
- -----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 1/29/93
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Fund for Insurance Companies....................... 6.45% 17.16% 16.28%
- -----------------------------------------------------------------------------------------
S&P 500 Index............................................. 28.76% 24.15% 21.82%
- -----------------------------------------------------------------------------------------
</TABLE>

The chart above shows how the Fund's performance compares with the returns
of the Standard & Poor's Composite Index of 500 Stocks, a capital weighted,
unmanaged index representing the aggregate market value of the common equity of
500 stocks primarily traded on the New York Stock Exchange.

FEES AND EXPENSES

This table shows the expenses paid by the Fund. No sales load, exchange fee
or redemption fee is imposed on the purchase or sale of Fund shares.

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
---------------------------------------------
<S> <C>
Management fees............................................. 0.52%
Other expenses.............................................. -0-*
----
Total Fund operating expenses..................... 0.52%
====
</TABLE>

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

* The Advisor pays all of the Fund's operating expenses other than the
management fee.

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
This example compares the cost of investing in
the Fund with that of other funds. The example
assumes that you invest $10,000 in the Fund and
that the Fund has a return of 5% each year. Your
actual costs may be higher or lower.............. $52 $167 $291 $653
</TABLE>

3
<PAGE> 76

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is CURRENT INCOME and LONG-TERM GROWTH OF
INCOME, accompanied by GROWTH OF CAPITAL.

VALUE INVESTING

The Advisor follows a value style. This means that the Advisor buys stocks
that it believes are currently undervalued by the market and thus have a lower
price than their true worth. Typical value characteristics include:

- low price-to-earnings ratio relative to the market

- high dividend yield relative to the market

- low price-to-book value ratio relative to the market

- financial strength

Stocks may be "undervalued" because they are part of an industry that is
out of favor with investors generally. Even in those industries, though,
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.

This value discipline can sometimes prevent the Fund from investing in
market sectors which are significantly represented in broad market indexes.

The Fund invests mostly in common stocks of large U.S. companies. Normally,
the Fund invests at least 80% of its total assets in stocks that pay dividends.
It also may invest in stocks that don't pay dividends or interest, but have
growth potential unrecognized by the market or changes in business or management
that indicate growth potential.

The Fund can invest up to 10% of its total assets in foreign securities.

BOND INVESTMENTS

The Fund buys common stocks and securities with common stock
characteristics, like convertible preferred stocks, convertible bonds or
warrants. It also may buy bonds. Convertible securities and bonds will be rated
investment grade (the four highest grades) by a major rating agency like Moody's
Investors Service or Standard & Poor's or, if unrated, be of comparable quality
in the Advisor's opinion.

After the Fund buys a bond or convertible security, it may be given a lower
rating or stop being rated. This would not require the Fund to sell the
security, but the Advisor will consider the change in rating in deciding whether
the Fund should keep the security.

MONEY MARKET INVESTMENTS

To meet redemptions and when waiting to invest cash receipts, the Fund may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Fund temporarily can invest in short-term, investment grade bonds and
other money market instruments in response to adverse market, economic or
political conditions. Although this kind of investing would provide some income,
it would not provide capital appreciation. 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.

TYPES OF SECURITIES

U.S. GOVERNMENT SECURITIES

The Fund can invest in U.S. Government securities. U.S. Government
securities include direct obligations issued by the United States Treasury, like
Treasury bills, certificates of indebtedness, notes,

4
<PAGE> 77

bonds and parts of notes or bonds. U.S. Government agencies and
instrumentalities that issue or guarantee securities include the Federal
National Mortgage Association ("Fannie Mae"), Government National Mortgage
Association ("Ginnie Mae"), Federal Home Loan Mortgage Association ("Freddie
Mac"), Federal Financing Bank, and Student Loan Marketing Association ("Sallie
Mae").

The Fund can enter into REPURCHASE AGREEMENTS involving U.S. Government
securities with commercial banks or broker-dealers. This is a method of
short-term investment of cash where the Fund would buy securities from a bank or
broker-dealer and sell them back a short time later (usually overnight) for a
slightly higher price. The Fund intends to be fully "collateralized" as to such
agreements, and the collateral will be marked-to-market daily. But if the person
obligated to repurchase from the Fund defaults, there may be possible delays and
expenses in liquidating the securities, a decline in their value and loss of
interest income.

CORPORATE BONDS

The Fund can invest in corporate bonds. These include variable and floating
rate bonds and corporate commercial paper.

REAL ESTATE INVESTMENT TRUSTS

The Fund can invest in securities of real estate investment trusts or
REITs.

DERIVATIVES

The Fund may use "derivatives," whose performance is derived from the
performance of an underlying asset. The Fund may use derivatives to hedge
against changes in interest rates, foreign currency exchange rates or securities
prices; for liquidity; or as part of their overall investment strategies. The
Fund will segregate liquid assets or enter offsetting positions to cover its
obligations, if any, under options, futures contracts and swap agreements to
avoid leveraging the Fund.

OTHER STRATEGIES

The Fund also follow certain policies when it:

- BORROWS MONEY: the Fund can borrow up to 10% of the value of its total
assets.

- make SHORT SALES AGAINST-THE-BOX: the Fund may borrow and sell "short"
securities when it also owns an equal amount of those securities (or
their equivalent). No more than 25% of the Fund's total assets can be
held as collateral for short sales at any one time.

- buy securities on a WHEN-ISSUED or DELAYED DELIVERY basis: the Fund will
mark assets as segregated in an amount equal to the when-issued
securities.

INVESTMENT RISKS

This section contains a summary discussion of the general risks of
investing in the Fund. As with any mutual fund, there can be no guarantee that
the Fund will meet its goals or that the Fund's performance will be positive for
any period of time.

5
<PAGE> 78

MARKET AND SELECTION RISK -- Market risk is the risk that the stock or bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the investments
that Fund management selects will underperform the stock market or other funds
with similar investment objectives and investment strategies.

FOREIGN MARKET RISK -- Since the Fund may invest in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because stocks traded on foreign markets have often
(though not always) performed differently than stocks in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular,
investment in foreign securities involves the following risks.

- The economies of some foreign markets often do not compare favorably with
that of the United States in areas such as growth of gross national
product, reinvestment of capital, resources, and balance of payments.
Some of these economics may rely heavily on particular industries or
foreign capital. They may be more vulnerable to adverse diplomatic
developments, the imposition of economic sanctions against a particular
country or countries, changes in international trading patterns, trade
barriers, and other protectionist or retaliatory measures.

- Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets, or the imposition of
punitive taxes.

- The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices.
They also could impair the Fund's ability to purchase or sell foreign
securities or transfer its assets or income back into the United States,
or otherwise adversely affect the Fund's operations.

- Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable legal judgments in
foreign courts, and political and social instability. Legal remedies
available to investors in some foreign countries may be less extensive
than those available to investors in the United States.

- Because there are generally fewer investors on foreign exchanges and a
smaller number of shares traded each day, it may be difficult for the
Fund to buy and sell securities on those exchanges. In addition, prices
of foreign securities may go up and down more than prices of securities
traded in the United States.

- Foreign markets may have different clearance and settlement procedures.
In certain markets, settlements may be unable to keep pace with the
volume of securities transactions. If this occurs, settlement may be
delayed and the Fund's assets may be uninvested and not earning returns.
The Fund also may miss investment opportunities or be unable to sell an
investment because of these delays.

- The value of the Fund's foreign holdings (and hedging transactions in
foreign currencies) will be affected by changes in currency exchange
rates.

- The costs of non-U.S. securities transactions tend to be higher than
those of U.S. transactions.

- International trade barriers or economic sanctions against certain
non-U.S. countries may adversely affect the Fund's non-U.S. holdings.

- If the Fund purchases a bond issued by a foreign government, the
government may be unwilling or unable to make payments when due. There
may be no formal bankruptcy proceeding by which the Fund would be able to
collect amounts owed by a foreign government.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU) A number of European countries
have agreed to enter into EMU in an effort to reduce trade barriers between
themselves and eliminate fluctuations in their currencies. EMU establishes a
single European currency (the euro), which was introduced on January 1,

6
<PAGE> 79

1999 and is expected to replace the existing national currencies of all initial
EMU participants by July 1, 2002. Certain securities (beginning with government
and corporate bonds) will be redenominated in the euro. Thereafter, these
securities will trade and make dividend and other payments only in euros. Like
other investment companies and business organizations, including the companies
in which the Fund invests, the Fund could be adversely affected:

- If the euro, or EMU as a whole, does not take effect as planned.

- If a participating country withdraws from EMU.

- If the computing, accounting and trading systems used by the Fund's
service providers, or by other entities with which the Fund or its
service providers do business, are not capable of recognizing the euro as
a distinct currency beginning with euro conversion.

RISKS OF CONVERTIBLE SECURITIES -- Convertibles are generally bonds or
preferred stocks that may be converted into common stock. Convertibles typically
pay current income, as either interest (bond convertibles) or dividends
(preferred stocks). A convertible's value usually reflects both the stream of
current income payments and the value of the underlying common stock. The market
value of a convertible performs like regular bonds; that is, if market interest
rates rise, the value of a convertible usually falls. Since it is convertible
into common stock, the convertible also has the same types of market and issuer
risk as the [value of the] underlying common stock.

ADDITIONAL BOND RISKS --

- CREDIT RISK -- Credit risk is the risk that the issuer of bonds will be
unable to pay the interest or principal when due. The degree of credit
risk depends on both the financial condition of the issuer and on the
terms of the specific bonds.

- INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than do prices of shorter term
securities.

- CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a
bond's issuer will call the bond for redemption prior to the bond's
maturity. If there is an early call of a bond, the Fund may lose income
and may have to invest the proceeds of the redemption in bonds with lower
yields than the called bond.

- CORPORATE LOANS -- Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure.
Borrowers generally pay interest on corporate loans at rates that change
in response to changes in market interest rates such as the London
Interbank Offered Rate ("LIBOR") or the prime rates of U.S. banks. As a
result, the value of corporate loan investments is generally less
responsive to shifts in market interest rates. Because the trading market
for corporate loans is less developed than the secondary market for bonds
and notes, the Fund may experience difficulties from time to time in
selling its corporate loans. Borrowers frequently provide collateral to
secure repayment of these obligations. Leading financial institutions
often act as agent for a broader group of lenders, generally referred to
as a "syndicate". The syndicate's agent arranges the corporate loans,
holds collateral and accepts payments of principal and interest. If the
agent developed financial problems, the Fund may not recover its
investment, or there might be a delay in the Fund's recovery. By
investing in a corporate loan, the Fund becomes a member of the
syndicate.

Corporate loans are subject to the risk of loss of principal and income.
Borrowers do not always provide collateral for corporate loans and the
value of the collateral may not completely cover the borrower's
obligations at the time of a default. If a borrower files for protection
from its creditors under the U.S. bankruptcy laws, these laws may limit
the Fund's rights to its collateral. In addition, the value of collateral
may erode during a bankruptcy case. In the event of a bankruptcy, the
holder of a corporate loan may not recover its principal, may experience
a long delay in recovering its investment and may not receive interest
during the delay.

7
<PAGE> 80

RISKS OF ILLIQUID INVESTMENTS -- The Fund may invest up to 15% of its
assets in illiquid securities that it cannot easily resell within seven days at
current value or that have contractual or legal restrictions on resale. If the
Fund buys illiquid securities it may be unable to quickly resell them or may be
able to sell them only at a price below current value.

- RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities
that the Fund buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no
active trading market.

Restricted securities may be illiquid. The Fund may be unable to sell
them on short notice or may be able to sell them only at a price below
current value. The Fund may get only limited information about the
issuer, so may be less able to predict a loss. In addition, if Fund
management receives material adverse non public information about the
issuer, the Fund will not be able to sell the security.

- 144A: -- Rule 144A securities are restricted securities that can be
resold to qualified institutional buyers but not the general public. Rule
144A securities may have an active trading market but carry the risk that
the active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are deemed to
be liquid.

RISKS OF DERIVATIVES -- The Fund may use instruments referred to as
"derivatives." Derivatives are financial instruments the value of which is
derived from another security, a commodity (such as gold or oil) or an index (a
measure of value or rates, such as the S&P 500 or the prime lending rate). Types
of derivatives that the Fund may use include forwards and options.

Derivatives allow the Fund to increase or decrease the level of risk to
which the Fund is exposed more quickly and efficiently than transactions in
other types of instruments. Derivatives, however, are volatile and involve
significant risks, including credit risk, currency risk, leverage risk,
liquidity risk and index risk.

- CREDIT RISK -- Credit risk is the risk that the counterparty on a
derivative transaction will be unable to honor its financial obligation
to the Fund.

- CURRENCY RISK -- Currency risk is the risk that changes in the exchange
rate between two currencies will adversely affect the value (in U.S.
dollar terms) of an investment.

- LEVERAGE RISK -- Leverage risk is the risk associated with certain types
of investments or trading strategies that relatively small market
movements may result in large changes in the value of an investment.
Certain investments or trading strategies that involve leverage can
result in losses that greatly exceed the amount originally invested.

- LIQUIDITY RISK -- Liquidity risk is the risk that certain securities may
be difficult or impossible to sell at the time that the seller would like
or at the price that the seller believes the security is currently worth.

- INDEX RISK -- If the derivative is linked to the performance of an index,
it will be subject to the risks associated with changes in that index. If
the index changes, the Fund could receive lower interest payments or
experience a reduction in the value of the derivative to below what the
Fund paid. Certain indexed securities, including inverse securities
(which move in an opposite direction to the index), may create leverage,
to the extent that they increase or decrease in value at a rate that is a
multiple of the changes in the applicable index.

Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Fund and
the risks associated with these instruments.

8
<PAGE> 81

HOW THE FUND IS MANAGED

ORGANIZATION

The Fund is one of ten series of shares, each having separate assets and
liabilities, of the Hotchkis and Wiley Funds (the Trust). The Board may, at its
own discretion, create additional series of shares.

INVESTMENT ADVISOR

Hotchkis and Wiley, located at 725 South Figueroa Street, Suite 4000, Los
Angeles, California 90017-5400 has been investment advisor to the Fund since
1994. The Advisor is a division of Merrill Lynch Asset Management, L.P., a
Delaware limited partnership. Subject to the direction and control of the Board,
the Advisor supervises and arranges the purchase and sale of securities held in
the portfolio of the Fund and administers the Fund. The Advisor also manages
separate investment advisory accounts.

For the fiscal year ended June 30, 1998, the Fund paid the Advisor a
management fee of .52% of the Fund's average net assets. The Advisor pays all of
the regular annual operating expenses relating to the Fund.

PORTFOLIO MANAGERS

The portfolio managers of the Fund are Gail Bardin and Sheldon Lieberman.
Ms. Bardin and Mr. Lieberman have responsibility for the day-to-day management
of the Fund's portfolio. Ms. Bardin is a managing director of the Advisor and
began co-managing the Fund in April 1994. She has been a portfolio manager of
the Advisor since 1988. Mr. Lieberman joined the Advisor in 1994 and began
co-managing the Fund in August 1997. Prior to joining the Advisor, Mr. Lieberman
was the Chief Investment Officer for the Los Angeles County Employees Retirement
Association. Ms. Bardin and Mr. Lieberman also serve as portfolio managers of
the Equity Income Fund, another series of the Trust that is managed by the
Advisor.

A NOTE ABOUT YEAR 2000

Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the issuers of securities
in which the Fund invests, and this could hurt the Fund's investment returns.

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 Fund 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 Bank Milwaukee

ABA #0750-00022

For credit to Firstar Mutual Fund Services

Account #112-952-137
9
<PAGE> 82

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 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.

PRICING OF FUND SHARES

The net asset value per share of the Fund is calculated every day that the
New York Stock Exchange is open for trading, at the close of regular trading
(currently 4:00 p.m., Eastern time), except that the net asset value need 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 Fund shares outstanding. The
value of portfolio securities is determined on the basis of the market value of
such securities or, when market prices are unavailable, at fair value.

HOW TO REDEEM SHARES

A shareholder wishing to redeem shares (sell them back to the Fund) may do
so at any time by writing or delivering instructions to the Fund at 725 South
Figueroa Street, Suite 4000, Los Angeles, California 90017-5400. 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) 430-1000.

DELAYS IN REDEEMING SHARES

At certain times when allowed by the SEC, we may delay sending your check
or wiring your redemption proceeds.

PAYMENTS

Payment also may be delayed up to 12 days if you bought shares with a
check.

CHANGES TO THE REDEMPTION PRIVILEGE

The redemption privilege may be modified or terminated at any time on 30
days' notice to shareholders.

REDEMPTION IN KIND

The Fund reserves the right to pay shareholders with large accounts
securities instead of cash in certain circumstances.

DIVIDENDS AND TAXES

The Fund expects to pay income dividends quarterly. The Fund will pay
distributions of any net realized short-term gains and any capital gains every
year.

10
<PAGE> 83

Income dividends and distributions of short-term capital gains are taxed as
ordinary income. Long-term capital gains distributed by the Fund are taxable at
capital gains tax rates no matter how long you have held the shares. The capital
gains rates differ depending on how long the Fund owned the securities.

Corporations investing in the Fund may be eligible for a dividends-received
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.

Please consult your own tax advisor for advice about your tax situation.

FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

These financial highlights were audited by PricewaterhouseCoopers LLP. The
accountants' report and the Fund's financial statements are included in the SAI
and the annual report, which are available upon request. Further performance
information is contained in the annual report.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............ $16.32 $13.51 $11.53 $ 9.89 $10.31
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................... 0.41 0.39 0.34 0.41 0.40
Net realized and unrealized gain (loss) on
investments.............................. 3.31 3.30 2.26 1.59 (0.24)
------ ------ ------ ------ ------
Total from investment operations.... 3.72 3.69 2.60 2.00 0.16
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)...... (0.41) (0.40) (0.40) (0.34) (0.38)
Distributions (from realized gains)......... (1.08) (0.48) (0.22) (0.02) (0.20)
------ ------ ------ ------ ------
Total distributions................. (1.49) (0.88) (0.62) (0.36) (0.58)
------ ------ ------ ------ ------
Net Asset Value, End of Year.................. $18.55 $16.32 $13.51 $11.53 $ 9.89
====== ====== ====== ====== ======
Total Return........................ 23.69% 28.20% 22.93% 20.62% 1.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)............ $ 40.7 $ 33.0 $ 24.6 $ 17.4 $ 10.5
Ratio of expenses to average net assets:
Before expense reimbursement................ 0.73% 0.75% 0.76% 1.05% 1.20%
After expense reimbursement................. 0.52% 0.53% 0.54% 0.58% 0.60%
Ratio of net income to average net assets:
Before expense reimbursement................ 2.06% 2.50% 2.78% 3.58% 3.32%
After expense reimbursement................. 2.27% 2.72% 3.00% 4.03% 3.91%
Portfolio turnover rate....................... 21% 22% 21% 29% 26%
</TABLE>

11
<PAGE> 84

INFORMATION ABOUT THE FUND

Please read this Prospectus before you invest in the Fund. Keep the
Prospectus for future reference. You can get additional information about the
Fund in:

- Statement of Additional Information (SAI) (incorporated by reference
into -- legally a part of -- this Prospectus)

- Annual Report (contains a discussion of Fund performance)

- Semi-annual Report

To get this information free of charge or for shareholder questions,
contact:

Hotchkis and Wiley

725 South Figueroa Street

Suite 4000

Los Angeles, CA 90017-5400

(213) 430-1000 (call collect)

Securities and Exchange Commission

Public Reference Section

Washington, DC 20549-6009

- call 1-800-SEC-0330 for information on the Commission's Public Reference
Room, where documents can be copied for a fee

- the information is available at the SEC's Internet site at
http://www.sec.gov

You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.

Investment Company Act File No. 811-4182

12
<PAGE> 85

HOTCHKIS AND WILEY FUNDS
STATEMENT OF ADDITIONAL INFORMATION

DATED APRIL 1, 1999

This Statement of Additional Information is not a prospectus, and it should
be read in conjunction with the prospectus dated April 1, 1999 for the Investor
Class shares of the Equity Income Fund, the Mid-Cap Fund, the Small Cap Fund,
the International Fund, the Global Equity Fund, the Balanced Fund, the Total
Return Bond Fund, the Low Duration Fund and the Short-Term Investment Fund, the
prospectus dated April 1, 1999 for the Distributor Class shares of the Small Cap
Fund, the International Fund, the Balanced Fund, the Total Return Bond Fund and
the Low Duration Fund and the prospectus dated April 1, 1999 of the Equity Fund
for Insurance Companies. Copies of the prospectuses may be obtained at no charge
from Hotchkis and Wiley Funds (the "Trust"), 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400. 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 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 may be referred to as the "Bond Funds" and the
other Funds may be referred to as the "Stock Funds." Hotchkis and Wiley (the
"Advisor") is the investment advisor to the Funds.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... B-2
Description of the Funds, Their Investments and Risks....... B-2
Investment Restrictions................................... B-2
Repurchase Agreements..................................... B-3
U.S. Government Securities................................ B-3
Municipal Obligations..................................... B-4
Corporate Debt Securities................................. B-5
Convertible Securities.................................... B-6
Mortgage-Related Securities............................... B-6
Asset-Backed Securities................................... B-9
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................. B-9
Duration.................................................. B-10
Derivative Instruments.................................... B-11
Foreign Securities........................................ B-15
Foreign Currency Options and Related Risks................ B-16
Forward Foreign Currency Exchange Contracts............... B-17
Foreign Investment Risks.................................. B-19
Risk Factors Relating to Investing in High Yield
Securities.............................................. B-21
Illiquid Securities....................................... B-21
Reverse Repurchase Agreements............................. B-22
Dollar Rolls.............................................. B-22
Borrowing................................................. B-23
Loans of Portfolio Securities............................. B-23
When-Issued Securities.................................... B-23
Real Estate Investment Trusts............................. B-23
Temporary Defensive Position.............................. B-23
Portfolio Turnover........................................ B-23
Management.................................................. B-25
The Advisor............................................... B-28
Principal Underwriter..................................... B-29
Rule 12b-1 Plan........................................... B-29
Other Service Providers................................... B-29
Portfolio Transactions and Brokerage...................... B-29
Trust Shares................................................ B-31
Purchase and Redemption of Shares........................... B-32
Issuance of Fund Shares for Securities.................... B-32
Redemption in Kind........................................ B-32
Net Asset Value............................................. B-32
Dividends and Tax Status.................................... B-33
Performance Information..................................... B-34
General Information About the Trust's Shareholders.......... B-34
Appendix--Description of Ratings............................ A-1
Financial Statements........................................ 1
</TABLE>

B-1
<PAGE> 86

TRUST HISTORY

The Trust was organized on August 22, 1984 as a Massachusetts business
trust. Before October 7, 1994, the Trust was called "Olympic Trust." The Trust
is a diversified, open-end, management investment company currently consisting
of ten separate series.

DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS

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 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 objective of the Low Duration Fund and the Short-Term
Investment Fund is to maximize total return, consistent with preservation of
capital.

INVESTMENT RESTRICTIONS

Each Fund has adopted the following restrictions (in addition to their
investment objectives) 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 (1)
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 (2) 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.

B-2
<PAGE> 87

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 to secure such borrowings; none of the Funds (except the Bond
Funds) will purchase any additional portfolio securities while such
borrowings are outstanding. (The Bond 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 Bond 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 Bond 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, the Global Equity Fund or the Bond Funds.)

Any percentage limitation on a Fund's investments is determined when the
investment is made, unless otherwise noted.

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
and Bond 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 times 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 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.

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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 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 (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) 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.

MUNICIPAL OBLIGATIONS

The Balanced and Bond Funds may invest in municipal obligations. The two
principal classifications of municipal bonds, notes and commercial paper are
"general obligation" and "revenue" bonds, notes or commercial paper. General
obligation bonds, notes or commercial paper are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds, notes or commercial paper include states,
counties, cities, towns and other governmental units. Revenue bonds, notes and
commercial paper are payable from the revenues derived from a particular
facility or class of facilities or, in some cases, from specific revenue
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multifamily housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.

Included within the revenue bonds category are participations in municipal
lease obligations or installment purchase contracts of municipalities
(collectively, "lease obligations"). State and local governments issue lease
obligations to acquire equipment leases and facilities. Lease obligations may
have risks not normally associated with general obligation or other revenue
bonds. Leases and installment purchase or conditional sale contracts (which may
provide for title to the leased asset to pass eventually to the issuer) have
developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional and statutory
requirements generally applicable for the issuance of debt. Certain lease
obligations contain "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is

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appropriated for such purpose by the appropriate legislative body on an annual
or other periodic basis. Consequently, continued lease payments on those lease
obligations containing "non-appropriation" clauses are dependent on future
legislative actions. If such legislative actions do not occur, the holders of
the lease obligations may experience difficulty in exercising their rights,
including disposition of the property.

Private activity obligations are issued to finance, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or solid waste
disposal. Private activity obligations are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. Shareholders, depending on
their individual tax status, may be subject to the federal alternative minimum
tax on the portion of a distribution attributable to these obligations. Interest
on private activity obligations will be considered exempt from federal income
taxes; however, shareholders should consult their own tax advisors to determine
whether they may be subject to the federal alternative minimum tax.

Resource recovery obligations are a type of municipal revenue obligation
issued to build facilities such as solid waste incinerators or waste-to-energy
plants. Usually, a private corporation will be involved and the revenue cash
flow will be supported by fees or units paid by municipalities for the use of
the facilities. The viability of a resource recovery project, environmental
protections regulations and project operator tax incentives may affect the value
and credit quality of these obligations.

Tax, revenue or bond anticipation notes are issued by municipalities in
expectation of future tax or other revenues which are payable from these
specific taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of which are
used to repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.

A variable rate obligation is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate obligation has terms which provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Variable or floating rate obligations may be secured by bank letters of credit.

Variable rate auction and residual interest obligations are created when an
issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The interest rate
on one portion reflects short-term interest rates, while the interest rate on
the other portion is typically higher than the rate available on the original
fixed-rate bond.

Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the municipal bond and municipal note
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The achievement of the Balanced and Bond Funds'
investment objectives is dependent in part on the continuing ability of the
issuers of municipal securities in which the Balanced and Bond Funds invest to
meet their obligations for the payment of principal and interest when due.
Obligations of issuers of municipal securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978, as amended. Therefore, the
possibility exists that, as a result of litigation or other conditions, the
ability of any issuer to pay, when due, the principal of and interest on its
municipal securities may be materially affected.

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,

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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.

CONVERTIBLE SECURITIES

The Funds may invest in convertible securities of domestic or foreign
issuers, which meet the ratings criteria set forth in the prospectuses. 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" (that is, its value as a fixed-income security)
or its "conversion value" (that is, 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 Bond Funds and the Balanced 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: (1)
those issued by the U.S. Government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"); (2) 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 (3) 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.

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Ginnie Mae is a wholly-owned United States Government corporation within
the Department of Housing and Urban Development. Ginnie Mae 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 Ginnie Mae (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.

Obligations of Fannie Mae and Freddie Mac 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. Fannie Mae and Freddie Mac may borrow from the U.S. Treasury
to meet its obligations, but the U.S. Treasury is under no obligation to lend to
Fannie Mae or Freddie Mac.

Private mortgage pass-through securities are structured similarly to Ginnie
Mae, Fannie Mae, and Freddie Mac 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. 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 Ginnie Mae,
Freddie Mac, or Fannie Mae. 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 also 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: (1)
invest primarily in mortgage-backed securities; (2) do not issue redeemable
securities; (3) operate under general exemptive orders exempting them from all
provisions of the 1940 Act; and (4) 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

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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 Bond Funds and the Balanced Fund may also 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.

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.

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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 PO class). The yield to
maturity on an IO class 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.

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 Bond Funds and the Balanced 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.

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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 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 Bond Funds and the Balanced Fund, 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. 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.

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.

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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 prospectuses, to the extent consistent with their
investment objectives and policies and the investment restrictions listed in
this Statement of Additional Information, 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 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. The
International and the Bond 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 involve 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.

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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 prospectuses and if permitted by its investment restrictions. An interest
rate, foreign currency or index futures contract provides for the future sale by
one party and purchase by another party of a specified quantity of a financial
instrument, foreign currency or the cash value of an index at a specified price
and time. A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is made.

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

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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
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.

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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 market value of the Fund's assets.

Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
a Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.

The particular securities comprising the index underlying the index
financial futures contract may vary from the securities held by a Fund. As a
result, the Fund's ability to hedge effectively all or a portion of the value of
its securities through the use of such financial futures contracts will depend
in part on the degree to which price movements in the index underlying the
financial futures contract correlate with the price movements of the securities
held by the Fund. The correlation may be affected by disparities in the Fund's
investments as compared to those comprising the index and general economic or
political factors. In addition, the correlation between movements in the value
of the index may be subject to change over time as additions to and deletions
from the index alter its structure. The correlation between futures contracts on
U.S. Government securities and the securities held by a Fund may be adversely
affected by similar factors and the risk of imperfect correlation between
movements in the prices of such futures contracts and the prices of securities
held by the Fund may be greater. The trading of futures contracts also is
subject to certain market risks, such as inadequate trading activity, which
could at times make it difficult or impossible to liquidate existing positions.

Each Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract market.
There can be no assurance, however, that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. In such situations, if the Fund has insufficient cash, it may
be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments. The liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices have in the past moved beyond the daily limit on a number of
consecutive trading days. A Fund will enter into a futures position only if, in
the judgment of the Advisor, there appears to be an actively traded secondary
market for such futures contracts.

The successful use of transactions in futures and related options also
depends on the ability of the Advisor to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on a hedging transaction which is not
fully or partially offset by an increase in the value of portfolio securities.
As a result, the Fund's total return for such period may be less than if it had
not engaged in the hedging transaction.

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Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by a Fund
of margin deposits in the event of the bankruptcy of a broker with whom the Fund
has an open position in a financial futures contract.

The amount of risk a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option on
a futures contract also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.

FOREIGN SECURITIES

The 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 Bond 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 Bond 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 Bond 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 Funds, that invest solely in
securities in developed markets. There is no assurance that any Bond Fund will
achieve these results.

The Bond Funds may invest in the following types of emerging market
fixed-income securities: (1) 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); (2)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of Sovereign Debt; (3) fixed-income securities issued
by banks and other business entities; and (4) 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
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 Bond 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

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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 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: (1) prospects for relative economic growth
among the different countries in which the Bond Funds may invest; (2) expected
levels of inflation; (3) government policies influencing business conditions;
(4) the outlook for currency relationships; and (5) 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 Bond 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 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

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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 (that is, 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

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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, 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 segregating 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.

B-18
<PAGE> 103

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 to
correctly 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-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.

FOREIGN INVESTMENT RISKS

Foreign Market Risk. Because the Funds may invest in foreign securities,
the Funds offer you more diversification than an investment only in the United
States since prices of securities traded on foreign markets have often, though
not always, moved counter to prices in the United States. Foreign security
investment, however, involves special risks not present in U.S. investments that
can increase the chances that the Funds will lose money. In particular, the
Stock Funds are subject to the risk that because there are generally fewer
investors on foreign exchanges and a smaller number of shares traded each day,
it may be difficult for a Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

Currency Risk and Exchange Risk. Securities in which a Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign currency,
your investment in a security denominated in that currency loses value because
the currency is worth fewer U.S. dollars. Similarly when the U.S. dollar
decreases in value against a foreign currency, your investment in a security
denominated in that currency gains value because the currency is worth more U.S.
dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.

For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a

B-19
<PAGE> 104

framework for the European Economic and Monetary Union ("EMU") among the
countries that comprise the European Union ("EU"). Among other things, EMU
establishes a single common European currency (the "euro") that was introduced
on January 1, 1999 and is expected to replace the existing national currencies
of all EMU participants by July 1, 2002. Upon implementation of EMU, certain
securities issued in participating EU countries (beginning with government and
corporate bonds) were redenominated in the euro, and are now listed, traded,
declaring dividends and making other payments only in euros.

No assurance can be given that the changes planned for the EU can be
successfully implemented, or that these changes will result in the economic and
monetary unity and stability intended. There is a possibility that EMU will not
be completed, or will be completed but then partially or completely unwound.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU at any time by an
initial participant could cause disruption of the financial markets as
securities redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power. Such developments could have an adverse impact on the Funds' investments
in Europe generally or in specific countries participating in EMU. Gains or
losses from euro conversion may be taxable to International and Global Equity
Fund shareholders under foreign or, in certain limited circumstances, U.S. tax
laws.

Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the United States securities laws do. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for a Fund's portfolio
manager to completely and accurately determine a company's financial condition.

Certain Risks of Holding Fund Assets Outside the United States. A Fund
generally holds the foreign securities in which it invests outside the United
States in foreign banks and securities depositories. These foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. They may also have operations subject to limited or no regulatory
oversight. Also, the laws of certain countries may put limits on a Fund's
ability to recover its assets if a foreign bank or depository or issuer of a
security or any of their agents goes bankrupt. In addition, it can be expected
that it will be more expensive for a Fund to buy, sell and hold securities in
certain foreign markets than it is in the U.S. market due to higher brokerage,
transaction, custody and/or other costs. The increased expense of investing in
foreign markets reduces the amount a Fund can earn on its investments.

Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for a Fund to carry out
transactions. If a Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If a
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.

B-20
<PAGE> 105

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

A description of security ratings is attached as an Appendix. Lower-rated
or unrated (that is, 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 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.

ILLIQUID SECURITIES

A Fund may not hold more than 15% of its net assets in illiquid securities.
Illiquid securities generally 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 because they have 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 having 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. 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 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

B-21
<PAGE> 106

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.

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, among others, 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 (for example, 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, (1) it must 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 Advisor; and
(2) it must not be "traded flat" (that is, 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.

REVERSE REPURCHASE AGREEMENTS

The Balanced and Bond 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 these
Funds for purposes of the limit applicable to borrowings.

DOLLAR ROLLS

The Balanced and Bond Funds may use dollar rolls as part of their
investment strategy. In a dollar roll, a Fund sells securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar securities (same type and coupon) on a specified future date from the
same party. During the roll period, the Fund forgoes principal and interest paid
on the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or cash equivalent security position that matures
on or before the forward settlement date of the dollar roll transaction.

The Balanced and Bond Funds will segregate cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to their obligations with respect to
dollar rolls. Dollar rolls involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. If the
buyer of the securities under a dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party,

B-22
<PAGE> 107

or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Dollar rolls are speculative techniques involving
leverage and are considered borrowings by these Funds, subject to their
limitations on borrowings.

BORROWING

As a fundamental policy, the Equity Income, Mid-Cap, Balanced, 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 each Fund's
total assets. The Bond 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 Bond Funds may lend their
portfolio securities, provided: (1) 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; (2) the Fund may at any time call the loan and obtain the return of the
securities loaned; (3) the Fund will receive any interest or dividends paid on
the loaned securities; and (4) 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, International, Global Equity and Bond 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 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.

REAL ESTATE INVESTMENT TRUSTS

Each Fund may invest in securities of real estate investment trusts or
REITs. Unlike corporations, REITs do not have to pay income taxes if they meet
certain Internal Revenue Code requirements. REITs offer investors greater
liquidity and diversification than direct ownership of properties, as well as
greater income potential than an investment in common stocks. Like any
investment in real estate, though, a REIT's performance depends on several
factors, such as its ability to find tenants for its properties, to renew leases
and to finance property purchases and renovations.

TEMPORARY DEFENSIVE POSITION

When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, a Fund may invest all or part of
its assets in short-term investment grade debt

B-23
<PAGE> 108

obligations of the U.S. Government, its agencies and instrumentalities, bank
certificates of deposit, bankers' acceptances, high quality commercial paper,
demand notes and repurchase agreements.

PORTFOLIO TURNOVER

The increase in portfolio turnover from fiscal 1996 to fiscal 1997 for the
Bond Funds was attributable to increases in portfolio transactions to satisfy
the Funds' liquidity needs, and the large decrease in portfolio turnover for the
Low Duration Fund from fiscal 1997 to 1998 was attributable to .

B-24
<PAGE> 109

MANAGEMENT

The Trustees oversee the actions of the Funds' Advisor and other service
providers and decide upon matters of general policy. The Trustees also review
the actions of the Funds' officers, who conduct and supervise the daily business
operations of the Funds. 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 (64).................. Trustee Managing Partner, A.W. Jones Co.
885 Third Avenue (investments); Chairman, Jonathan Mfg. Corp.
New York, NY 10022 (slide manufacturing).
John A. G. Gavin (67)..................... Trustee Chairman, Gamma Services Corp. (venture
2100 Century Park West capital) (since 1968); Principal, Gavin,
Los Angeles, CA 90067 Dailey & Partners (consulting) (since 1993);
U.S. Ambassador to Mexico (1981-1986);
Director, Atlantic Richfield Co., Dresser
Industries, Inc., Pinkertons, International
Wire Corp. and Kap Resources.
Joe Grills (64)........................... Trustee Member of the Committee of Investment of
P.O. Box 98 Employee Benefit Assets of the Financial
Rapidan, VA 22733 Executives Institute ("CIEBA") (since 1986);
Member of CIEBA's Executive Committee since
1988 and its Chairman (1991-1992); Assistant
Treasurer of International Business Machines
Incorporated ("IBM") and Chief Investment
Officer of the IBM Retirement Funds
(1986-1993); Member of the Investment
Advisory Committees: State of New York
Common Retirement Fund, Howard Hughes
Medical Institute and Virginia Retirement
System; Director and Vice Chairman of the
Board of Duke Management Company; Director
of KIMCO Realty Corp. and LaSalle Street
Fund; Trustee or Director of 22 registered
investment companies (representing 55
portfolios) for which Merrill Lynch Asset
Management is the advisor.
John F. Hotchkis* (67).................... Trustee Chairman and Portfolio Manager of the
725 South Figueroa, Suite 4000 Advisor.
Los Angeles, CA 90017-5400
</TABLE>

B-25
<PAGE> 110

<TABLE>
<CAPTION>
POSITION
NAME, ADDRESS & AGE WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
------------------- ------------------ --------------------------------------------
<S> <C> <C>
Robert B. Hutchinson (79)................. Trustee Former Chairman (1987-88) and Director
2525 Montevista Place West (1976-88), Prudential Bank (savings bank);
Seattle, WA 98198 Former director and Senior Vice President,
Finance and Secretary, Simpson Investment
Co. (holding company for a wood products
company, pulp and paper company and a PVC
products company); Former director,
Enterprises International, Inc. (industrial
strapping material manufacturer); Former
member of the Advisory Committee of
Washington State Investment Board.
Michael L. Quinn* (52).................... Trustee Chief Executive Officer of the Advisor
Merrill Lynch Capital (since November 1996); Head of Merrill Lynch
Management Group Capital Management Group (since 1995);
800 Scudders Mill Road co-head of the Equity Division of Merrill
Plainsboro, NJ 08536 Lynch, Pierce, Fenner & Smith Inc.
(1991-1995); Trustee, Valley Hospital and
the University of Denver.
Merle T. Welshans (80).................... Trustee Adjunct Professor of Finance, Washington
14360 Ladue Road University; Chairperson of Investment
Chesterfield, MO 63017 Committee of the Missouri United Methodist
Foundation; Retired, Financial Vice
President, Union Electric Company of
Missouri.
Richard R. West (61)...................... Trustee Dean Emeritus of New York University's
Box 604 Leonard R. Stern School of Business (since
Genoa, NV 89411 1993); formerly Dean (1984-1993) and
Professor of Finance (1984-1995), New York
University's Leonard R. Stern School of
Business; Director, Vornado Realty Trust,
Inc., Alexander's Inc., and Bowne & Co.,
Inc.; Trustee or Director of 56 registered
investment companies (representing 81
portfolios) for which Merrill Lynch Asset
Management is the advisor.
Nancy D. Celick (47)...................... President and Chief Administrative Officer and Director of
725 South Figueroa Street, Suite 4000 Principal the Advisor; Chief Financial Officer of the
Los Angeles, CA 90017 Executive Officer Advisor (1993-1998); Chief Financial Officer
of Kennedy-Wilson, Inc. (auction marketing
services) (1992-1993); Chief Financial
Officer of First National Corporation (bank
holding company) (1984-1992).
</TABLE>

B-26
<PAGE> 111

<TABLE>
<CAPTION>
POSITION
NAME, ADDRESS & AGE WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
------------------- ------------------ --------------------------------------------
<S> <C> <C>
Roger DeBard, PhD (56).................... Executive Vice Managing Director of the Advisor (since
725 South Figueroa Street, Suite 4000 President 1995); Partner of the Advisor (1994-1995);
Los Angeles, CA 90017-5400 Principal of the Advisor (1992-1994);
Portfolio Manager of the Advisor (1985-
1992).
Mark D. Cone (31)......................... Vice President Vice President of the Advisor; Retail
725 South Figueroa Street, Suite 4000 Account Manager, Neuberger & Berman
Los Angeles, CA 90017-5400 (1991-1994).
Gracie Fermelia (37)...................... Secretary, Vice President of the Advisor; Senior
725 South Figueroa Street, Suite 4000 Treasurer, and Manager, Price Waterhouse (1985-1994).
Los Angeles, CA 90017-5400 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 following table sets forth the
aggregate compensation paid to the Trustees during the Trust's fiscal year ended
June 30, 1998 and the aggregate compensation paid to the Trustees for service on
the Trust's Board and that of any other fund for which the Advisor serves as
investment advisor or has an investment advisor that is an affiliated person of
the Advisor ("Fund Complex") for the year ended December 31, 1998.

<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME AND POSITION FROM TRUST TO TRUSTEES*
----------------- ------------ ------------
<S> <C> <C>
Robert L. Burch III................................ $12,000 $ 12,000
Trustee
John A. G. Gavin................................... $12,000 $ 12,000
Trustee
Joe Grills......................................... $12,000 $186,333
Trustee
John F. Hotchkis................................... $ -0- $ -0-
Trustee
Robert B. Hutchinson............................... $ 9,000 $ 9,000
Trustee
Michael L. Quinn................................... $ -0- $ -0-
Trustee
Merle T. Welshans.................................. $12,000 $ 12,000
Trustee
Richard R. West.................................... $12,000 $326,125
Trustee
</TABLE>

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

* The compensation from the Fund Complex includes service on the boards of
investment companies advised by Merrill Lynch Asset Management, L.P. and its
advisory affiliates (Mr. Grills serves registered investment companies
representing portfolios and Mr. West serves registered investment
companies representing portfolios).

For information as to ownership of shares by principal holders and officers
and Trustees of the Trust, see "General Information About the Trust's
Shareholders."

B-27
<PAGE> 112

THE ADVISOR

The Advisor provides the Funds with management and investment advisory
services. Hotchkis and Wiley is a division of Merrill Lynch Asset Management,
L.P., located at 725 South Figueroa Street, Suite 4000, Los Angeles, California
90017-5400.

Each Fund, except for the Equity Fund for Insurance Companies and the Bond
Funds, pays the Advisor for the services performed a fee at the annual rate of
0.75% of the Fund's average daily 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 daily net assets and 0.50% of average daily 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 daily net assets. The Low
Duration Fund pays the Advisor a fee at the annual rate of 0.46% of its average
daily net assets. The Short-Term Investment Fund pays the Advisor a fee at the
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 through
$249,999,999, 0.30% of the Fund's average daily net assets from $250,000,000
through $499,999,999, and 0.25% of the Fund's average daily net assets over
$500,000,000.

In addition, prior to March 1, 1999, the Advisor had voluntarily agreed to
limit the regular annual operating expenses of the Equity Income Fund, Mid-Cap
Fund, Small Cap Fund, International Fund, Global Equity Fund, and Balanced Fund
to 1.00% of each Fund's average net assets and had agreed to limit the regular
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. Effective March 1, 1999, the Advisor has agreed to
limit the annual operating expenses of the Investor Class of each Fund as
follows: Equity Income Fund-0.95%, Mid-Cap Fund-1.15%, Global Equity Fund-1.25%,
Balanced Fund-0.95%, Total Return Bond Fund-0.65%, Low Duration Fund-0.58% and
Short-Term Investment Fund-0.48%. The Advisor has agreed to limit the annual
operating expenses of the Distributor Class of each such Fund to an amount which
is .25% higher than the limit for the Investor Class of the same Fund. Effective
March 1, 1999, there is no limit on the annual expenses of the Small Cap Fund
and the International Fund. There is no limit on the annual expenses of the
Equity Fund for Insurance Companies, which are paid by the Advisor.

As a result of its agreement to limit Fund expenses, for the year ended
June 30, 1998, the Advisor waived a portion of its fee with respect to the
Mid-Cap Fund, Global Equity Fund, Total Return Bond Fund, Low Duration Fund, and
Short-Term Investment Fund in the amounts of $92,525, $111,644, $86,499,
$144,309, and $105,600, respectively. For the year ended June 30, 1998, the
Equity Income Fund, Small Cap Fund, International Fund, Balanced Fund, Total
Return Bond Fund, and Low Duration Fund paid $1,424,185, $491,489, $8,732,479,
$761,196, $39,539, and $773,803, respectively, to the Advisor. The Mid-Cap Fund,
Global Equity Fund, and Short-Term Investment Fund paid no advisory fees and
were reimbursed $52,325, $67,175, and $11,030, respectively, by the Advisor for
the year ended June 30, 1998.

As a result of its agreement to limit Fund expenses, the Advisor waived a
portion of its fee for the year ended June 30, 1997, with respect to the Small
Cap Fund, International Fund, Total Return Bond Fund, Low Duration Fund and
Short-Term Investment Fund in the amounts of $54,357, $391,595, $83,124,
$134,885, and $88,511, respectively, and for the period from commencement of
operations on January 2, 1997 through June 30, 1997, with respect to the Mid-Cap
Fund and Global Equity Fund in the amounts of $48,881 and $45,349, respectively.
For the year ended June 30, 1997, the Equity Income Fund, Small Cap Fund,
Balanced Fund, International Fund, Total Return Bond Fund, Low Duration Fund
paid $1,411,861, $82,914, $562,261, $3,694,456, $70,395 and $632,940,
respectively, to the Advisor. For the year ended June 30, 1997, the Short-Term
Investment Fund paid no advisory fee and was reimbursed $15,943 and for the
period from January 2, 1997 through June 30, 1997, the Mid-Cap Fund and Global
Equity Fund paid no advisory fees and were reimbursed $43,832 and $35,429,
respectively, by the Advisor.

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 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

B-28
<PAGE> 113

Equity Fund, Small Cap Fund, Balanced 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.

For the fiscal years ended June 30, 1998, 1997 and 1996, the Equity Fund
for Insurance Companies paid $196,908, $147,584, and $67,516, respectively, to
the Advisor. The Advisor pays all of the regular annual 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.

PRINCIPAL UNDERWRITER

Princeton Funds Distributor, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is the Funds' distributor. The distributor is an indirect
subsidiary of Merrill Lynch & Co., Inc., and is an affiliate of the Advisor.

RULE 12B-1 PLAN

The Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act that allows the Distributor Class of the Small Cap,
International, Balanced, Total Return Bond and Low Duration Funds to make
payments to administrators, broker/dealers or other institutions that provide
accounting, record-keeping or other services to investors and that have an
administration services agreement with the Trust or the Advisor to make
Distributor Class shares available to their clients ("Recipients"). Recipients
are paid .25% on an annualized basis of the average net asset value of the
Distributor Class shares invested through the Recipient as compensation for
providing distribution-related services such as advertising, printing and
mailing prospectuses to other than current shareholders, and training sales
personnel regarding the Funds.

OTHER SERVICE PROVIDERS

The Trust's custodian, Firstar Bank Milwaukee, 615 East Michigan Street,
Milwaukee, Wisconsin 53202, is responsible for holding the Funds' assets and
Firstar Mutual Fund Services, LLC, acts as the Trust's accounting services
agent. The Chase Manhattan Bank, through its global custody network, provides
custodial services for assets of the Trust held outside the U.S. The Trust's
independent accountants, PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, examine the Trust's financial statements and assist
in the preparation of certain reports to the Securities and Exchange Commission.

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", that is, 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 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

B-29
<PAGE> 114

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 (1) were for purposes
contemplated by the Agreements; (2) were for products or services which provide
lawful and appropriate assistance to the Advisor's decision-making process; and
(3) 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 a
factor in the selection of brokers to execute brokerage and principal
transactions, subject to the requirements of "best execution", as defined above,
although the Advisor is not currently doing so.

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 6/30/98 ENDED 6/30/97 ENDED 6/30/96
---- ------------- ------------- -------------
<S> <C> <C> <C>
Equity Income..................................... $ 110,157 $ 230,762** $152,950
Mid-Cap........................................... $ 11,847 $ 1,984* --
Small Cap......................................... $ 195,891** $ 31,024 $ 45,342
International..................................... $2,249,821** $1,506,506** $905,601
Global Equity..................................... $ 22,157 $ 11,449* --
Balanced.......................................... $ 23,692 $ 25,414 $ 28,215
Low Duration...................................... $ -0- $ -0- $ -0-
Total Return Bond................................. $ -0- $ -0- $ -0-
Short-Term Investment............................. $ -0- $ -0- $ -0-
Equity Fund for Insurance Companies............... $ 16,115 $ 14,527 $ 24,542
</TABLE>

- ---------------
* Period from commencement of operations on January 2, 1997 through June 30,
1997.

** The increase in commissions paid by the Funds is due to significant increases
in those Funds' assets, resulting in an increase in investment purchases from
the previous year.

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<PAGE> 115

Commissions paid to affiliated broker-dealers for the fiscal year ended
June 30, 1998 by the Equity Income, Global Equity and International Funds were
$12,468, $414 and $302,055, respectively.

[STATE AGGREGATE VALUE OF HOLDINGS OF ANY REGULAR BROKER AS OF FYE--ITEM 16(E)]

TRUST SHARES

The Small Cap Fund, International Fund, Balanced Fund, Total Return Bond
Fund and Low Duration Fund each offer two classes of shares: Distributor Class
shares and Investor Class shares. Each other Fund offers shares of a single
class called Investor Class shares.

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,
except that the Distributor Class shares are subject to distribution fees
payable under the Plan of Distribution. 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 additional
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.

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 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 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.

B-31
<PAGE> 116

Common expenses incurred by the Trust are allocated among the Funds based
upon: (1) relative net assets; (2) as incurred on a specific identification
basis; or (3) evenly among the Funds, depending on the nature of the
expenditure.

Except for (1) changes which do not adversely affect the rights of Trust
shareholders; (2) a change in the name of the Trust, or a series or class
thereof; (3) authorization of a new series or class; (4) changes to supply any
omission or correct any ambiguous or defective provision; or (5) changes
required by any federal, 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.

PURCHASE AND REDEMPTION OF SHARES

[TO COME, INCLUDING INFO ON EXCHANGE PRIVILEGES, ETC.]

ISSUANCE OF FUND SHARES FOR SECURITIES

Investors may purchase Fund shares for consideration consisting of
securities rather than cash when, in the judgment of the Advisor, the
securities: (a) meet the investment objective and policies of the Fund, (b) are
liquid and not subject to restrictions on resale, and (c) have a value that is
readily ascertainable via listing on or trading in a recognized United States or
international exchange or market.

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.

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, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving 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.

Securities are valued by an independent pricing agent to the extent
possible. 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 Stock Market ("NSM") 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

B-32
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and asked prices on such exchange or on NSM. Unlisted equity securities that are
not included in NSM 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. 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 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.

[DESCRIBE HOW NAV OF TWO CLASSES IS CALCULATED]

DIVIDENDS AND TAX STATUS

Each Fund has qualified as a regulated investment company. Qualification as
a regulated investment company requires, among other things, that (1) 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; and (2) 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% 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.

B-33
<PAGE> 118

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, updated to the last day of the most recent
quarter prior to submission of the advertising for

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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 December 31, 1998 are as
follows:

<TABLE>
<CAPTION>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
------ ----- ----- ---------
<S> <C> <C> <C> <C> <C>
Equity Income Fund.................. 4.34% 15.82% 14.13% 12.26% (Since 6/24/87)
Mid-Cap Fund........................ -10.26% -- -- 9.02% (Since 1/2/97)
Small Cap Fund...................... -15.56% 10.02% 12.87% 11.98% (Since 9/20/85)
Global Equity Fund.................. 6.71% -- -- 7.25% (Since 1/2/97)
International Fund.................. 6.41% 9.05% -- 12.52% (Since 12/1/90)
Balanced Fund....................... 5.20% 11.54% 11.64% 11.89% (Since 8/13/85)
Total Return Bond Fund.............. 8.79% -- -- 11.03% (Since 12/6/94)
Low Duration Fund................... 5.64% 7.45% -- 7.92% (Since 5/18/93)
Short-Term Investment Fund.......... 5.77% 6.07% -- 6.31% (Since 5/18/93)
Equity Fund for Insurance
Companies......................... 6.45% 17.16% -- 16.28% (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 totaling 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 December 31, 1998 were 5.04%,
6.00%, and 5.34%, 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, Inc., Morningstar, Inc. 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,

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<PAGE> 120

Morningstar 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.

GENERAL INFORMATION ABOUT THE TRUST'S SHAREHOLDERS

PRINCIPAL HOLDERS:

As of January 15, 1999, the following shareholders owned of record, and to
the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Equity Income Fund:

McDonalds Charities Investment Program, P.O. Box 9242, Boston, MA
02209-9242 -- 14.09%

Northern States Power Company, P.O. Box 64482, St. Paul, MN
55164-0482 -- 10.26%

Sun Health, P.O. Box 9800, Calabasas, CA 91372-0800 -- 6.46%

Bernsen Foundation, 15 W. 6th Street, Suite 1308, Tulsa, OK
74119-5407 -- 5.91%

As of January 15, 1999, the following shareholder 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
94104-4122 -- 14.58%

MANAGEMENT:

As of January 15, 1999, the Trust's officers and Trustees as a group owned
1.61% of the Equity Income Fund's outstanding shares.

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

PRINCIPAL HOLDERS:

As of January 15, 1999, Merrill Lynch Retirement Plans, 265 Davidson
Avenue, Floor 4, Somerset, NJ 08873-4120, owned of record, and to the knowledge
of the Trust, beneficially 42.05% of the Mid-Cap Fund's outstanding shares and
may be deemed a controlling person of that Fund.

As of January 15, 1999, the following persons owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Mid-Cap Fund:

Elizabeth Janeway Foundation, P.O. Box 60078, Los Angeles, CA
90060-0078 -- 9.44%

John F. Hotchkis, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 8.46%

MANAGEMENT:

As of January 15, 1999, the Trust's officers and Trustees as a group owned
8.77% of the Mid-Cap Fund's outstanding shares.

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

B-36
<PAGE> 121

PRINCIPAL HOLDERS:

As of January 15, 1999, the following shareholder owned of record, and to
the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Small Cap Fund:

Merrill Lynch Retirement Plans, 265 Davidson Avenue, Floor 4, Somerset, NJ
08873-4120 -- 25.29%

As of January 15, 1999, the following shareholder 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
94104-4122 -- 20.02%

MANAGEMENT:

As of January 15, 1999, the Trust's officers and Trustees as a group owned
6.66% of the Small Cap Fund's outstanding shares.

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

PRINCIPAL HOLDERS:

As of January 15, 1999, the following shareholder owned of record, and to
the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the International Fund:

Merrill Lynch Retirement Plans, 4800 Dear Lake Drive, E Floor 3,
Jacksonville, FL 32246-6484 -- 9.96%

Merrill Lynch Retirement Plans, 265 Davidson Avenue, Floor 4, Somerset, NJ
08873-4120 -- 5.81%

As of January 15, 1999, the following shareholders 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
94104-4122 -- 30.89%

Salomon Smith Barney Inc., 333 W 34th Street, Floor 7, New York, NY
10001-2402 -- 9.31%

MANAGEMENT:

As of January 15, 1999, the Trust's officers and Trustees as a group owned
0.06% of the International Fund's outstanding shares.

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

PRINCIPAL HOLDERS:

As of January 15, 1999, John F. Hotchkis, 725 S. Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400, owned of record, and to the knowledge of the
Trust, beneficially 32.88% of the Global Equity Fund outstanding shares and may
be deemed a controlling person of that Fund.

As of January 15, 1999, the following shareholders owned of record, and to
the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Global Equity Fund:

Merrill Lynch Retirement Plans, 265 Davidson Avenue, Floor 4, Somerset, NJ
08873-4120 -- 27.22%

Hotchkis and Wiley, 725 S. Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 8.34%

MANAGEMENT:

As of January 15, 1999, the Trust's officers and Trustees as a group owned
33.36% of the Global Equity Fund's outstanding shares.

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

PRINCIPAL HOLDERS:

As of January 15, 1999, Mac & Co., 1 Cabot Road, Medford, MA 02155-5141,
owned of record, and to the knowledge of the Trust, beneficially 26.93% of the
Balanced Fund's outstanding shares and may be deemed to be a controlling person
of that Fund.

B-37
<PAGE> 122

As of January 15, 1999, the following shareholder owned of record, and to
the knowledge of the Trust, beneficially more than five percent of the
outstanding shares of the Balanced Fund:

Chase Bank of Texas, P.O. Box 2558, Houston, TX 77252-2558 -- 10.71%

As of January 15, 1999, the following shareholder owned of record, but not
beneficially, more than five percent of the outstanding shares of the Balanced
Fund:

Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 31.45%

MANAGEMENT:

As of January 15, 1999, the Trust's officers and Trustees as a group owned
1.39% of the Balanced Fund's outstanding shares.

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

PRINCIPAL HOLDERS:

As of January 15, 1999, the following shareholders 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:

Golden Books Retirement Plan, 10101 Science Drive, Sturtevant, WI
53177-1757 -- 8.64%

Merrill Lynch Retirement Plans, 265 Davidson Avenue, Floor 4, Somerset, NJ
08873-4120 -- 18.12%

As of January 15, 1999, the following shareholder 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
94104-4122 -- 36.64%

MANAGEMENT:

As of January 15, 1999, the Trust's officers and Trustees as a group owned
2.43% of the Total Return Bond Fund's outstanding shares.

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

PRINCIPAL HOLDERS:

As of January 15, 1999, the following shareholder 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
94104-4122 -- 50.27%

MANAGEMENT:

As of January 15, 1999, the Trust's officers and Trustees as a group owned
1.03% of the Low Duration Fund's outstanding shares.

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

PRINCIPAL HOLDERS:

As of January 15, 1999, the following shareholders 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:

United Airlines Group Investment Trust, P.O. Box 92956, Chicago, IL
60675-2956 -- 15.48%

Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 7.84%

National Investor Services Corp., 55 Water Street, Floor 32, New York, NY
10041-3299 -- 5.17%

As of January 15, 1999, the following shareholder 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
94104-4122 -- 18.73%

B-38
<PAGE> 123

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.

"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
(that is, 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 sell-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.

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

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

STANDARD & POOR'S RATING 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.

A-1
<PAGE> 124

"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.

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.

A-2
<PAGE> 125

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.

"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.

A-3
<PAGE> 126

Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME FUND

<TABLE>
<CAPTION>
COMMON STOCKS -- 99.2% Shares Value
- ----------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 4.0%
..........................................................
Lockheed Martin Corporation 12,000 $ 1,270,500
..........................................................
Northrop Grumman Corporation 40,729 4,200,178
..........................................................
Rockwell International
Corporation 32,721 1,572,653
..................... ..................... -----------
7,043,331
- ----------------------------------------------------------
APPAREL & TEXTILES -- 0.8%
..........................................................
Russell Corporation 46,000 1,388,625
- ----------------------------------------------------------
AUTO PARTS -- 1.7%
..........................................................
Dana Corporation 50,000 2,675,000
..........................................................
Meritor Automotive, Inc. 10,874 260,976
..................... ..................... -----------
2,935,976
- ----------------------------------------------------------
AUTOS & TRUCKS -- 6.9%
..........................................................
Ford Motor Company 106,000 6,254,000
..........................................................
General Motors Corporation 88,000 5,879,500
..................... ..................... -----------
12,133,500
- ----------------------------------------------------------
BANKS -- 6.6%
..........................................................
Banc One Corporation 16,000 893,000
..........................................................
First Chicago NBD Corporation 44,468 3,940,977
..........................................................
First Union Corporation 31,000 1,805,750
..........................................................
Fleet Financial Group, Inc. 31,000 2,588,500
..........................................................
KeyCorp 68,000 2,422,500
..................... ..................... -----------
11,650,727
- ----------------------------------------------------------
BEVERAGES -- 0.4%
..........................................................
Anheuser-Busch Companies, Inc. 16,500 778,594
- ----------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 2.4%
..........................................................
Georgia-Pacific (Timber Group) 50,710 1,169,499
..........................................................
Weyerhaeuser Company 64,000 2,956,000
..................... ..................... -----------
4,125,499
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------
Shares Value
<S> <C> <C>
CHEMICALS -- 2.8%
..........................................................
The Dow Chemical Company 32,700 $ 3,161,681
..........................................................
Eastman Chemical Company 28,000 1,743,000
..................... ..................... -----------
4,904,681
- ----------------------------------------------------------
CONGLOMERATES -- 1.8%
..........................................................
Tenneco, Inc. 83,000 3,159,188
- ----------------------------------------------------------
CONSUMER PRODUCTS -- 1.0%
..........................................................
Tupperware Corporation 64,000 1,800,000
- ----------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.1%
..........................................................
Harsco Corporation 40,195 1,841,433
- ----------------------------------------------------------
FINANCIAL SERVICES -- 4.3%
..........................................................
Associates First Capital
Corporation - Class A 29,000 2,229,375
..........................................................
Beneficial Corporation 17,000 2,604,188
..........................................................
Household International, Inc. 19,500 970,125
..........................................................
Transamerica Corporation 15,500 1,784,437
..................... ..................... -----------
7,588,125
- ----------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 2.4%
..........................................................
Whirlpool Corporation 62,000 4,262,500
- ----------------------------------------------------------
INSURANCE -- 6.2%
..........................................................
American General Corporation 44,000 3,132,250
..........................................................
Lincoln National Corporation 23,000 2,101,625
..........................................................
Safeco Corporation 57,900 2,627,212
..........................................................
St. Paul Companies, Inc. 42,000 1,766,625
..........................................................
TIG Holdings, Inc. 56,133 1,291,059
..................... ..................... -----------
10,918,771
- ----------------------------------------------------------
LEISURE/TOYS -- 1.1%
..........................................................
Fortune Brands, Inc. 48,200 1,852,687
- ----------------------------------------------------------
MACHINERY -- 1.6%
..........................................................
New Holland N.V. 143,300 2,812,263
- ----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

1
<PAGE> 127
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME FUND

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
METALS & MINING -- 3.3%
..........................................................
Aluminum Company of America 38,000 $ 2,505,625
..........................................................
Phelps Dodge Corporation 14,300 817,781
..........................................................
Reynolds Metals Company 44,000 2,461,250
..................... ..................... -----------
5,784,656
- ----------------------------------------------------------
NATURAL GAS -- 1.0%
..........................................................
Eastern Enterprises 39,000 1,672,125
- ----------------------------------------------------------
OIL -- DOMESTIC -- 8.4%
..........................................................
Atlantic Richfield Company 38,457 3,004,453
..........................................................
Occidental Petroleum Corporation 157,000 4,239,000
..........................................................
Phillips Petroleum Company 84,500 4,071,844
..........................................................
USX-Marathon Group, Inc. 52,000 1,784,250
..........................................................
Ultramar Diamond Shamrock
Corporation 50,000 1,578,125
..................... ..................... -----------
14,677,672
- ----------------------------------------------------------
PAPER -- 2.7%
..........................................................
Georgia-Pacific Group 20,493 1,207,806
..........................................................
International Paper Company 47,500 2,042,500
..........................................................
Union Camp Corporation 29,000 1,439,125
..................... ..................... -----------
4,689,431
- ----------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.6%
..........................................................
Eastman Kodak Company 38,800 2,834,825
- ----------------------------------------------------------
POLLUTION CONTROL -- 2.7%
..........................................................
Browning-Ferris Industries, Inc. 47,000 1,633,250
..........................................................
Waste Management, Inc. 87,000 3,045,000
..................... ..................... -----------
4,678,250
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------
Shares Value
<S> <C> <C>
RAILROADS -- 1.9%
..........................................................
CSX Corporation 15,000 $ 682,500
..........................................................
Norfolk Southern Corporation 86,000 2,563,875
..................... ..................... -----------
3,246,375
- ----------------------------------------------------------
RETAIL -- 4.6%
..........................................................
Intimate Brands, Inc. 46,500 1,281,656
..........................................................
J.C. Penney Company, Inc. 35,000 2,530,937
..........................................................
May Department Stores Company 32,500 2,128,750
..........................................................
Sears, Roebuck & Company 34,400 2,100,550
..................... ..................... -----------
8,041,893
- ----------------------------------------------------------
SAVINGS & LOANS -- 4.2%
..........................................................
Fannie Mae 55,000 3,341,250
..........................................................
H.F. Ahmanson & Company 56,200 3,990,200
..................... ..................... -----------
7,331,450
- ----------------------------------------------------------
STEEL -- 2.3%
..........................................................
Allegheny Teledyne, Inc. 56,000 1,281,000
..........................................................
USX-U.S. Steel Group, Inc. 85,000 2,805,000
..................... ..................... -----------
4,086,000
- ----------------------------------------------------------
TOBACCO -- 3.9%
..........................................................
Philip Morris Companies, Inc. 151,825 5,978,109
..........................................................
UST, Inc. 30,000 810,000
..................... ..................... -----------
6,788,109
- ----------------------------------------------------------
TRUCKING -- 0.8%
..........................................................
Ryder System, Inc. 43,000 1,357,188
- ----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

2
<PAGE> 128
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME FUND

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
UTILITY -- ELECTRIC -- 11.1%
..........................................................
CMS Energy Corporation 72,000 $ 3,168,000
..........................................................
Central & South West Corporation 75,000 2,015,625
..........................................................
DTE Energy Company 48,000 1,938,000
..........................................................
Entergy Corporation 33,800 971,750
..........................................................
GPU, Inc. 25,000 945,313
..........................................................
Illinova Corporation 120,000 3,600,000
..........................................................
PacifiCorp 48,121 1,088,738
..........................................................
PECO Energy Company 19,168 559,466
..........................................................
PP&L Resources, Inc. 60,000 1,361,250
..........................................................
Public Service Enterprises Group,
Inc. 59,000 2,031,813
..........................................................
SCANA Corporation 62,000 1,848,375
..................... ..................... -----------
19,528,330
- ----------------------------------------------------------
UTILITY -- TELEPHONE -- 5.6%
..........................................................
AT&T Corporation 74,700 4,267,238
..........................................................
ALLTEL Corporation 68,000 3,162,000
..........................................................
Bell Atlantic Corporation 54,000 2,463,750
..................... ..................... -----------
9,892,988
- ----------------------------------------------------------
Total common stocks
(cost $129,676,443) 173,805,192
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
VARIABLE RATE Principal
DEMAND NOTES * -- 0.4% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
General Mills, Inc., 5.2651% $230,978 $ 230,978
............................................................
Pitney Bowes, Inc., 5.2651% 596,679 596,679
..................... ...................... -----------
Total variable rate demand notes 827,657
(cost $827,657)
- ------------------------------------------------------------
Total investments -- 99.6%
(cost $130,504,100) 174,632,849
............................................................
Other assets in excess of
liabilities -- 0.4% 621,736
..................... ...................... -----------
Total net assets -- 100.0% $175,254,585
- ------------------------------------------------------------
</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, 1998.

See Notes to Financial Statements

3
<PAGE> 129

Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
MID-CAP FUND

<TABLE>
<CAPTION>
COMMON STOCKS -- 93.7% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 1.9%
...........................................................
Northrop Grumman Corporation 1,400 $ 144,375
- -----------------------------------------------------------
APPAREL & TEXTILES -- 3.9%
...........................................................
Coats Viyella PLC ADR 24,600 91,118
...........................................................
Russell Corporation 6,700 202,256
...................... ...................... ----------
293,374
- -----------------------------------------------------------
AUTO PARTS -- 6.1%
...........................................................
Dana Corporation 1,800 96,300
...........................................................
Echlin, Inc. 1,800 88,312
...........................................................
ITT Industries, Inc. 3,500 130,812
...........................................................
Lear Corporation # 2,800 143,675
...................... ...................... ----------
459,099
- -----------------------------------------------------------
BANKS -- 7.2%
...........................................................
Compass Bancshares, Inc. 1,150 51,894
...........................................................
Colonial BancGroup, Inc. 2,000 64,500
...........................................................
First Midwest Bancorp, Inc. 2,000 87,937
...........................................................
Union Planters Corporation 1,600 94,100
...........................................................
UnionBanCal Corporation 2,500 241,250
...................... ...................... ----------
539,681
- -----------------------------------------------------------
BEVERAGES -- 1.7%
...........................................................
Pernod Ricard SA ADR 7,200 124,743
- -----------------------------------------------------------
CHEMICALS -- 3.9%
...........................................................
DSM N.V. ADR 3,500 89,813
...........................................................
Eastman Chemical Company 2,000 124,500
...........................................................
Lyondell Petrochemical Company 2,500 76,094
...................... ...................... ----------
290,407
- -----------------------------------------------------------
COMMUNICATION EQUIPMENT MANUFACTURERS -- 0.6%
...........................................................
Princeton Video Image, Inc. # 10,200 47,175
- -----------------------------------------------------------
COMMUNICATIONS & MEDIA -- 1.4%
...........................................................
Groupe AB SA ADR # 18,300 102,937
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
COMPUTERS -- 2.2%
...........................................................
Komag, Inc. # 5,600 $ 29,925
...........................................................
Quantum Corporation # 6,500 134,875
...................... ...................... ----------
164,800
- -----------------------------------------------------------
COMPUTER SOFTWARE & SERVICES -- 2.2%
...........................................................
Vanstar Corporation # 11,400 166,013
- -----------------------------------------------------------
CONSUMER NON-DURABLES -- MISCELLANEOUS -- 0.2%
...........................................................
The Dial Corporation 600 15,562
- -----------------------------------------------------------
CONSUMER PRODUCTS -- 1.9%
...........................................................
Tupperware Corporation 5,200 146,250
- -----------------------------------------------------------
CONTAINERS -- 2.7%
...........................................................
Crown Cork & Seal Company, Inc. 4,300 204,250
- -----------------------------------------------------------
ELECTRIC PRODUCTS -- 1.7%
...........................................................
UCAR International, Inc. # 4,500 131,344
- -----------------------------------------------------------
ELECTRONICS -- 2.8%
...........................................................
Avnet, Inc. 2,000 109,375
...........................................................
Silicon Valley Group, Inc. # 6,400 102,800
...................... ...................... ----------
212,175
- -----------------------------------------------------------
FOODS -- 1.2%
...........................................................
Dean Foods Company 1,700 93,394
- -----------------------------------------------------------
HEALTHCARE -- DRUGS -- 1.1%
...........................................................
Bergen Brunswig Corporation - Class
A 1,800 83,475
- -----------------------------------------------------------
HOSPITAL/HEALTHCARE MANAGEMENT -- 1.3%
...........................................................
Foundation Health Systems, Inc. -
Class A # 3,700 97,587
- -----------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 2.3%
...........................................................
Whirlpool Corporation 2,500 171,875
- -----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

4
<PAGE> 130
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
MID-CAP FUND

<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
INSURANCE -- 3.6%
...........................................................
Harleysville Group, Inc. 3,400 $ 70,550
...........................................................
IPC Holdings Limited 3,000 90,938
...........................................................
Ohio Casualty Corporation 1,200 53,100
...........................................................
St. Paul Companies, Inc. 1,400 58,888
...................... ...................... ----------
273,476
- -----------------------------------------------------------
MACHINERY -- 3.2%
...........................................................
EVI Weatherford, Inc. # 3,230 119,914
...........................................................
New Holland N.V. 6,100 119,713
...................... ...................... ----------
239,627
- -----------------------------------------------------------
METALS & MINING -- 1.5%
...........................................................
Reynolds Metals Company 2,000 111,875
- -----------------------------------------------------------
MISCELLANEOUS -- 3.3%
...........................................................
American Coin Merchandising, Inc. # 9,800 193,550
...........................................................
Zapata Corporation 5,300 52,338
...................... ...................... ----------
245,888
- -----------------------------------------------------------
NATURAL GAS -- 1.0%
...........................................................
Equitable Resources, Inc. 1,400 42,700
...........................................................
MCN Energy Group, Inc. 1,300 32,337
...................... ...................... ----------
75,037
- -----------------------------------------------------------
OIL -- DOMESTIC -- 4.7%
...........................................................
Murphy Oil Corporation 2,600 131,787
...........................................................
Phillips Petroleum Company 2,000 96,375
...........................................................
Valero Energy Corporation 3,800 126,350
...................... ...................... ----------
354,512
- -----------------------------------------------------------
OIL & GAS DRILLING -- 3.4%
...........................................................
Diamond Offshore Drilling, Inc. 1,500 60,000
...........................................................
Nuevo Energy Corporation # 3,000 96,375
...........................................................
Pioneer Natural Resources Company 4,300 102,663
...................... ...................... ----------
259,038
- -----------------------------------------------------------
OIL & GAS SERVICES -- 2.4%
...........................................................
Tidewater, Inc. 5,500 181,500
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
OIL WELL SERVICES -- 0.2%
...........................................................
Bayard Drilling Technologies, Inc.
# 1,000 $ 8,125
...........................................................
TransCoastal Marine Services, Inc.
# 1,800 10,856
...................... ...................... ----------
18,981
- -----------------------------------------------------------
PAPER -- 2.7%
...........................................................
Chesapeake Corporation 2,800 109,025
...........................................................
Consolidated Papers, Inc. 3,400 92,650
...................... ...................... ----------
201,675
- -----------------------------------------------------------
POLLUTION CONTROL -- 1.0%
...........................................................
Waste Management International PLC
# 7,100 77,213
- -----------------------------------------------------------
PROFESSIONAL SERVICES -- 0.9%
...........................................................
Olsten Corporation 6,200 69,362
- -----------------------------------------------------------
PUBLISHING -- 0.1%
...........................................................
Playboy Enterprises, Inc. - Class A
# 500 8,187
- -----------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS -- 1.0%
...........................................................
Redwood Trust, Inc. 4,400 77,275
- -----------------------------------------------------------
RETAIL -- 1.1%
...........................................................
Family Dollar Stores, Inc. 4,300 79,550
- -----------------------------------------------------------
RETAIL -- SPECIALTY -- 0.8%
...........................................................
AutoZone, Inc. # 2,000 63,875
- -----------------------------------------------------------
SAVINGS & LOANS -- 2.2%
...........................................................
Charter One Financial, Inc. 2,500 84,219
...........................................................
Washington Federal, Inc. 3,003 82,958
...................... ...................... ----------
167,177
- -----------------------------------------------------------
STEEL -- 3.3%
...........................................................
AK Steel Holding Corporation 7,200 128,700
...........................................................
USX-U.S. Steel Group, Inc. 3,600 118,800
...................... ...................... ----------
247,500
- -----------------------------------------------------------
TOBACCO -- 3.9%
...........................................................
RJR Nabisco Holdings Corp. 9,000 213,750
...........................................................
Universal Corporation/VA 2,200 82,225
...................... ...................... ----------
295,975
- -----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

5
<PAGE> 131
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
MID-CAP FUND

<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
TRANSPORTATION -- AIR -- 0.7%
...........................................................
ASA Holdings, Inc. 1,000 $ 49,625
- -----------------------------------------------------------
TRUCKING -- 0.8%
...........................................................
Ryder System, Inc. 1,800 56,813
- -----------------------------------------------------------
UTILITY -- ELECTRIC -- 5.6%
...........................................................
GPU, Inc. 4,000 151,250
...........................................................
Montana Power Company 1,600 55,600
...........................................................
PacifiCorp 4,900 110,863
...........................................................
PP&L Resources, Inc. 4,700 106,631
...................... ...................... ----------
424,344
- -----------------------------------------------------------
Total common stocks
(cost $7,428,386) 7,067,021
- -----------------------------------------------------------
VARIABLE RATE
DEMAND NOTES* Principal
- -- 6.8% Amount
- -----------------------------------------------------------
General Mills, Inc., 5.2651% $200,000 200,000
...........................................................
Pitney Bowes, Inc., 5.2651% 200,000 200,000
...........................................................
Warner-Lambert Co., 5.2660% 111,047 111,047
............................................. ----------
Total variable rate demand notes 511,047
(cost $511,047)
- -----------------------------------------------------------
Total investments -- 100.5%
(cost $7,939,433) 7,578,068
...........................................................
Liabilities in excess of other
assets -- (0.5)% (38,888)
...................... ...................... ----------
Total net assets -- 100.0% $ 7,539,180
- -----------------------------------------------------------
</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, 1998.

ADR -- American Depository Receipts.

# -- Non-income producing security.

See Notes to Financial Statements

6
<PAGE> 132

Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
SMALL CAP FUND

<TABLE>
<CAPTION>
COMMON STOCKS-- 96.1% Shares Value
- ------------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 3.8%
............................................................
AVTEAM, Inc. # 337,700 $ 3,630,275
- ------------------------------------------------------------
AUTO PARTS -- 3.5%
............................................................
Stoneridge, Inc. # 157,600 2,876,200
............................................................
Titan International, Inc. 26,500 450,500
...................... ...................... ----------
3,326,700
- ------------------------------------------------------------
APPLIANCE & HOUSEHOLD FURNITURE -- 2.2%
............................................................
Hussman International, Inc. 110,800 2,056,725
- ------------------------------------------------------------
BANK & BANK HOLDING COMPANIES -- 2.0%
............................................................
Banknorth Group, Inc. 9,200 340,400
............................................................
First Midwest Bancorp Inc. 19,700 866,184
............................................................
Hubco, Inc. 18,000 644,625
...................... ...................... ----------
1,851,209
- ------------------------------------------------------------
CHEMICALS -- 3.2%
............................................................
The Carbide/Graphite Group, Inc.
# 110,600 3,076,063
- ------------------------------------------------------------
COMMERCIAL SERVICES -- 2.3%
............................................................
FirstService Corporation # 173,100 2,207,025
- ------------------------------------------------------------
COMMUNICATION EQUIPMENT/MANUFACTURERS -- 0.4%
............................................................
Princeton Video Image, Inc.# 73,800 341,325
- ------------------------------------------------------------
COMMUNICATIONS & MEDIA -- 2.0%
............................................................
Groupe AB SA ADR # 338,900 1,906,312
- ------------------------------------------------------------
COMPUTERS -- 1.6%
............................................................
Hutchinson Technology, Inc. # 19,500 531,375
............................................................
MICROS Systems, Inc. # 29,300 969,647
...................... ...................... ----------
1,501,022
- ------------------------------------------------------------
COMPUTER SYSTEMS -- 4.0%
............................................................
Radisys Corporation # 174,600 3,753,900
- ------------------------------------------------------------
ELECTRONICS -- 2.1%
............................................................
Hadco Corporation # 41,900 976,794
............................................................
Silicon Valley Group, Inc. # 60,900 978,206
...................... ...................... ----------
1,955,000
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
ENTERTAINMENT -- 2.1%
............................................................
Alliance Communications
Corporation Class B # 116,000 $ 2,001,000
- ------------------------------------------------------------
FINANCE -- MISCELLANEOUS -- 3.2%
............................................................
Executive Risk, Inc. 41,700 3,075,375
- ------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO -- 3.4%
............................................................
J & J Snack Foods Corporation # 154,300 3,221,012
- ------------------------------------------------------------
HEALTHCARE -- MISCELLANEOUS -- 5.0%
............................................................
HealthPlan Services Corporation 273,400 4,784,500
- ------------------------------------------------------------
INSURANCE -- 10.4%
............................................................
ESG Re Limited 284,200 6,145,825
............................................................
FPIC Insurance Group, Inc. # 36,100 1,213,862
............................................................
Stirling Cooke Brown Holdings
Limited 88,900 2,500,313
...................... ...................... ----------
9,860,000
- ------------------------------------------------------------
MACHINERY -- 4.8%
............................................................
Denison International PLC ADR # 183,000 3,614,250
............................................................
Hawk Corporation Class A # 56,100 988,763
...................... ...................... ----------
4,603,013
- ------------------------------------------------------------
METALS & MINING -- 0.3%
............................................................
Northwest Pipe Company # 12,900 303,150
- ------------------------------------------------------------
MISCELLANEOUS -- 12.5%
............................................................
American Coin Merchandising,
Inc. # 347,000 6,853,250
............................................................
Mac-Gray Corporation # 17,400 221,850
............................................................
Ralcorp Holdings, Inc. # 155,000 2,925,625
............................................................
Zapata Corporation 190,300 1,879,212
...................... ...................... ----------
11,879,937
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 2.2%
............................................................
Abraxas Petroleum Corporation # 83,100 758,288
............................................................
Trico Marine Services, Inc. # 100,100 1,370,119
...................... ...................... ----------
2,128,407
- ------------------------------------------------------------
</TABLE>

See Notes to Financial Statements

7
<PAGE> 133
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
SMALL CAP FUND

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
OIL & GAS DRILLING -- 2.2%
............................................................
Coho Energy, Inc. # 134,000 $ 904,500
............................................................
Nuevo Energy Company # 36,000 1,156,500
...................... ...................... ----------
2,061,000
- ------------------------------------------------------------
PUBLISHING -- 3.9%
............................................................
Playboy Enterprises, Inc. Class
A # 35,500 581,313
............................................................
Playboy Enterprises, Inc. # 177,900 3,157,725
...................... ...................... ----------
3,739,038
- ------------------------------------------------------------
RETAIL -- FOOD CHAINS -- 3.7%
............................................................
Dominick's Supermarkets, Inc. # 79,700 3,551,631
- ------------------------------------------------------------
RETAIL -- JEWELRY -- 4.7%
............................................................
Finlay Enterprises, Inc. # 30,000 723,750
............................................................
Friedman's, Inc. # 223,600 3,703,375
...................... ...................... ----------
4,427,125
- ------------------------------------------------------------
SAVINGS & LOANS -- 1.2%
............................................................
Coastal Bancorp, Inc. 48,750 1,194,375
- ------------------------------------------------------------
SECURITY SERVICES -- 0.9%
............................................................
Wackenhut Corporation - Class B 39,000 838,500
- ------------------------------------------------------------
SOFTWARE -- 3.9%
............................................................
Vanstar Corporation # 251,600 3,663,925
- ------------------------------------------------------------
STEEL FABRICATOR -- 0.8%
............................................................
Citation Corporation # 24,010 480,200
............................................................
WHX Corporation # 19,400 249,775
...................... ...................... ----------
729,975
- ------------------------------------------------------------
TRANSPORTATION -- AIR FREIGHT -- 2.4%
............................................................
AirNet Systems, Inc. # 140,000 $ 2,257,500
- ------------------------------------------------------------
TRANSPORTATION -- AIRLINES -- 0.7%
............................................................
Aviall, Inc. # 48,000 657,000
- ------------------------------------------------------------
TRUCKING -- 0.7%
............................................................
Allied Holdings, Inc. # 31,200 657,150
- ------------------------------------------------------------
Total common stocks
(cost $90,573,759) 91,239,169
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CONVERTIBLE CORPORATE BONDS Principal
- -- 1.7% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
Hutchinson Technology, (Acquired
3/13/98, cost $1,380,000),
6.0%, 3/15/2005 r $1,380,000 $ 1,593,900
- ------------------------------------------------------------
Total investments -- 97.8%
(cost $91,953,759) 92,833,069
............................................................
Other assets in excess of
liabilities -- 2.2% 2,080,207
...................... ...................... ----------
$94,913,276
Total net assets -- 100.0%
- ------------------------------------------------------------
</TABLE>

ADR -- American Depository Receipts.

# -- Non-income producing security.

r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.

See Notes to Financial Statements

8
<PAGE> 134

Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL FUND

<TABLE>
COMMON STOCKS -- 93.2%
- ------------------------------------------------------------
<S> <C> <C>
AUSTRALIA -- 2.5% Shares Value
- ------------------------------------------------------------
BANKS -- 1.8%
............................................................
Australia and New Zealand
Banking Group, Ltd. 3,751,475 $ 25,879,227
- ------------------------------------------------------------
BUILDING MATERIALS -- 0.7%
............................................................
Pioneer International, Ltd. 4,578,810 10,916,349
.................... ..................... -------------
Total Australia 36,795,576
- ------------------------------------------------------------
AUSTRIA -- 0.6%
- ------------------------------------------------------------
STEEL -- 0.6%
............................................................
Boehler-Uddeholm AG 132,640 8,763,278
.................... ..................... -------------
Total Austria 8,763,278
- ------------------------------------------------------------
CANADA -- 3.8%
- ------------------------------------------------------------
BANKS -- 1.5%
............................................................
Canadian Imperial Bank of
Commerce 705,092 22,679,292
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.0%
............................................................
Imasco, Ltd. 804,800 14,858,685
- ------------------------------------------------------------
METALS & MINERALS -- 1.3%
............................................................
Noranda, Inc. 1,067,399 18,436,695
.................... ..................... -------------
Total Canada 55,974,672
- ------------------------------------------------------------
DENMARK -- 0.7%
- ------------------------------------------------------------
BANKS -- 0.7%
............................................................
BG Bank A/S 162,505 10,064,796
.................... ..................... -------------
Total Denmark 10,064,796
- ------------------------------------------------------------
FINLAND -- 2.5%
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 2.1%
............................................................
Metra OYJ ABP 336,011 11,023,812
............................................................
UPM-Kymmene OYJ 732,430 20,158,067
.................... ..................... -------------
31,181,879
- ------------------------------------------------------------
MACHINERY -- 0.4%
............................................................
Rauma Group OYJ 251,930 5,165,807
.................... ..................... -------------
Total Finland 36,347,686
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
FRANCE -- 8.4%
- ------------------------------------------------------------
BANKS -- 2.1%
............................................................
Societe Generale 150,880 $ 31,368,715
- ------------------------------------------------------------
BEVERAGES -- 1.2%
............................................................
Pernod-Ricard SA 263,778 18,280,260
- ------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS -- 1.9%
............................................................
Lafarge SA 271,572 28,073,385
- ------------------------------------------------------------
OIL -- INTERNATIONAL -- 1.8%
............................................................
Elf Aquitaine SA 181,500 25,516,748
- ------------------------------------------------------------
TOBACCO -- 1.4%
............................................................
SEITA SA 455,293 20,633,424
.................... ..................... -------------
Total France 123,872,532
- ------------------------------------------------------------
GERMANY -- 4.8%
- ------------------------------------------------------------
BANKS -- 1.3%
............................................................
Commerzbank AG 485,960 18,495,747
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.9%
............................................................
Friedrich Grohe AG 33,208 11,222,437
............................................................
Dyckerhoff AG 45,200 17,653,961
.................... ..................... -------------
28,876,398
- ------------------------------------------------------------
CHEMICALS -- 0.7%
............................................................
Bayer AG 189,886 9,825,495
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 0.9%
............................................................
Buderus AG 27,795 13,860,282
.................... ..................... -------------
Total Germany 71,057,922
- ------------------------------------------------------------
HONG KONG -- 7.2%
- ------------------------------------------------------------
BANKS -- 1.4%
............................................................
HSBC Holdings PLC 880,400 21,531,153
- ------------------------------------------------------------
METALS & MINING -- 0.3%
............................................................
Yanzhou Coal Mining Co., Ltd.
# 21,746,000 4,153,547
- ------------------------------------------------------------
PRINTING & PUBLISHING -- 1.0%
............................................................
South China Morning Post
(Holdings), Ltd. 32,175,000 15,467,598
- ------------------------------------------------------------
</TABLE>

See Notes to Financial Statements

9
<PAGE> 135
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL FUND

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
RETAIL -- GENERAL MERCHANDISE -- 0.2%
............................................................
Dickson Concepts
(International), Ltd. 2,208,000 $ 3,077,520
- ------------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 1.5%
............................................................
Hang Lung Development Company 8,150,000 8,098,906
............................................................
New World Development Co.,
Ltd. 7,124,000 13,790,919
.................... ..................... -------------
21,889,825
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 2.3%
............................................................
CLP Holdings Limited 4,540,000 20,682,765
............................................................
Swire Pacific Ltd. - Class A 3,419,800 12,909,357
.................... ..................... -------------
33,592,122
- ------------------------------------------------------------
UTILITY -- TELECOMMUNICATIONS -- 0.5%
............................................................
Hong Kong Telecommunications,
Ltd. 3,807,200 7,149,024
.................... ..................... -------------
Total Hong Kong 106,860,789
- ------------------------------------------------------------
IRELAND -- 2.3%
- ------------------------------------------------------------
FOOD PRODUCERS -- 0.6%
............................................................
Greencore Group PLC 1,546,416 8,412,277
- ------------------------------------------------------------
PAPER -- 1.7%
............................................................
Jefferson Smurfit Group PLC 8,482,255 25,200,756
.................... ..................... -------------
Total Ireland 33,613,033
- ------------------------------------------------------------
ITALY -- 1.7%
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 1.7%
............................................................
ENI SPA 3,783,924 24,799,703
.................... ..................... -------------
Total Italy 24,799,703
- ------------------------------------------------------------
JAPAN -- 9.4%
- ------------------------------------------------------------
AUTO PARTS -- 0.5%
............................................................
Koito Manufacturing Co., Ltd. 1,414,000 6,979,068
- ------------------------------------------------------------
AUTOS & TRUCKS -- 0.4%
............................................................
Suzuki Motor Corporation 647,000 5,873,977
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
ELECTRONIC COMPONENTS -- 1.7%
............................................................
Nintendo Co., Ltd. 263,800 $ 24,425,043
- ------------------------------------------------------------
ELECTRONICS -- 3.0%
............................................................
Kyocera Corporation 466,900 22,809,249
............................................................
Nichicon Corporation 1,165,000 13,011,131
............................................................
Sony Corporation 99,400 8,558,777
.................... ..................... -------------
44,379,157
- ------------------------------------------------------------
FINANCIAL SERVICES -- 1.2%
............................................................
Promise Company, Ltd. 442,400 18,201,562
- ------------------------------------------------------------
IRON/STEEL -- 0.6%
............................................................
Yodogawa Steel Works 1,911,000 8,936,404
- ------------------------------------------------------------
LEISURE -- TOYS -- 1.5%
............................................................
NAMCO, Ltd. 963,300 22,488,681
- ------------------------------------------------------------
REAL ESTATE INVESTMENT & MANAGEMENT -- 0.5%
............................................................
Daito Trust Construction Co.,
Ltd. 949,000 7,179,810
.................... ..................... -------------
Total Japan 138,463,702
- ------------------------------------------------------------
NETHERLANDS -- 8.4%
- ------------------------------------------------------------
BANKS -- 1.7%
............................................................
ABN AMRO Holding N.V. 1,043,725 24,422,757
- ------------------------------------------------------------
CHEMICALS -- 1.6%
............................................................
Akzo Nobel N.V. 109,074 24,246,745
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.5%
............................................................
Hollandsche Beton Groep N.V. 381,500 7,951,738
- ------------------------------------------------------------
INSURANCE -- 0.9%
............................................................
Fortis Amev N.V. 242,471 14,196,236
- ------------------------------------------------------------
INSURANCE -- MULTI-LINE -- 2.2%
............................................................
ING Groep N.V. 490,381 32,109,941
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 0.9%
............................................................
Koninklijke KPN NV 331,530 12,761,045
- ------------------------------------------------------------
</TABLE>

See Notes to Financial Statements

10
<PAGE> 136
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL FUND

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION SERVICES -- 0.6%
............................................................
TNT Post Group N.V. # 331,530 $ 8,474,768
.......................................... -------------
Total Netherlands 124,163,230
- ------------------------------------------------------------
NEW ZEALAND -- 0.3%
- ------------------------------------------------------------
BUILDING MATERIALS -- 0.3%
............................................................
Fletcher Challenge Building 3,788,279 4,719,467
.......................................... -------------
Total New Zealand 4,719,467
- ------------------------------------------------------------
NORWAY -- 1.7%
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.6%
............................................................
Kvaerner ASA - Class A 267,545 9,065,139
- ------------------------------------------------------------
PHARMACEUTICALS & HEALTHCARE -- 1.1%
............................................................
Nycomed Amersham 2,172,315 16,136,225
.......................................... -------------
Total Norway 25,201,364
- ------------------------------------------------------------
SINGAPORE -- 1.0%
- ------------------------------------------------------------
BANKS -- 0.5%
............................................................
Development Bank of
Singapore, Ltd. 1,443,370 7,987,957
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIES -- 0.5%
............................................................
Jardine Matheson Holdings,
Ltd. 2,780,600 7,507,620
.......................................... -------------
Total Singapore 15,495,577
- ------------------------------------------------------------
SPAIN -- 3.8%
- ------------------------------------------------------------
BANKS -- 1.5%
............................................................
Banco Santander SA 846,000 21,690,179
- ------------------------------------------------------------
OIL -- INTERNATIONAL -- 1.3%
............................................................
Repsol SA 353,375 19,504,986
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.0%
............................................................
Telefonica de Espana SA 316,363 14,651,600
.......................................... -------------
Total Spain 55,846,765
- ------------------------------------------------------------
SWEDEN -- 1.5%
- ------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.5%
............................................................
Electrolux AB - Class B 1,313,650 22,566,925
.......................................... -------------
Total Sweden 22,566,925
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
SWITZERLAND -- 9.6%
- ------------------------------------------------------------
BANKS -- 1.3%
............................................................
Credit Suisse Group 84,448 $ 18,790,199
- ------------------------------------------------------------
BUILDING MATERIALS -- 0.6%
............................................................
Sarna Kunststoff Holding AG
"registered" 5,080 8,875,194
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.8%
............................................................
Nestle SA "registered" 12,189 26,084,639
- ------------------------------------------------------------
INSURANCE -- 1.7%
............................................................
Swiss Reinsurance Co.
"registered" 10,090 25,517,493
- ------------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.7%
............................................................
SIG Schweizerische Industrie-
Gesellschaft Holding 21,432 17,450,099
............................................................
Sulzer AG "registered" (P.C.) 28,680 22,632,970
.......................................... -------------
40,083,069
- ------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 1.5%
............................................................
Novartis AG "registered" 13,633 22,685,535
.......................................... -------------
Total Switzerland 142,036,129
- ------------------------------------------------------------
UNITED KINGDOM -- 23.0%
- ------------------------------------------------------------
APPAREL & TEXTILES -- 0.6%
............................................................
Coats Viyella PLC 7,665,850 9,400,992
- ------------------------------------------------------------
AUTOS -- 0.8%
............................................................
Lex Service PLC 1,367,300 11,292,628
- ------------------------------------------------------------
BANKS -- 2.9%
............................................................
Abbey National PLC 1,022,349 18,166,648
............................................................
National Westminster Bank PLC 1,401,031 25,035,901
.......................................... -------------
43,202,549
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.7%
............................................................
Hanson PLC 4,012,587 24,386,532
- ------------------------------------------------------------
</TABLE>

See Notes to Financial Statements

11
<PAGE> 137
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL FUND

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
DIVERSIFIED -- 1.4%
............................................................
Cookson Group PLC 6,214,560 $ 21,360,117
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 3.5%
............................................................
BTR PLC 5,819,190 16,505,834
............................................................
Elementis PLC 1,813,920 4,600,317
............................................................
Tomkins PLC 5,529,083 30,005,193
.......................................... -------------
51,111,344
- ------------------------------------------------------------
ENERGY -- MISCELLANEOUS -- 0.5%
............................................................
BG PLC 1,235,294 7,141,667
- ------------------------------------------------------------
FOOD & BEVERAGES -- 1.6%
............................................................
Allied Domecq PLC 2,578,004 24,216,869
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.9%
............................................................
Hillsdown Holdings PLC 8,384,145 22,801,971
............................................................
Tate & Lyle PLC 666,200 5,282,661
.......................................... -------------
28,084,632
- ------------------------------------------------------------
INSURANCE -- 1.9%
............................................................
CGU PLC 1,514,885 28,258,394
- ------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 1.0%
............................................................
Medeva PLC 5,075,970 14,397,729
- ------------------------------------------------------------
RETAIL -- FOOD CHAINS -- 1.1%
............................................................
Safeway PLC 2,502,850 16,390,813
- ------------------------------------------------------------
TOBACCO -- 1.9%
............................................................
B.A.T Industries PLC 2,787,129 27,901,936
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 1.0%
............................................................
Powergen PLC 1,080,000 14,920,388
- ------------------------------------------------------------
UTILITY -- WATER -- 1.2%
............................................................
Hyder PLC 1,129,000 17,688,278
.......................................... -------------
Total United Kingdom 339,754,868
............................................................
Total common stocks
(cost $1,183,166,225) 1,376,398,014
- ------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS
- -- 6.7%
- -----------------------------------------------------------
Principal
COMMERCIAL PAPER -- 6.4% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
Centex Corporation
7.00%, 7/01/1998 $20,000,000 $ 20,000,000
...........................................................
International Lease Finance
Corporation
5.51%, 7/07/1998 30,000,000 29,972,450
...........................................................
Lockheed Martin Corporation
5.67%, 7/06/1998 44,750,000 44,714,759
.......................................... -------------
94,687,209
- -----------------------------------------------------------
CASH EQUIVALENTS -- 0.3%
- -----------------------------------------------------------
Vista Institutional Prime
Money Market Fund 4,826,689 4,826,689
- -----------------------------------------------------------
Total short-term investments
(cost $99,513,898) 99,513,898
- -----------------------------------------------------------
Total investments -- 99.9%
(cost $1,282,680,123) 1,475,911,912
...........................................................
Other assets in excess of
liabilities -- 0.1% 893,472
.......................................... -------------
Total net assets -- 100.0% $1,476,805,384
- -----------------------------------------------------------
</TABLE>

# Non-income producing security.

P.C. -- Participation Certificates.

See Notes to Financial Statements

12
<PAGE> 138

Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND

<TABLE>
<CAPTION>
COMMON STOCKS -- 99.4%
- -----------------------------------------------------------
AUSTRALIA -- 2.9% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
BANKS -- 1.6%
...........................................................
Australia & New Zealand Banking
Group, Ltd. 16,940 $ 116,859
- -----------------------------------------------------------
DIVERSIFIED COMPANIES -- 1.3%
...........................................................
Reinsurance Australia Corporation 37,170 94,878
...................... ...................... ---------
Total Australia 211,737
- -----------------------------------------------------------
CANADA -- 2.9%
- -----------------------------------------------------------
BANKS -- 1.6%
...........................................................
Canadian Imperial Bank of Commerce 3,710 119,332
- -----------------------------------------------------------
METALS & MINERALS -- 1.3%
...........................................................
Noranda, Inc. 5,415 93,531
...................... ...................... ---------
Total Canada 212,863
- -----------------------------------------------------------
FINLAND -- 2.7%
- -----------------------------------------------------------
FOREST PRODUCTS & PAPER -- 2.7%
...........................................................
UPM-Kymmene Corporation OYJ 4,035 111,052
...........................................................
Metra OYJ ABP 2,651 86,974
...................... ...................... ---------
Total Finland 198,026
- -----------------------------------------------------------
FRANCE -- 6.4%
- -----------------------------------------------------------
BANKS -- 2.0%
...........................................................
Societe Generale 725 150,731
- -----------------------------------------------------------
BEVERAGES -- 1.1%
...........................................................
Pernod-Ricard SA 1,200 83,162
- -----------------------------------------------------------
BUILDING MATERIALS & COMPONENTS -- 1.9%
...........................................................
Lafarge SA 1,327 137,177
- -----------------------------------------------------------
TOBACCO -- 1.4%
...........................................................
SEITA SA 2,235 101,288
...................... ...................... ---------
Total France 472,358
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
GERMANY -- 2.7% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
BANKS -- 1.3%
...........................................................
Commerzbank AG 2,500 $ 95,151
- -----------------------------------------------------------
MEDICAL PRODUCTS -- 1.4%
...........................................................
Draegerwerk AG 4,185 99,928
...................... ...................... ---------
Total Germany 195,079
- -----------------------------------------------------------
HONG KONG -- 3.7%
- -----------------------------------------------------------
BANKS -- 0.6%
...........................................................
Dao Heng Bank Group, Ltd. 30,000 42,588
- -----------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 0.9%
...........................................................
New World Development Co., Ltd. 33,000 63,883
- -----------------------------------------------------------
RETAIL -- SPECIALTY -- 0.5%
...........................................................
Dickson Concepts International, Ltd. 28,000 39,027
- -----------------------------------------------------------
UTILITY -- ELECTRIC -- 1.3%
...........................................................
CLP Holdings Limited 22,000 100,225
- -----------------------------------------------------------
UTILITY -- TELECOMMUNICATIONS -- 0.4%
...........................................................
Hong Kong Telecommunications, Ltd. 14,800 27,791
...................... ...................... ---------
Total Hong Kong 273,514
- -----------------------------------------------------------
IRELAND -- 1.7%
- -----------------------------------------------------------
PAPER -- 1.7%
...........................................................
Jefferson Smurfit Group PLC 41,620 123,653
...................... ...................... ---------
Total Ireland 123,653
- -----------------------------------------------------------
ITALY -- 1.1%
- -----------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 1.1%
...........................................................
ENI SPA 12,000 78,648
...................... ...................... ---------
Total Italy 78,648
- -----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

13
<PAGE> 139
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND

<TABLE>
<CAPTION>
- -----------------------------------------------------------
JAPAN -- 9.9% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
AUTO PARTS -- 0.9%
...........................................................
NIFCO, Inc. 8,000 $ 63,407
- -----------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.8%
...........................................................
Nintendo Co., Ltd. 1,400 129,625
- -----------------------------------------------------------
ELECTRONICS -- 3.0%
...........................................................
Kyocera Corporation 2,500 122,131
...........................................................
Nichicon Corporation 9,000 100,515
...................... ...................... ---------
222,646
- -----------------------------------------------------------
FINANCIAL SERVICES -- 1.4%
...........................................................
Promise Company, Ltd. 2,550 104,914
- -----------------------------------------------------------
FOODS -- 0.8%
...........................................................
MOS Food Services 5,000 59,444
- -----------------------------------------------------------
LEISURE/TOYS -- 2.0%
...........................................................
NAMCO, Ltd. 6,300 147,076
...................... ...................... ---------
Total Japan 727,112
- -----------------------------------------------------------
NETHERLANDS -- 7.3%
- -----------------------------------------------------------
BANKS -- 1.7%
...........................................................
ABN AMRO Holding N.V. 5,335 124,837
- -----------------------------------------------------------
CHEMICALS -- 1.8%
...........................................................
Akzo Nobel N.V. 605 134,489
- -----------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.8%
...........................................................
Hollandsche Beton Groep N.V 6,415 133,710
- -----------------------------------------------------------
INSURANCE -- MULTI-LINE -- 2.0%
...........................................................
ING Groep N.V. 2,165 141,763
...................... ...................... ---------
Total Netherlands 534,799
- -----------------------------------------------------------
NEW ZEALAND -- 1.2%
- -----------------------------------------------------------
BUILDING MATERIALS -- 1.2%
...........................................................
Fletcher Challenge Building 69,015 85,979
...................... ...................... ---------
Total New Zealand 85,979
- -----------------------------------------------------------
NORWAY -- 1.2%
- -----------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.4%
...........................................................
Kvaerner ASA - Class A 960 32,527
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
JAPAN -- 9.9% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
MEDICAL PRODUCTS & SUPPLIES -- 0.8%
...........................................................
Nycomed Amersham PLC -- Class B 7,805 $ 57,977
...................... ...................... ---------
Total Norway 90,504
- -----------------------------------------------------------
SINGAPORE -- 0.5%
- -----------------------------------------------------------
DIVERSIFIED -- 0.5%
...........................................................
Jardine Matheson Holdings, Ltd. 14,000 37,800
...................... ...................... ---------
Total Singapore 37,800
- -----------------------------------------------------------
SPAIN -- 1.3%
- -----------------------------------------------------------
OIL -- INTERNATIONAL -- 1.3%
...........................................................
Repsol SA 1,700 93,834
...................... ...................... ---------
Total Spain 93,834
- -----------------------------------------------------------
SWEDEN -- 1.6%
- -----------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.6%
...........................................................
Electrolux AB - Class B 6,675 114,668
...................... ...................... ---------
Total Sweden 114,668
- -----------------------------------------------------------
SWITZERLAND -- 8.2%
- -----------------------------------------------------------
BANKS -- 0.8%
...........................................................
Credit Suisse Group 257 57,184
- -----------------------------------------------------------
BUILDING MATERIALS -- 1.5%
...........................................................
Forbo Holding AG "registered" 224 114,008
- -----------------------------------------------------------
FOOD PRODUCERS -- 1.1%
...........................................................
Nestle SA "registered" 38 81,321
- -----------------------------------------------------------
INSURANCE -- 1.8%
...........................................................
Swiss Reinsurance Co. "registered" 52 131,507
- -----------------------------------------------------------
MACHINERY & EQUIPMENT -- 1.4%
...........................................................
SIG Schweizerische
Industrie-Gesellschaft Holding AG 128 104,219
- -----------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 1.6%
...........................................................
Novartis AG 70 116,481
...................... ...................... ---------
Total Switzerland 604,720
- -----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

14
<PAGE> 140
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND

<TABLE>
<CAPTION>
- -----------------------------------------------------------
UNITED KINGDOM -- 18.0% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
APPAREL & TEXTILES -- 1.0%
...........................................................
Coats Viyella PLC 59,050 $ 72,416
- -----------------------------------------------------------
AUTOS -- 1.2%
...........................................................
Lex Service PLC 10,900 90,024
- -----------------------------------------------------------
BANKS -- 1.2%
...........................................................
National Westminster Bank PLC 4,900 87,561
- -----------------------------------------------------------
BUILDING MATERIALS -- 2.0%
...........................................................
Hanson PLC 24,100 146,468
- -----------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 6.0%
...........................................................
BTR PLC 32,417 91,950
...........................................................
Cookson Group PLC 27,000 92,802
...........................................................
Elementis PLC 47,400 120,212
...........................................................
Tomkins PLC 25,432 138,014
...................... ...................... ---------
442,978
- -----------------------------------------------------------
FOOD & BEVERAGES -- 1.3%
...........................................................
Allied Domecq PLC 9,860 92,621
- -----------------------------------------------------------
INSURANCE -- 1.6%
...........................................................
CGU PLC 6,340 118,265
- -----------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 1.0%
...........................................................
Medeva PLC 25,878 73,402
- -----------------------------------------------------------
TOBACCO -- 1.9%
...........................................................
B.A.T. Industries PLC 14,000 140,154
- -----------------------------------------------------------
UTILITY -- ELECTRIC -- 0.8%
...........................................................
Powergen PLC 4,400 60,787
...................... ...................... ---------
Total United Kingdom 1,324,676
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- -----------------------------------------------------------
UNITED STATES -- 26.1% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 1.5%
...........................................................
Northrop Grumman Corporation 1,100 $ 113,438
- -----------------------------------------------------------
AUTOS & TRUCKS -- 2.2%
...........................................................
Ford Motor Company 1,100 64,900
...........................................................
General Motors Corporation 1,400 93,538
...................... ...................... ---------
158,438
- -----------------------------------------------------------
BANKS -- 2.4%
...........................................................
Bankers Trust Corporation 500 58,031
...........................................................
First Chicago NBD Corporation 1,300 115,212
...................... ...................... ---------
173,243
- -----------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 1.3%
...........................................................
Weyerhaeuser Company 2,000 92,375
- -----------------------------------------------------------
CONGLOMERATES -- 0.8%
...........................................................
Tenneco, Inc. 1,600 60,900
- -----------------------------------------------------------
FINANCIAL SERVICES -- 0.8%
...........................................................
Associates First Capital Corporation 1 71
...........................................................
Beneficial Corporation 400 61,275
...................... ...................... ---------
61,346
- -----------------------------------------------------------
INSURANCE -- 2.0%
...........................................................
Safeco Corporation 1,800 81,675
...........................................................
TIG Holdings, Inc. 2,800 64,400
...................... ...................... ---------
146,075
- -----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

15
<PAGE> 141
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND

<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
MACHINERY -- 1.1%
...........................................................
New Holland N.V. 4,200 $ 82,425
- -----------------------------------------------------------
METALS & MINING -- 0.9%
...........................................................
Aluminum Company of America 1,000 65,937
- -----------------------------------------------------------
OIL -- DOMESTIC -- 2.4%
...........................................................
Occidental Petroleum Corporation 2,300 62,100
...........................................................
Phillips Petroleum Company 2,400 115,650
...................... ...................... ---------
177,750
- -----------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.3%
...........................................................
Eastman Kodak Company 1,300 94,981
- -----------------------------------------------------------
POLLUTION CONTROL -- 1.1%
...........................................................
Waste Management, Inc. 2,400 84,000
- -----------------------------------------------------------
RAILROADS -- 0.9%
...........................................................
Norfolk Southern Corporation 2,300 68,569
- -----------------------------------------------------------
RETAIL -- SPECIALTY APPAREL -- 0.8%
...........................................................
Abercrombie & Fitch Co. # 1,290 56,760
- -----------------------------------------------------------
STEEL -- 0.7%
...........................................................
USX-U.S. Steel Group, Inc. 1,600 52,800
- -----------------------------------------------------------
TOBACCO -- 1.4%
...........................................................
Philip Morris Companies, Inc. 2,600 102,375
- -----------------------------------------------------------
UTILITY -- ELECTRIC -- 2.3%
...........................................................
Illinova Corporation 2,100 63,000
...........................................................
PacifiCorp 1,200 27,150
...........................................................
PP&L Resources, Inc. 3,400 77,138
...................... ...................... ---------
167,288
- -----------------------------------------------------------
UTILITY -- TELEPHONE -- 2.2%
...........................................................
ALLTEL Corporation 1,800 83,700
...........................................................
AT&T Corp. 1,300 74,262
............................................. ---------
157,962
............................................. ---------
Total United States 1,916,662
- -----------------------------------------------------------
Total common stocks
(cost $6,771,625) 7,296,632
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Principal
CASH EQUIVALENTS -- 1.8% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
Chase Bank Domestic Liquidity Fund
(cost $135,816) $135,816 $ 135,816
- -----------------------------------------------------------
Total investments -- 101.2%
(cost $6,907,441) 7,432,448
...........................................................
Liabilities in excess of other
assets -- (1.2)%
.............................................. (87,163)
---------
Total net assets -- 100.0% $7,345,285
- -----------------------------------------------------------
</TABLE>

# Non-income producing security.
See Notes to Financial Statements

16
<PAGE> 142

Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
BALANCED FUND

<TABLE>
<CAPTION>
COMMON STOCKS -- 43.0% Shares Value
- ----------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 2.0%
..........................................................
Lockheed Martin Corporation 5,700 $ 603,487
..........................................................
Northrop Grumman Corporation 10,200 1,051,875
..........................................................
Rockwell International Corporation 9,000 432,563
..................... ...................... ----------
2,087,925
- ----------------------------------------------------------
APPAREL & TEXTILES -- 0.5%
..........................................................
Russell Corporation 15,800 476,963
- ----------------------------------------------------------
AUTO PARTS -- 0.6%
..........................................................
Dana Corporation 11,000 588,500
..........................................................
Meritor Automotive, Inc. 2,000 48,000
..................... ...................... ----------
636,500
- ----------------------------------------------------------
AUTOS & TRUCKS -- 2.6%
..........................................................
Ford Motor Company 25,000 1,475,000
..........................................................
General Motors Corporation 18,600 1,242,713
..................... ...................... ----------
2,717,713
- ----------------------------------------------------------
BANKS -- 2.2%
..........................................................
Banc One Corporation 4,200 234,413
..........................................................
Comerica, Inc. 2,100 139,125
..........................................................
First Chicago NBD Corporation 9,800 868,525
..........................................................
First Union Corporation 12,100 704,825
..........................................................
National City Corporation 4,500 319,500
..................... ...................... ----------
2,266,388
- ----------------------------------------------------------
BEVERAGES -- 0.5%
..........................................................
Anheuser-Busch Companies, Inc. 10,000 471,875
- ----------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 0.9%
..........................................................
Georgia-Pacific (Timber Group) 11,400 262,912
..........................................................
Weyerhaeuser Company 15,000 692,813
..................... ...................... ----------
955,725
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
CHEMICALS -- 1.6%
..........................................................
The Dow Chemical Company 9,500 $ 918,531
..........................................................
Eastman Chemical Company 11,400 709,650
..........................................................
Millennium Chemicals, Inc. 2,142 72,560
..................... ...................... ----------
1,700,741
- ----------------------------------------------------------
CONGLOMERATES -- 0.8%
..........................................................
Tenneco, Inc. 21,800 829,763
- ----------------------------------------------------------
CONSUMER PRODUCTS -- 0.5%
..........................................................
Tupperware Corporation 17,200 483,750
- ----------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.4%
..........................................................
Harsco Corporation 10,000 458,125
- ----------------------------------------------------------
FINANCIAL SERVICES -- 1.5%
..........................................................
Associates First Capital
Corporation -- Class A 6,552 503,685
..........................................................
Beneficial Corporation 4,200 643,387
..........................................................
Transamerica Corporation 3,600 414,450
..................... ...................... ----------
1,561,522
- ----------------------------------------------------------
HEALTHCARE -- DRUGS -- 0.2%
..........................................................
American Home Products Corporation 800 41,400
..........................................................
Bristol Myers Squibb Company 1,600 183,900
..................... ...................... ----------
225,300
- ----------------------------------------------------------
HEALTHCARE -- MEDICAL PRODUCTS -- 0.1%
..........................................................
Baxter International, Inc. 2,800 150,675
- ----------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 0.9%
..........................................................
Whirlpool Corporation 13,700 941,875
- ----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

17
<PAGE> 143
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
BALANCED FUND

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
INSURANCE -- 3.0%
..........................................................
American General Corporation 10,700 $ 761,706
..........................................................
Harleysville Group, Inc. 18,000 373,500
..........................................................
Lincoln National Corporation 5,000 456,875
..........................................................
Safeco Corporation 14,200 644,325
..........................................................
St. Paul Companies, Inc. 14,200 597,288
..........................................................
TIG Holdings, Inc. 13,900 319,700
..................... ...................... ----------
3,153,394
- ----------------------------------------------------------
LEISURE/TOYS -- 0.5%
..........................................................
Fortune Brands, Inc. 12,500 480,469
- ----------------------------------------------------------
MACHINERY -- 0.7%
..........................................................
Deere & Company 1,500 79,312
..........................................................
New Holland N.V. 34,000 667,250
..................... ...................... ----------
746,562
- ----------------------------------------------------------
METALS & MINING -- 1.9%
..........................................................
Aluminum Company of America 13,300 876,969
..........................................................
Phelps Dodge Corporation 9,000 514,687
..........................................................
Reynolds Metals Company 9,900 553,781
..................... ...................... ----------
1,945,437
- ----------------------------------------------------------
OIL -- DOMESTIC -- 3.6%
..........................................................
Atlantic Richfield Company 10,700 835,938
..........................................................
Occidental Petroleum Corporation 31,000 837,000
..........................................................
Phillips Petroleum Company 22,600 1,089,038
..........................................................
USX-Marathon Group, Inc. 18,000 617,625
..........................................................
Ultramar Diamond Shamrock
Corporation 14,000 441,875
..................... ...................... ----------
3,821,476
- ----------------------------------------------------------
PAPER -- 1.4%
..........................................................
Georgia-Pacific Group 6,700 394,881
..........................................................
International Paper Company 16,000 688,000
..........................................................
Union Camp Corporation 7,500 372,188
..................... ...................... ----------
1,455,069
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
PHOTOGRAPHY & OPTICAL -- 0.7%
..........................................................
Eastman Kodak Company 9,700 $ 708,706
- ----------------------------------------------------------
POLLUTION CONTROL -- 1.1%
..........................................................
Browning-Ferris Industries, Inc. 11,918 414,150
..........................................................
Waste Management, Inc. 20,900 731,500
..................... ...................... ----------
1,145,650
- ----------------------------------------------------------
RAILROADS -- 1.0%
..........................................................
CSX Corporation 8,000 364,000
..........................................................
Norfolk Southern Corporation 23,000 685,687
..................... ...................... ----------
1,049,687
- ----------------------------------------------------------
RETAIL -- 1.8%
..........................................................
Intimate Brands, Inc. 13,200 363,825
..........................................................
J.C. Penney Company, Inc. 7,500 542,344
..........................................................
May Department Stores Company 8,000 524,000
..........................................................
Sears, Roebuck & Company 8,200 500,713
..................... ...................... ----------
1,930,882
- ----------------------------------------------------------
SAVINGS & LOAN -- 1.5%
..........................................................
Fannie Mae 13,500 820,125
..........................................................
H.F. Ahmanson & Company 11,000 781,000
..................... ...................... ----------
1,601,125
- ----------------------------------------------------------
STEEL -- 0.7%
..........................................................
USX-U.S. Steel Group, Inc. 23,000 759,000
- ----------------------------------------------------------
TOBACCO -- 1.4%
..........................................................
Philip Morris Companies, Inc. 36,000 1,417,500
- ----------------------------------------------------------
TRUCKING -- 0.2%
..........................................................
Ryder System, Inc. 5,600 176,750
- ----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

18
<PAGE> 144
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
BALANCED FUND

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
UTILITY -- ELECTRIC -- 4.9%
..........................................................
CMS Energy Corporation 5,600 $ 246,400
..........................................................
Central & South West Corporation 14,700 395,063
..........................................................
DTE Energy Company 12,000 484,500
..........................................................
Edison International 19,300 570,556
..........................................................
Entergy Corporation 7,700 221,375
..........................................................
GPU, Inc. 5,700 215,531
..........................................................
Illinova Corporation 27,000 810,000
..........................................................
PacifiCorp 18,300 414,038
..........................................................
PECO Energy Company 14,000 408,625
..........................................................
PP&L Resources, Inc. 20,600 467,362
..........................................................
Public Service Enterprises Group,
Inc. 7,100 244,506
..........................................................
SCANA Corporation 14,700 438,244
..........................................................
Texas Utilities Company 5,538 230,519
..................... ...................... ----------
5,146,719
- ----------------------------------------------------------
UTILITY -- GAS PIPELINE -- 0.5%
..........................................................
Nicor, Inc. 6,000 240,750
..........................................................
Peoples Energy Corporation 8,500 328,312
..................... ...................... ----------
569,062
- ----------------------------------------------------------
UTILITY -- TELEPHONE -- 2.8%
..........................................................
AT&T Corporation 16,400 936,850
..........................................................
ALLTEL Corporation 16,100 748,650
..........................................................
Bell Atlantic Corporation 12,288 560,640
..........................................................
SBC Communications, Inc. 17,314 692,560
..................... ...................... ----------
2,938,700
- ----------------------------------------------------------
Total common stocks (cost
$36,671,272) 45,011,028
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
CORPORATE BONDS Principal
- -- 19.2% Amount Value
- ----------------------------------------------------------
<S> <C> <C>
BANKS -- 2.3%
..........................................................
MBNA Corporation, 6.0375%,
6/17/2002 # $ 1,500,000 $ 1,494,529
..........................................................
MBNA Global Capital Securities,
CLB 2/01/2007, 6.51875%,
2/01/2027 # 1,000,000 932,881
..................... ...................... ----------
2,427,410
- ----------------------------------------------------------
EUROBANKS -- 5.8%
..........................................................
Foreningsbanken Kredit AB, CLB
12/18/2001, 6.4375%,
12/29/2049 # 2,500,000 2,509,500
..........................................................
Nordbanken, CLB 10/25/2001,
6.2875%, 10/29/2049 # 2,000,000 2,006,922
..........................................................
Okobank, CLB 9/27/1999,
7.23828%, 9/29/2049 # 1,500,000 1,498,007
..................... ...................... ----------
6,014,429
- ----------------------------------------------------------
FINANCIAL SERVICES -- 6.8%
..........................................................
Countrywide Home Loans, Inc.,
6.84%, 10/22/2004 2,500,000 2,564,855
..........................................................
Florida Windstorm (Acquired
7/31/1997, cost $998,883),
6.85%, 8/25/2007 r 1,000,000 1,037,516
..........................................................
Lehman Brothers, Inc., 6.50%,
4/15/2008 2,000,000 2,007,506
..........................................................
URSA Major Rated Limited
(Acquired 1/28/1998,
cost $1,483,505), 5.90%,
1/06/2003 r 1,500,000 1,504,261
..................... ...................... ----------
7,114,138
- ----------------------------------------------------------
PAPER -- 1.8%
..........................................................
Fort Howard Corporation,
11.00%, 1/02/2002 1,828,480 1,868,381
- ----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

19
<PAGE> 145
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
BALANCED FUND

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
TRANSPORTATION -- 2.5%
..........................................................
Delta Air Lines ETC:
9.90%, 1/02/2002 $ 150,000 $ 165,603
10.50%, 4/30/2016 750,000 1,011,934
..........................................................
Northwest Airlines, Inc.,
11.30%, 12/21/2012 1,078,338 1,427,613
..................... ...................... ----------
2,605,150
- ----------------------------------------------------------
Total corporate bonds (cost
$19,813,501) 20,029,508
- ----------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 11.4%
- ----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.7%
..........................................................
Federal Home Loan Mortgage
Corporation,
1189 K, 9.570629%, 1/15/2021# 858,708 875,526
..........................................................
2067 PD, 6.50%, 9/15/2026 2,900,000 2,922,733
..........................................................
Federal National Mortgage
Association:
G93-31 SD, 10.30143%,
12/25/2022 # 486,770 476,508
..........................................................
0.00%, 10/09/2019 3,025,000 869,024
..........................................................
1998-34 2, 7.00%, 6/18/2028 866,728 851,424
..................... ...................... ----------
5,995,215
- ----------------------------------------------------------
PASS-THROUGH SECURITIES -- 3.0%
..........................................................
Government National Mortgage
Association,
8404, 7.00%, 9/20/2018 # 948,904 973,755
..........................................................
8919, 6.875%, 2/20/2022 # 1,182,161 1,211,632
..........................................................
8247, 7.00%, 7/20/2023 # 919,357 942,442
..................... ...................... ----------
3,127,829
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.7%
..........................................................
Federal Home Loan Mortgage
Corporation:
1627 PN (IO), 6.00%,
9/15/2022 $ 3,100,000 $ 933,852
..........................................................
1965 SA (Inverse IO),
2.049999%, 3/15/2024 # 3,050,000 408,194
..........................................................
Federal National Mortgage
Association:
1997-65 A (PO), 0.00%,
9/25/2000 1,585,179 1,466,200
..................... ...................... ----------
2,808,246
- ----------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $11,868,698) 11,931,290
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
NON-AGENCY MORTGAGE-
BACKED SECURITIES
- -- 19.5%
- ------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED
SECURITIES -- 16.5%
............................................................
Aesop Funding II LLC (Acquired
7/23/97, cost $2,200,000),
1997-1 A1, 6.22%, 10/20/2001r 2,200,000 2,220,735
............................................................
Commercial Financial Services
Securitized Multiple Asset
Rated Trust (Acquired
2/24/1998, cost $1,195,453),
1998-1 A1, 7.45%, 3/15/2006 r 1,195,453 1,197,879
............................................................
Ditech Home Loan Owner Trust,
1997-1 A3, 6.71%, 8/15/2018 1,750,000 1,782,296
............................................................
Firstplus Home Loan Owner
Trust, 1998-1 A4, 6.20%,
3/10/2015 1,500,000 1,505,542
............................................................
Green Tree Financial
Corporation, 1996-5 B2,
8.45%, 7/15/2027 1,549,754 1,634,990
............................................................
Heilig-Meyers Master Trust
(Acquired 2/20/1998, cost
$1,399,872), 1998-1A A,
6.125%, 1/20/2007 r 1,400,000 1,398,412
............................................................
IMC Home Equity Loan Trust,
1996-4 A4, 7.11%, 8/25/2014 1,250,000 1,290,967
............................................................
</TABLE>

See Notes to Financial Statements

20
<PAGE> 146
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
BALANCED FUND

<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
Nomura Asset Securities
Corporation:
1995-MD3 A1B, 8.15%,
3/04/2020 1,000,000 1,102,813
............................................................
1998-D6 A1B, 6.59%, 3/17/2028 2,500,000 2,572,162
............................................................
Chase Commercial Mortgage
Securities Corporation,
1997-1 X (IO), 1.3965%,
4/19/2015 # 23,240,320 1,856,506
............................................................
Donaldson, Lufkin & Jenrette
(Acquired 4/25/1997, cost
$732,279), 1997-CF1 S (IO),
1.09368%, 3/15/2017 # r 11,859,874 733,830
...................... ...................... ----------
17,296,132
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.0%
............................................................
GE Capital Mortgage Services,
Inc., 1995-8 A5, 7.50%,
10/25/2025 896,719 894,192
............................................................
Independent National Mortgage
Corporation, 1996-D A2,
7.00%, 5/25/2026 380,084 381,249
............................................................
PNC Mortgage Securities
Corporation, 1996-1 A11,
Class Z, 7.50%, 6/25/2026 1,843,801 1,878,505
...................... ...................... ----------
3,153,946
- ------------------------------------------------------------
Total non-agency mortgage-backed securities
(cost $20,161,367) 20,450,078
- ------------------------------------------------------------
PREFERRED STOCKS
- -- 0.9% Shares
- ----------------------------------------------------------
Home Ownership Funding 2,
(Acquired 2/20/1997, Cost
$1,000,000) r 1,000 953,750
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS Principal
- -- 5.1% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bonds:
7.50%, 11/15/2016 $ 1,500,000 $ 1,801,408
...........................................................
6.50%, 11/15/2026 750,000 833,203
...........................................................
6.375%, 8/15/2027 750,000 824,063
...........................................................
6.125%, 11/15/2027 750,000 803,907
..................... ...................... -----------
4,262,581
- -----------------------------------------------------------
U.S. Treasury Notes:
...........................................................
6.625%, 5/15/2007 1,000,000 1,075,001
- -----------------------------------------------------------
Total U.S. Treasury obligations
(cost $5,199,250) 5,337,582
- -----------------------------------------------------------
SHORT-TERM INVESTMENTS -- 2.4%
- -----------------------------------------------------------
VARIABLE RATE DEMAND
NOTES* -- 2.4%
...........................................................
General Mills, Inc., 5.2651% 1,621,420 1,621,420
...........................................................
Sara Lee, Corp., 5.2562% 878,922 878,922
..................... ...................... -----------
Total short-term investments 2,500,342
(cost $2,500,342)
- -----------------------------------------------------------
Total investments -- 101.5%
(cost $97,214,430) 106,213,578
...........................................................
Liabilities in excess of other
assets -- (1.5)% (1,618,165)
..................... ...................... -----------
$104,595,413
Total net assets -- 100.0%
- -----------------------------------------------------------
</TABLE>

# Variable rate security. The rate listed is as of June 30, 1998.

* 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, 1998.

IO -- Interest Only.

PO-- Principal Only.

ETC -- Equipment Trust Certificate.

CLB -- Callable.

r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.
See Notes to Financial Statements

21
<PAGE> 147
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 25.3% Amount Value
- -------------------------------------------------------------
<S> <C> <C>
APPAREL -- 0.8%
.............................................................
La Petite Holdings, CLB 8/01/1998,
9.625%, 8/01/2001 $ 350,000 $ 360,500
- -------------------------------------------------------------
BANKS -- 3.3%
.............................................................
The Hertz Corporation, 6.625%,
5/15/2008 1,000,000 1,011,861
.............................................................
MBNA Corporation, 6.0375%,
6/17/2002 # 500,000 498,176
................. .................
----------
1,510,037
- -------------------------------------------------------------
EUROBANKS -- 2.0%
.............................................................
Fokus Bank A/S, CLB 9/29/1999,
6.90%, 9/29/2004 # 500,000 503,919
.............................................................
Hong Kong & Shanghai Bank, CLB
8/26/1998, 6.00%, 8/29/2049 # 555,000 412,143
................. .................
----------
916,062
- -------------------------------------------------------------
FINANCIAL SERVICES -- 6.9%
.............................................................
Newcourt Credit Group,
5.91%, 10/24/2000 # 500,000 501,505
.............................................................
Countrywide Home Loans, Inc.,
6.2225%, 3/16/2005 # 750,000 751,632
.............................................................
General Motors Acceptance Corp.,
8.25%, 3/01/2005 1,000,000 1,113,549
.............................................................
Lehman Brothers, Inc.,
6.50%, 4/15/2008 750,000 752,815
................. .................
----------
3,119,501
- -------------------------------------------------------------
INDUSTRIAL -- 0.6%
.............................................................
Westinghouse Electric Corporation,
8.93%, 6/22/1999 250,000 255,462
- -------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
OIL & GAS (DOMESTIC) -- 1.0%
.............................................................
Harcor Energy, Inc., CLB 7/15/1999,
14.875%, 7/15/2002 $ 400,000 $ 475,000
- -------------------------------------------------------------
SAVINGS & LOAN -- 1.1%
.............................................................
Western Financial Savings, CLB
7/1/2000, 8.50%, 7/01/2003 500,000 492,423
- -------------------------------------------------------------
TELECOMMUNICATIONS -- 6.5%
.............................................................
Comcast Cable Communications, Inc.,
8.375%, 5/01/2007 500,000 562,470
.............................................................
Teleport Communications, CLB
7/01/2001, 0.00%, 7/01/2007+ 1,150,000 1,000,500
.............................................................
TKR Cable, Inc., CLB 10/30/1999,
10.50%, 10/30/2007 500,000 547,873
.............................................................
Worldcom, Inc., CLB 1/15/2001,
8.875%, 1/15/2006 775,000 842,813
................. .................
----------
2,953,656
- -------------------------------------------------------------
TRANSPORTATION -- 2.1%
.............................................................
Delta Air Lines ETC:
9.90%, 1/02/2002 250,000 276,005
.............................................................
10.50%, 4/30/2016 500,000 674,622
................. .................
----------
950,627
- -------------------------------------------------------------
UTILITY -- 1.0%
.............................................................
Calenergy Co., Inc., CLB 1/15/1999,
10.25%, 1/15/2004 400,000 431,000
- -------------------------------------------------------------
Total corporate bonds and notes
(cost $11,349,464) 11,464,268
- -------------------------------------------------------------
</TABLE>

See Notes to Financial Statements

22
<PAGE> 148
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 16.5% Amount Value
- -------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 13.4%
.............................................................
Federal Home Loan Mortgage
Corporation:
1573 GC, 9.617275%, 1/15/2023 # $1,272,812 $ 1,237,639
.............................................................
1261 J, 8.00%, 7/15/2021 649,703 680,489
.............................................................
2067 PD, 6.50%, 9/15/2026 1,500,000 1,511,758
.............................................................
1468 S, 11.691%, 2/15/2023 # 449,224 473,348
.............................................................
2043 SC, 10.12813%, 4/15/2028 # 399,363 396,272
.............................................................
1564 SE, 8.226833%, 8/15/2008 # 353,637 356,257
.............................................................
2036 Z, 7.00%, 3/15/2028 109,020 108,679
.............................................................
2055 ZA, 6.50%, 5/15/2013 1,005,417 974,611
.............................................................
Federal National Mortgage
Association:
G93-27 SB, 6.46933%, 8/25/2023 # 115,176 98,845
.............................................................
1993-37 SB, 7.02916%, 3/25/2023 # 224,549 215,169
................. .................
----------
6,053,067
- -------------------------------------------------------------
PASS-THROUGH SECURITIES -- 1.1%
.............................................................
Government National Mortgage
Association, 8247, 7.00%,
7/20/2023 # 459,678 471,221
- -------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.0%
.............................................................
Federal Home Loan Mortgage
Corporation, 1965 SA (Inverse
IO), 2.049999%, 3/15/2024 # 1,000,000 133,834
.............................................................
Federal National Mortgage
Association (PO): 1997-76 B,
0.00%, 6/25/2018 685,025 671,730
0.00%, 10/09/2019 400,000 114,912
................. .................
----------
920,476
- -------------------------------------------------------------
Total government agency mortgage-
backed securities (cost
$7,068,743) 7,444,764
- -------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
NON-AGENCY MORTGAGE- Principal
BACKED SECURITIES -- 31.7% Amount Value
- -------------------------------------------------------------
- -------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES -- 13.8%
.............................................................
Associates Manufactured Housing
Pass-Through Certificates, 1996-2
A4, 6.60%, 6/15/2027 $ 500,000 $ 511,772
.............................................................
Commercial Financial Services
Securitized Multiple Asset Rated
Trust (Acquired 9/24/1997, cost
$376,613), 1997-5 A1, 7.72%,
6/15/2005 r 376,613 378,790
.............................................................
Commercial Financial Services
Securitized Multiple Asset Rated
Trust (Acquired 2/24/1998, cost
$170,779), 1998-1 A1, 7.45%,
3/15/2006 r 170,779 171,126
.............................................................
CPS Auto Trust 1998-1 A, 6.00%,
8/15/2003 480,628 480,553
.............................................................
Ditech Home Loan Owner Trust,
1997-1 A3, 6.71%, 8/15/2018 600,000 611,073
.............................................................
Firstplus Home Loan Trust, 1996-2
A4, 7.35%, 10/20/2009 499,852 505,758
.............................................................
Firstplus Home Loan Owner Trust,
1998-1 A4, 6.20%, 3/10/2015 400,000 401,478
.............................................................
Green Tree Financial Corporation:
1995-4 A4, 6.75%, 6/15/2025 400,000 406,334
.............................................................
1996-5 B2, 8.45%, 7/15/2027 749,881 791,124
.............................................................
Green Tree Recreational, Equipment
& Consumer Trust, 1996-B CTFS,
7.70%, 7/15/2018 450,000 449,016
.............................................................
Heilig-Meyers Master Trust
(Acquired 2/20/1998, cost
$499,954), 1998-1A A, 6.125%,
1/20/2007 r 500,000 499,433
.............................................................
IMC Home Equity Loan Trust, 1996-4
A4, 7.11%, 8/25/2014 1,000,000 1,032,773
................. .................
----------
6,239,230
- -------------------------------------------------------------
</TABLE>

See Notes to Financial Statements

23
<PAGE> 149
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 17.9%
.............................................................
Blackrock Capital Finance L.P.
(Acquired 6/23/1997, cost
$276,801), 1997-R2 AP, 7.04398%,
12/25/2035 # r $ 278,498 $ 293,173
.............................................................
CMC Securities Corporation, 1994-G,
7.00%, 9/25/2024 200,000 203,959
.............................................................
Citicorp Mortgage Securities, Inc.:
1990-D A1, 9.50%, 10/25/2005 129,518 129,432
.............................................................
1997-3 A2, 6.92%, 8/25/2027 323,265 324,718
.............................................................
Collateralized Mortgage Obligations
Trust, 57-D, 9.90%, 2/01/2019 396,972 428,616
.............................................................
Commercial Mortgage Acceptance
Corporation (Acquired 3/13/1998,
cost $433,589), 1996-C2 A2,
6.8516%, 9/15/2023 r 428,831 430,034
.............................................................
The C.S. First Boston Mortgage
Securities Corp. Commercial
Mortgage Pass-Through
Certificates, Series, 1998-C1
A1B, 6.48%, 5/17/2008 1,000,000 1,017,666
.............................................................
GE Capital Mortgage Services, Inc.,
1994-24 A4, 7.00%, 7/25/2024 169,843 172,910
.............................................................
Housing Securities, Inc.:
(Acquired 3/03/1995, cost
$314,978), 1994-1 AB2, 6.50%,
3/25/2009 r 477,239 390,501
.............................................................
(Acquired 1/19/1995, cost
$183,274)
1994-2 B1, 6.50%, 7/25/2009 r 243,554 219,945
.............................................................
Independent National Mortgage
Corporation, 1995-F A5, 8.25%,
5/25/2010 1,000,000 1,036,980
.............................................................
</TABLE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
Nomura Asset Securities
Corporation:
1995-MD3 A1B, 8.15%, 3/04/2020 $ 750,000 $ 827,110
.............................................................
1998-D6 A1B, 6.59%, 3/17/2028 1,050,000 1,080,308
.............................................................
Ocwen Residential MBS Corp.
(Acquired 6/18/1998, cost
$998,750), 1998-R2 AP, 4.9739%,
11/25/2034 r # 1,000,000 999,061
.............................................................
Resolution Trust Corporation,
1994-C2 G, 8.00%, 4/25/2025 540,366 545,389
................. .................
----------
8,099,802
- -------------------------------------------------------------
Total non-agency mortgage-backed
securities (cost $14,101,007) 14,339,032
- -------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 20.5%
- -------------------------------------------------------------
U.S. Treasury Bonds:
7.50%, 11/15/2016 2,500,000 3,002,345
.............................................................
6.375%, 8/15/2027 2,375,000 2,609,533
.............................................................
6.125%, 11/15/2027 775,000 830,704
.............................................................
U.S. Treasury Notes:
6.25%, 2/15/2003 750,000 772,032
.............................................................
5.875%, 11/15/2005 500,000 509,844
.............................................................
6.625%, 5/15/2007 500,000 537,500
.............................................................
5.625%, 5/15/2008 1,000,000 1,014,063
- -------------------------------------------------------------
Total U.S. Treasury obligations
(cost $9,081,048) 9,276,021
- -------------------------------------------------------------
PREFERRED STOCK -- 1.1% Shares
- -------------------------------------------------------------
Home Ownership Funding 2, (Acquired
2/20/1997, cost $500,000) r 500 476,875
- -------------------------------------------------------------
</TABLE>

See Notes to Financial Statements

24
<PAGE> 150
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
VARIABLE RATE DEMAND Principal
NOTES* -- 3.3% Amount Value
- -------------------------------------------------------------
<S> <C> <C>
General Mills, Inc., 5.2651% $ 240,255 $ 240,255
.............................................................
Pitney Bowes, Inc., 5.2651% 935,320 935,320
.............................................................
Sara Lee Corp., 5.2562% 326,435 326,435
................. .................
----------
Total variable rate demand notes
(cost $1,502,010) 1,502,010
- -------------------------------------------------------------
Total investments -- 98.4%
(cost $43,602,272) 44,502,970
.............................................................
Other assets in excess of
liabilities -- 1.6% 744,831
................. .................
----------
Total net assets -- 100.0% $45,247,801
- -------------------------------------------------------------
</TABLE>

# Variable rate security. Rate listed is as of June 30, 1998.

* 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, 1998.

IO -- Interest Only.

PO -- Principal Only.

CLB -- Callable.

r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.

ETC -- Equipment Trust Certificate.

+ -- Deferred interest security that receives no coupon payments until a
predetermined date.

See Notes to Financial Statements

25
<PAGE> 151

Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 35.2% Amount Value
- ----------------------------------------------------------
<S> <C> <C>
APPAREL -- 1.4%
..........................................................
La Petite Holdings, CLB
8/01/1998, 9.625%, 8/01/2001 $ 3,500,000 $ 3,605,000
- ----------------------------------------------------------
BANKS -- 3.0%
..........................................................
Chase Capital II, CLB 2/1/2007
6.21875%, 2/01/2027 # 2,100,000 2,062,101
..........................................................
MBNA Corporation,
6.0375%, 6/17/2002 # 1,125,000 1,120,897
..........................................................
MBNA Global Capital
Securities,
CLB 2/01/2007, 6.51875%,
2/01/2027 # 2,000,000 1,865,762
..........................................................
Old Kentucky Capital Trust I,
6.51875%, 2/01/2027 # 2,500,000 2,497,272
..................... ..................... -----------
7,546,032
- ----------------------------------------------------------
EUROBANKS -- 9.7%
..........................................................
Fokus Bank A/S, CLB 9/29/1999,
6.90%, 9/29/2004 # 4,000,000 4,031,352
..........................................................
Foreningsbanken Kredit AB,
CLB 12/18/2001, 6.4375%,
12/29/2049 # 5,750,000 5,771,850
..........................................................
Hong Kong & Shanghai Bank, CLB
8/26/1998, 6.00%, 8/29/2049# 3,500,000 2,599,100
..........................................................
Nordbanken, CLB 10/25/2001,
6.2875%, 10/29/2049 # 5,830,000 5,850,177
..........................................................
Okobank, CLB 9/09/2002,
6.1875%, 9/29/2049 # 2,750,000 2,746,345
..........................................................
Skandinavinska Enskilda
Banken, CLB 6/28/2003,
6.6875%, 6/29/2049 # 3,500,000 3,529,470
..................... ..................... -----------
24,528,294
- ----------------------------------------------------------
FINANCIAL SERVICES -- 4.7%
..........................................................
Newcourt Credit Group, 5.91%,
10/24/2000 # 2,750,000 2,758,280
..........................................................
Countrywide Home Loans, Inc.,
6.2225%, 3/16/2005 # 5,000,000 5,010,879
..........................................................
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
Florida Windstorm (Acquired
7/31/1997, cost $3,496,092),
6.85%, 8/25/2007 r $ 3,500,000 $ 3,631,305
..........................................................
General Motors Acceptance
Corporation,
8.25%, 3/01/2005 500,000 556,774
..................... ..................... -----------
11,957,238
- ----------------------------------------------------------
MISCELLANEOUS -- 1.6%
..........................................................
URSA Major Rated Limited
(Acquired 1/28/1998, cost
$3,956,013), 5.90%,
1/06/2003 r 4,000,000 4,011,364
- ----------------------------------------------------------
OIL & GAS (DOMESTIC) -- 2.2%
..........................................................
Harcor Energy, Inc., CLB
7/15/1999, 14.875%,
7/15/2002 4,636,000 5,505,250
- ----------------------------------------------------------
PAPER -- 1.1%
..........................................................
Fort Howard Corporation,
11.00%, 1/02/2002 2,696,375 2,755,216
- ----------------------------------------------------------
REAL ESTATE -- 2.4%
..........................................................
Taubman Realty Group, L.P.,
6.7375%, 7/30/2001 # 6,000,000 6,101,207
- ----------------------------------------------------------
TELECOMMUNICATIONS -- 5.7%
..........................................................
Continental Cablevision, Inc.,
CLB 6/01/1999, 11.00%,
6/01/2007 4,000,000 4,350,080
..........................................................
Illinois Bell Telephone Co.,
CLB 9/11/1998, 7.625%,
4/01/2006 300,000 302,577
..........................................................
</TABLE>

See Notes to Financial Statements

26
<PAGE> 152
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
Teleport Communications, CLB
7/01/2001, 0.00%,
7/01/2007+ $ 5,215,000 $ 4,537,050
..........................................................
TKR Cable, Inc., CLB
10/30/1999, 10.50%,
10/30/2007 4,675,000 5,122,612
..................... ..................... -----------
14,312,319
- ----------------------------------------------------------
UTILITY -- ELECTRIC -- 3.4%
..........................................................
Calenergy Co., Inc., CLB
1/15/1999, 10.25%, 1/15/2004 3,350,000 3,609,625
..........................................................
Long Island Lighting Co., CLB
9/11/1998, 8.90%, 7/15/2019 4,800,000 5,090,956
..................... ..................... -----------
8,700,581
- ----------------------------------------------------------
Total corporate bonds and notes (cost
$88,719,210) 89,022,501
- ----------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 11.6%
- ----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 6.1%
..........................................................
Federal Home Loan Mortgage Corporation:
1081 I, 7.00%, 12/15/2019 20,402 20,375
..........................................................
1194 G, 6.50%, 10/15/2006 500,000 503,607
..........................................................
1206 GA, 7.00%, 3/15/2018 2,177,324 2,178,162
..........................................................
1267 O, 7.25%, 12/15/2005 30,176 30,323
..........................................................
1336 H, 7.75%, 1/15/2021 400,000 409,683
..........................................................
1543 KE, 9.17437%,
9/15/2022 # 1,046,602 1,028,965
..........................................................
1617 D, 6.50%, 11/15/2023 71,000 69,665
..........................................................
1944 SB, 10.5625%,
3/15/2027 # 132,077 133,107
..........................................................
2036 Z, 7.00%, 3/15/2028 320,758 319,755
..........................................................
2039 Z, 6.50%, 3/15/2013 1,014,920 1,008,577
..........................................................
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
2043 SC, 10.12813%,
4/15/2028 # $ 1,597,452 $ 1,585,087
..........................................................
2055 ZA, 6.50%, 5/15/2013 2,312,458 2,241,604
..........................................................
Federal National Mortgage Association:
1988-26 C, 7.50%, 7/25/2018 71,972 72,736
..........................................................
1990-112 E, 8.50%, 7/25/2019 10,457 10,444
..........................................................
1991-147 K, 7.00%, 1/25/2021 5,000 5,042
..........................................................
1991-153 N, 7.50%, 2/25/2007 207,422 212,698
..........................................................
1992-138 O, 7.50%, 7/25/2022 42,947 42,854
..........................................................
1992-163 E, 6.75%, 9/25/2022 307,392 307,670
..........................................................
1993-23 SH, 9.75053%,
3/25/2023 # 2,260,872 2,212,707
..........................................................
1993-45 SB, 8.994%,
4/25/2023 # 1,500,000 1,449,982
..........................................................
1994-60 D, 7.00%, 4/25/2024 30,000 30,512
..........................................................
1997-76 FT, 6.0875%,
9/17/2027 # 1,583,947 1,544,734
..................... ..................... -----------
15,418,289
- ----------------------------------------------------------
PASS-THROUGH SECURITIES -- 3.8%
..........................................................
Federal Home Loan Mortgage
Corporation, 255452, 8.50%,
2/01/2008 481,445 501,103
..........................................................
Federal National Mortgage
Association,
21130, 8.00%, 9/01/2000 4,388 4,544
..........................................................
Government National Mortgage Association:
8067, 7.00%, 11/20/2022 # 1,302,650 1,335,920
..........................................................
8247, 7.00%, 7/20/2023 # 919,357 942,442
..........................................................
8898, 6.875%, 1/20/2022 # 3,327,950 3,410,916
..........................................................
8956, 7.375%, 4/20/2022 # 3,310,761 3,411,110
..................... ..................... -----------
9,606,035
- ----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

27
<PAGE> 153
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
STRIPPED MORTGAGE-BACKED SECURITIES -- 1.7%
..........................................................
Federal Home Loan Mortgage Corporation,
1965 SA (Inverse IO),
2.049999%, 3/15/2024 # $10,500,000 $ 1,405,258
..........................................................
Federal National Mortgage Association:
1993-72 J (IO), 6.50%,
12/25/2006 1,023,636 74,201
..........................................................
1993-97 L (IO), 7.50%,
5/25/2023 1,095,099 71,879
..........................................................
1997-65 A (PO), 0.00%,
9/25/2000 2,642,135 2,443,823
..........................................................
1997-7 SP (IO), 2.60%,
04/18/2015 22,993,118 472,332
........................................... -----------
4,467,493
- ----------------------------------------------------------
Total government agency mortgage-backed
securities (cost $28,694,791) 29,491,817
- ----------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES -- 36.2%
- ----------------------------------------------------------
ASSET-BACKED SECURITIES -- 25.3%
..........................................................
Asset-Backed Securities
Investment Trust (Acquired
8/08/1997, cost $4,000,000),
1997-D A, 6.79%, 8/17/2003 r 4,000,000 4,009,836
..........................................................
Champion Auto Grantor Trust
(Acquired 3/18/1998, cost
$2,206,222), 1998-A A,
6.11%, 10/15/2002 r 2,206,256 2,210,737
..........................................................
Commercial Financial Services
Securitized Multiple Asset
Rated Trust (Acquired
09/24/1997, cost
$2,353,829), 1997-5 A1,
7.72%, 6/15/2005 r 2,353,829 2,367,437
..........................................................
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
Commercial Financial Services
Securitized Multiple Asset
Rated Trust (Acquired
2/24/1998, Cost $2,927,640),
1998-1 A1, 7.45%,
3/15/2006 r $ 2,927,640 $ 2,933,580
..........................................................
Commercial Mortgage Acceptance
Corporation (Acquired
3/13/1998, cost $1,858,238),
1996-C2 A2, 6.8516%,
9/15/2023 r 1,837,850 1,843,001
..........................................................
CPS Auto Trust, 1998-1 A,
6.00%, 8/15/2003 1,922,513 1,922,213
..........................................................
Ditech Home Loan Owner Trust,
1997-1 A3, 6.71%, 8/15/2018 3,280,000 3,340,532
..........................................................
Firstplus Home Loan Owner
Trust:
1996-2 A4, 7.35%, 10/20/2009 3,998,814 4,046,060
..........................................................
1998-1 A4, 6.20%, 3/10/2015 2,456,000 2,465,075
..........................................................
1998-4 A4, 6.32%, 3/10/2017 5,000,000 5,015,000
..........................................................
First Tennessee Auto Grantor
Trust (Acquired 4/17/1998,
cost $3,284,803), 1998-A A,
6.134%, 4/15/2003 r 3,284,803 3,285,316
..........................................................
Green Tree Financial
Corporation:
1995-4 A4, 6.75%, 6/15/2025 5,435,000 5,521,063
..........................................................
1996-5 B2, 8.45%, 7/15/2027 4,145,001 4,372,976
..........................................................
Green Tree Recreational,
Equipment & Consumer Trust,
1996-B CTFS, 7.70%,
7/15/2018 2,250,000 2,245,079
..........................................................
Heilig-Meyers Master Trust
(Acquired 2/20/1998, cost
$4,099,626), 1998-1A A,
6.125%, 1/20/2007 r 4,100,000 4,095,351
..........................................................
</TABLE>

See Notes to Financial Statements

28
<PAGE> 154
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
Long Beach Acceptance Auto
Grantor Trust (Acquired
1/29/1998, cost $2,225,348),
1998-1 A, 6.19%, 1/25/2004 r $ 2,225,373 $ 2,226,070
..........................................................
The Money Store Residential
Trust, 1998-I A2, 6.20%,
3/15/2008 2,250,000 2,252,813
..........................................................
Nomura Asset Securities
Corporation, 1995-MD3 A1B,
8.15%, 3/04/2020 2,750,000 3,032,736
..........................................................
Resolution Trust Corporation,
1994-C1 F, 8.00%, 6/25/2026 2,075,145 2,088,704
..........................................................
Trust Investment Enhanced
Return Securities, 1997-7 A,
CLB 2/15/1999, 6.688%,
11/15/2003 4,700,000 4,723,298
..................... ..................... -----------
63,996,877
- ----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.0%
..........................................................
Blackrock Capital Finance L.P.
(Acquired 6/23/1997, Cost
$1,522,404), 1997-R2 AP,
7.04398%, 12/25/2035 # r 1,531,738 1,612,450
..........................................................
Chemical Mortgage Securities,
Inc., 1993-3 A1, 7.125%,
7/25/2023 172,517 173,142
..........................................................
Citicorp Mortgage Securities,
Inc.: 1990-D A1, 9.50%,
10/25/2005 259,037 258,865
..........................................................
1997-3 A2, 6.92%, 8/25/2027 2,747,752 2,760,103
..........................................................
Countrywide Funding
Corporation, 1994-17 A9,
8.00%, 7/25/2024 4,000 4,243
..........................................................
GE Capital Mortgage Services,
Inc., 1995-8 A5, 7.50%,
10/25/2025 2,391,252 2,384,511
..........................................................
Housing Securities, Inc.,
1994-2 B1, 6.50%, 7/25/2009 218,034 196,899
..........................................................
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
Independent National Mortgage
Corporation:
1995-A A4, 8.75%, 3/25/2025 $ 18,000 $ 18,578
..........................................................
1996-D A2, 7.00%, 5/25/2026 1,628,932 1,633,924
..........................................................
Ocwen Residential MBS Corp.
(Acquired 6/18/1998, cost
$4,993,750), 1998-R2 AP,
4.9739%, 11/25/2034 # r 5,000,000 4,995,305
..........................................................
Prudential Home Mortgage
Securities, Co., 1993-36
A10, 7.25%, 10/25/2023 500,000 507,357
..........................................................
Residential Funding Mortgage
Securities Inc.: 1993-S9 A8,
8.166665%, 2/25/2008 # 125,305 125,069
..........................................................
1992-S5 A5, 7.50%, 2/25/2007 690,553 693,173
..........................................................
Salomon Brothers Mortgage
Securities VII, 1994-6 AI,
7.0105%, 5/25/2004 # 2,512,040 2,536,821
..........................................................
Structured Mortgage Asset
Residential Trust:
1991-1H, 8.25%, 6/25/2022 180,613 181,396
..........................................................
1992-3 A, 8.00%, 10/25/2007 173,063 178,479
..........................................................
1993-5A AA, 6.9367%,
6/25/2024 # 272,916 268,960
..........................................................
Walsh Acceptance (Acquired
3/06/1997, cost $1,750,106),
1997-2 A, 6.6875%,
3/01/2027 # r 1,736,539 1,736,402
..................... ..................... -----------
20,265,677
- ----------------------------------------------------------
PASS-THROUGH SECURITIES -- 0.2%
..........................................................
Citicorp Mortgage Securities,
Inc.:
1988-16 A1, 10.00%,
11/25/2018 37,210 39,807
..........................................................
1989-8 A1, 10.50%, 6/25/2019 367,994 397,248
..................... ..................... -----------
437,055
- ----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

29
<PAGE> 155
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
LOW DURATION FUND

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.7%
..........................................................
<S> <C> <C>
Asset Securitization
Corporation, 1997-D5, PSI
(IO), 1.37804%, 2/14/2041 # $14,885,789 $ 1,617,267
..........................................................
Chase Commercial Mortgage
Securities Corporation,
1997-1 X (IO), 1.3965%,
4/19/2015 # 25,691,230 2,052,293
..........................................................
CS First Boston Mortgage
Securities Corporation
(Acquired 8/14/1997, cost
$1,362,985), 1995-WF1 AX
(IO), 1.487257%,
12/21/2027 # r 20,702,711 1,093,372
..........................................................
Donaldson, Lufkin & Jenrette,
(Acquired 4/25/1997, Cost
$2,154,921), 1997-CF1 S
(IO), 1.09368%, 3/15/2017 #r 35,184,294 2,177,028
..................... ..................... -----------
6,939,960
- ----------------------------------------------------------
Total non-agency mortgage-backed securities
(cost $91,608,401) 91,639,569
- ----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
PREFERRED STOCK -- 0.5% Shares
- -----------------------------------------------------------
<S> <C> <C>
Home Ownership Funding 2, (Acquired
2/20/1997, cost $1,500,000) r 1,500 1,430,625
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS Principal
- -- 8.3% Amount
- ----------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bonds:
7.500%, 11/15/2016 $ 4,300,000 5,164,033
..........................................................
6.375%, 8/15/2027 2,000,000 2,197,502
..........................................................
6.125%, 11/15/2027 3,250,000 3,483,597
..........................................................
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------
<S> <C> <C>
U.S. Treasury Notes:
5.875%, 11/15/1999 $ 500,000 $ 502,344
..........................................................
6.25%, 2/15/2003 2,000,000 2,058,752
..........................................................
5.875%, 11/15/2005 2,250,000 2,294,298
..........................................................
6.50%, 10/15/2006 4,925,000 5,232,817
..................... ..................... -----------
Total U.S. Treasury
obligations (cost 20,933,343
$20,683,031)
- ----------------------------------------------------------
SHORT-TERM INVESTMENTS -- 6.9%
- ----------------------------------------------------------
DISCOUNT NOTES -- 6.5%
..........................................................
CSX Corp., 5.69%, 7/13/1998
4(2) 500,000 499,052
..........................................................
Centex Corp., 7.00%, 7/01/1998 7,000,000 7,000,000
..........................................................
International Lease Finance
Corp., 5.51%, 7/07/1998 9,000,000 8,991,734
..................... ..................... -----------
Total discount notes 16,490,786
- ----------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 0.4%
..........................................................
General Mills, Inc., 5.2651% 965,517 965,517
- ----------------------------------------------------------
Total short-term investments
(cost $17,456,303) 17,456,303
- ----------------------------------------------------------
Total investments -- 98.7% (cost
$248,661,736) 249,974,158
..........................................................
Other assets in excess of
liabilities -- 1.3% 3,176,377
..................... ..................... -----------
Total net assets -- 100.0% $253,150,535
- ----------------------------------------------------------
</TABLE>

# Variable rate security. Rate listed is as of June 30, 1998.

* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rate listed is as of June 30, 1998.

IO -- Interest Only.

PO -- Principal Only.

CLB -- Callable.

r Restricted Security. Purchased in a private placement transaction; resale to
the public may require registration or may extend only to qualified
institutional buyers.

4(2) -- Restricted security requiring resale to institutional investors.

+ -- Deferred interest security that receives no coupon payments until a
predetermined date.

See Notes to Financial Statements

30
<PAGE> 156
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND

<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 33.0% Amount Value
- -----------------------------------------------------------
APPAREL -- 1.3%
...........................................................
<S> <C> <C>
La Petite Holdings, CLB
8/01/1998, 9.625%, 8/01/2001 $ 350,000 $ 360,500
- -----------------------------------------------------------
BANKS -- 1.8%
...........................................................
MBNA Corporation, 6.0375%,
6/17/2002 # 500,000 498,176
- -----------------------------------------------------------
EUROBANKS -- 9.7%
...........................................................
Fokus Bank A/S, CLB 9/29/1999,
6.90%, 9/29/2004 # 600,000 604,703
...........................................................
Foreningsbanken Kredit AB, CLB
12/18/2001, 6.4375%,
12/29/2049 # 750,000 752,850
...........................................................
Nordbanken, CLB 10/25/2001,
6.2875%, 10/29/2049 # 550,000 551,903
...........................................................
Skandinavinska Enskilda Banken,
CLB 6/28/2003, 6.6875%,
6/29/2049 # 800,000 806,736
..................... ...................... ----------
2,716,192
- -----------------------------------------------------------
FINANCIAL SERVICES -- 4.5%
...........................................................
Newcourt Credit Group, 5.91%,
10/24/2000 # 500,000 501,505
...........................................................
Countrywide Home Loans, Inc.,
6.2225%, 3/16/2005 # 750,000 751,632
..................... ...................... ----------
1,253,137
- -----------------------------------------------------------
OIL & GAS (DOMESTIC) -- 2.7%
...........................................................
Harcor Energy, Inc., CLB
7/15/1999, 14.875%, 7/15/2002 650,000 771,875
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- -----------------------------------------------------------
PAPER & FOREST PRODUCTS -- 1.7%
...........................................................
<S> <C> <C>
Fort Howard Corporation, 11.00%,
1/02/2002 $ 463,440 $ 473,553
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 7.3%
...........................................................
Continental Cablevision, Inc.,
CLB 6/01/1999, 11.00%,
6/01/2007 700,000 761,264
...........................................................
Illinois Bell Telephone Co., CLB
9/11/1998, 7.625%, 4/01/2006 150,000 151,288
...........................................................
Teleport Communications, CLB
7/01/2001, 0.00%, 7/01/2007 + 750,000 652,500
...........................................................
TKR Cable, Inc., CLB 10/30/1999,
10.50%, 10/30/2007 450,000 493,086
..................... ...................... ----------
2,058,138
- -----------------------------------------------------------
UTILITY -- ELECTRIC -- 4.0%
...........................................................
Calenergy Co., Inc., CLB
1/15/1999, 10.25%, 1/15/2004 500,000 538,750
...........................................................
Long Island Lighting Co., CLB
9/11/1998, 8.90%, 7/15/2019 550,000 583,339
..................... ...................... ----------
1,122,089
- -----------------------------------------------------------
Total corporate bonds and notes
(cost $9,253,774) 9,253,660
- -----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

31
<PAGE> 157
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND

<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 21.3% Amount Value
- -----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.5%
...........................................................
<S> <C> <C>
Federal Home Loan Mortgage
Corporation:
1081 I, 7.00%, 12/15/2019 $ 8,390 $ 8,379
...........................................................
1206 GA, 7.00%, 3/15/2018 417,645 417,806
...........................................................
1988 SD, 10.25%, 9/15/2027 # 975,610 981,636
...........................................................
2036 Z, 7.00%, 3/15/2028 79,287 79,039
...........................................................
2043 SC, 10.12813%, 4/15/2028 # 285,259 283,051
...........................................................
2055 ZA, 6.50%, 5/15/2013 603,250 584,766
...........................................................
Federal National Mortgage
Association:
1992-39 SD, 22.9866%,
7/25/2019 # 38,319 39,257
..................... ...................... ----------
2,393,934
- -----------------------------------------------------------
GOVERNMENT AGENCY NOTES -- 1.4%
...........................................................
Federal Home Loan Bank, CLB
9/16/1998, 4.69%, 3/16/1999 # 400,000 398,130
- -----------------------------------------------------------
PASS-THROUGH SECURITIES -- 7.5%
...........................................................
Federal Housing Authority
Project, 7.43%, 2/01/2023 135,150 137,382
...........................................................
Government National Mortgage
Association,
8067, 7.00%, 11/20/2022 # 521,060 534,368
...........................................................
8346, 7.00%, 12/20/2023 # 1,071,298 1,098,198
...........................................................
8570, 7.00%, 10/20/2019 # 313,313 321,500
..................... ...................... ----------
2,091,448
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- -----------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 3.9%
...........................................................
<S> <C> <C>
Federal National Mortgage
Association, 1993-129 J (IO),
6.50%, 2/25/2007 $ 970,629 $ 90,208
...........................................................
1993-97 L (IO), 7.50%,
5/25/2023 403,875 26,509
...........................................................
1997-65 A (PO), 0.00%,
9/25/2000 337,818 312,463
...........................................................
1997-76 B (PO), 0.00%,
6/25/2018 685,025 671,730
..................... ...................... ----------
1,100,910
- -----------------------------------------------------------
Total government agency mortgage-backed
securities (cost $5,948,740) 5,984,422
- -----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

32
<PAGE> 158
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND

<TABLE>
<CAPTION>
NON-AGENCY MORTGAGE-
BACKED SECURITIES -- Principal
16.9% Amount Value
- -----------------------------------------------------------
ASSET-BACKED SECURITIES -- 11.3%
...........................................................
<S> <C> <C>
Asset-Backed Securities
Investment Trust (Acquired
8/08/1997, cost $500,000),
1997-D A, 6.79%, 8/17/2003 r $ 500,000 $ 501,229
...........................................................
Champion Auto Grantor Trust
(Acquired 10/28/1997, cost
$168,851), 1997-D A, 6.27%,
9/15/2002 r 168,851 169,325
...........................................................
Commercial Financial Services
Securitized Multiple Asset
Rated Trust (Acquired
9/24/1997, cost $376,613),
1997-5 A1, 7.72%, 6/15/2005 r 376,613 378,790
...........................................................
First Tennessee Auto Grantor
Trust (Acquired 4/17/1998,
cost $887,785), 1998-A A,
6.134%, 4/15/2003 r 887,785 887,923
...........................................................
Long Beach Acceptance Auto
Grantor Trust (Acquired
1/29/1998, cost $447,795),
1998-1 A, 6.19%, 1/25/2004 r 447,800 447,940
...........................................................
The Money Store Home Equity
Trust, 1994-C A3, 7.40%,
3/15/2018 278,553 280,089
...........................................................
Trust Investment Enhanced Return
Securities, 1997-7A, CLB
2/15/1999, 6.688%, 11/15/2003 500,000 502,478
..................... ...................... ----------
3,167,774
- -----------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount Value
- -----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.6%
...........................................................
<S> <C> <C>
American Housing Trust, XD,
8.60%, 11/25/2015 $ 429,321 $ 429,856
...........................................................
Citicorp Mortgage Securities,
Inc., 1990-D A1, 9.50%,
10/25/2005 129,518 129,432
...........................................................
Resolution Trust Corporation,
1994-C2 G, 8.00%, 4/25/2025 360,244 363,593
...........................................................
Salomon Brothers Mortgage
Securities VI, 1986-1 A,
6.00%, 12/25/2011 373,786 370,918
...........................................................
Walsh Acceptance (Acquired
3/06/1997, cost $291,684),
1997-2 A, 6.6875%, 3/01/2027 #
r 289,423 289,401
..................... ...................... ----------
1,583,200
- -----------------------------------------------------------
Total non-agency mortgage-backed securities
(cost $4,748,668) 4,750,974
- -----------------------------------------------------------
U.S. TREASURY
OBLIGATIONS -- 3.6%
- -----------------------------------------------------------
U.S. Treasury Notes, 5.875%,
3/31/1999 (cost $1,002,185) 1,000,000 1,003,126
- -----------------------------------------------------------
SHORT-TERM INVESTMENTS -- 26.7%
- -----------------------------------------------------------
DISCOUNT NOTES -- 24.9%
...........................................................
CSX Corp., 0.00%, 7/13/1998 4(2) 1,500,000 1,497,155
...........................................................
Exxon Asset Management, 5.54%,
7/01/1998 4(2) 1,500,000 1,500,000
...........................................................
Lockheed Martin Corp.:
5.67%, 7/06/1998 4(2) 1,250,000 1,249,016
...........................................................
5.70%, 7/21/1998 4(2) 1,500,000 1,495,250
...........................................................
Tyson Foods, Inc., 5.67%,
7/06/1998 1,250,000 1,249,016
..................... ...................... ----------
Total discount notes 6,990,437
- -----------------------------------------------------------
</TABLE>

See Notes to Financial Statements

33
<PAGE> 159
Schedule of Investments -- June 30, 1998
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND

<TABLE>
<CAPTION>
Principal
Amount Value
- -----------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 1.8%
...........................................................
<S> <C> <C>
General Mills, Inc., 5.2651% $ 957 $ 957
...........................................................
Pitney Bowes, Inc., 5.2651% 488,381 488,381
..................... ...................... ----------
Total variable rate demand notes 489,338
- -----------------------------------------------------------
Total short-term investments
(cost $7,479,775) 7,479,775
- -----------------------------------------------------------
Total investments -- 101.5%
(cost $28,433,142) 28,471,957
...........................................................
Liabilities in excess of other
assets -- (1.5)% (433,479)
..................... ...................... ----------
Total net assets -- 100.0% $28,038,478
- -----------------------------------------------------------
</TABLE>

# Variable rate security. Rate listed is as of June 30, 1998.

* 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, 1998.

IO -- Interest Only.

PO -- Principal Only.

CLB -- Callable.

r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.

4(2) -- Restricted security requiring resale to institutional investors.

+ -- Deferred interest security that receives no coupon payments until a
predetermined date.

See Notes to Financial Statements

34
<PAGE> 160

(Intentionally Left Blank)
<PAGE> 161

Financial Statements -- June 30, 1998
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
EQUITY
INCOME MID-CAP SMALL
FUND FUND CAP FUND
---------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value*................................ $174,632,849 $7,578,068 $92,833,069
Foreign currency**.................................... -- -- --
Cash.................................................. 729 11,515 107,585
Dividends and interest receivable..................... 406,212 10,436 33,074
Receivable from Advisor............................... -- -- --
Receivable for investments sold....................... 569,635 -- 1,877,318
Receivable for Fund shares sold....................... 28 -- 226,577
Prepaid expenses...................................... 12,990 6,635 15,966
------------ ---------- -----------
Total assets..................................... 175,622,443 7,606,654 95,093,589
------------ ---------- -----------
LIABILITIES:
Payable for forward currency exchange contracts....... -- -- --
Payable to Advisor.................................... 108,182 674 59,838
Payable for investments purchased..................... 176,612 45,039 14,613
Payable for Fund shares repurchased................... 3,310 -- 84,061
Dividends payable..................................... -- -- --
Accrued expenses and other liabilities................ 79,754 21,761 21,801
------------ ---------- -----------
Total liabilities................................ 367,858 67,474 180,313
------------ ---------- -----------
Net assets....................................... $175,254,585 $7,539,180 $94,913,276
============ ========== ===========
NET ASSETS CONSIST OF:
Paid in capital....................................... $110,271,920 $7,095,188 $87,939,585
Undistributed (distributions in excess of) net
investment income.................................. 52,825 -- --
Undistributed net realized gain (loss) on
securities......................................... 20,801,091 805,357 6,094,381
Net unrealized appreciation (depreciation) of
securities and foreign currency.................... 44,128,749 (361,365) 879,310
------------ ---------- -----------
Net assets....................................... $175,254,585 $7,539,180 $94,913,276
============ ========== ===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)........................................ 7,958,305 583,725 3,584,579
Net asset value per share (offering and redemption
price)............................................. $ 22.02 $ 12.92 $ 26.48
============ ========== ===========
*Cost of Investments................................... $130,504,100 $7,939,433 $91,953,759
============ ========== ===========
**Cost of Foreign Currency.............................. $ -- $ -- $ --
============ ========== ===========
</TABLE>

See Notes to Financial Statements

36
<PAGE> 162
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
TOTAL LOW SHORT-TERM
INTERNATIONAL GLOBAL EQUITY BALANCED RETURN BOND DURATION INVESTMENT
FUND FUND FUND FUND FUND FUND
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1,475,911,912 $7,432,448 $106,213,578 $44,502,970 $249,974,158 $28,471,957
2,226 81,127 -- -- -- --
51,741 -- -- 2,559 -- --
6,622,150 17,969 715,502 465,168 2,585,770 256,143
-- 675 -- -- -- 2,517
5,413,808 -- 180,507 135 230,810 4,711
11,822,254 -- -- 550,326 2,271,181 479,019
46,064 6,604 8,818 6,402 15,589 9,791
-------------- ---------- ------------ ----------- ------------ -----------
1,499,870,155 7,538,823 107,118,405 45,527,560 255,077,508 29,224,138
-------------- ---------- ------------ ----------- ------------ -----------
1,323,573 6,070 -- -- -- --
900,305 -- 64,706 3,245 54,871 --
4,878,853 32,817 2,379,308 -- -- --
14,974,451 102,078 -- 15,180 380,331 1,002,871
-- -- -- 227,308 1,293,755 136,991
987,589 52,573 78,978 34,026 198,016 45,798
-------------- ---------- ------------ ----------- ------------ -----------
23,064,771 193,538 2,522,992 279,759 1,926,973 1,185,660
-------------- ---------- ------------ ----------- ------------ -----------
$1,476,805,384 $7,345,285 $104,595,413 $45,247,801 $253,150,535 $28,038,478
============== ========== ============ =========== ============ ===========
$1,288,778,487 $6,831,129 $ 91,283,788 $44,088,113 $251,083,806 $28,184,516
(6,410,587) (24,779) 1,426 34,272 -- (72,392)
1,162,718 13,165 4,311,051 224,718 754,307 (112,461)
193,274,766 525,770 8,999,148 900,698 1,312,422 38,815
-------------- ---------- ------------ ----------- ------------ -----------
$1,476,805,384 $7,345,285 $104,595,413 $45,247,801 $253,150,535 $28,038,478
============== ========== ============ =========== ============ ===========
58,310,329 645,500 5,272,538 3,362,189 24,826,266 2,767,981
$ 25.33 $ 11.38 $ 19.84 $ 13.46 $ 10.20 $ 10.13
============== ========== ============ =========== ============ ===========
$1,282,680,123 $6,907,441 $ 97,214,430 $43,602,272 $248,661,736 $28,433,142
============== ========== ============ =========== ============ ===========
$ 2,229 $ 80,372 $ -- $ -- $ -- $ --
============== ========== ============ =========== ============ ===========
</TABLE>

See Notes to Financial Statements

37
<PAGE> 163

Financial Statements -- Year Ended June 30, 1998
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
EQUITY SMALL
INCOME MID-CAP CAP
FUND FUND FUND
---------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income*
Dividends......................................... $ 5,351,735 $ 103,729 $ 298,766
Interest.......................................... 76,780 14,269 162,805
----------- --------- -----------
Total income................................. 5,428,515 117,998 461,571
----------- --------- -----------
Expenses
Advisory fee...................................... 1,424,185 40,200 491,489
Legal and auditing fees........................... 29,751 5,882 12,064
Custodian fees and expenses....................... 33,355 5,920 12,319
Accounting and transfer agent fees and expenses... 52,938 41,133 40,976
Administration fee................................ 72,478 1,758 14,624
Trustees' fees and expenses....................... 6,323 7,247 5,964
Reports to shareholders........................... -- 1,281 3,480
Registration fees................................. 20,915 38,504 30,824
Other expenses.................................... 12,331 4,200 4,231
----------- --------- -----------
Total expenses............................... 1,652,276 146,125 615,971
Less, expense reimbursement....................... -- (92,525) --
----------- --------- -----------
Net expenses................................. 1,652,276 53,600 615,971
----------- --------- -----------
Net investment income (loss)......................... 3,776,239 64,398 (154,400)
----------- --------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on securities and foreign
currency transactions........................... 29,878,073 928,847 9,968,991
Net change in unrealized appreciation
(depreciation) of securities and foreign
currency........................................ 5,189,945 (555,561) (3,968,125)
----------- --------- -----------
Net gain (loss) on investments....................... 35,068,018 373,286 6,000,866
----------- --------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $38,844,257 $ 437,684 $ 5,846,466
=========== ========= ===========

*Net of Foreign Taxes Withheld......................... $ 42,115 $ 2,179 $ --
=========== ========= ===========
</TABLE>

See Notes to Financial Statements

38
<PAGE> 164
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GLOBAL TOTAL LOW SHORT-TERM
INTERNATIONAL EQUITY BALANCED RETURN BOND DURATION INVESTMENT
FUND FUND FUND FUND FUND FUND
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 33,083,711 $ 169,316 $ 1,313,683 $ 99,707 $ 313,046 $ 6,962
4,377,102 1,778 4,194,926 1,581,652 13,763,729 1,616,135
------------ --------- ----------- ---------- ----------- ----------
37,460,813 171,094 5,508,609 1,681,359 14,076,775 1,623,097
------------ --------- ----------- ---------- ----------- ----------
8,732,479 44,469 761,196 126,038 918,112 94,570
157,845 6,272 23,172 14,041 42,101 12,980
558,256 16,173 23,265 7,573 54,713 12,358
384,869 50,442 65,557 46,902 121,796 53,464
237,374 2,193 35,806 6,098 76,301 9,050
5,517 7,194 5,492 5,762 5,155 5,286
106,270 1,411 249 -- 22,600 5,617
165,981 38,638 23,332 27,899 48,168 23,424
38,339 4,144 7,723 1,160 12,981 2,335
------------ --------- ----------- ---------- ----------- ----------
10,386,930 170,936 945,792 235,473 1,301,927 219,084
-- (111,644) -- (86,499) (144,309) (105,600)
------------ --------- ----------- ---------- ----------- ----------
10,386,930 59,292 945,792 148,974 1,157,618 113,484
------------ --------- ----------- ---------- ----------- ----------
27,073,883 111,802 4,562,817 1,532,385 12,919,157 1,509,613
------------ --------- ----------- ---------- ----------- ----------
3,289,299 121,357 5,754,835 318,597 1,052,667 (42,539)
70,706,856 225,531 2,122,314 504,670 (221,716) (20,572)
------------ --------- ----------- ---------- ----------- ----------
73,996,155 346,888 7,877,149 823,267 830,951 (63,111)
------------ --------- ----------- ---------- ----------- ----------
$101,070,038 $ 458,690 $12,439,966 $2,355,652 $13,750,108 $1,446,502
============ ========= =========== ========== =========== ==========

$ 3,609,869 $ 13,148 $ 7,242 $ -- $ -- $ --
============ ========= =========== ========== =========== ==========
</TABLE>

See Notes to Financial Statements

39
<PAGE> 165

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

<TABLE>
<CAPTION>
EQUITY INCOME FUND MID-CAP FUND
------------------------------ --------------------------------------
Year Ended Year Ended Year Ended January 2, 1997**
June 30, 1998 June 30, 1997 June 30, 1998 through June 30, 1997
------------------------------ --------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).......... $ 3,776,239 $ 4,697,583 $ 64,398 $ 12,624
Net realized gain (loss) on securities
and foreign currency transactions... 29,878,073 34,935,223 928,847 6,232
Net change in unrealized appreciation
(depreciation) of securities and
foreign currency.................... 5,189,945 4,211,108 (555,561) 194,196
------------ ------------ ----------- ----------
Net increase in net assets
resulting from operations...... 38,844,257 43,843,914 437,684 213,052
------------ ------------ ----------- ----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income................. (3,812,071) (4,609,150) (66,341) (10,925)
Net realized gain on securities
transactions........................ (26,619,074) (18,088,501) (129,478) --
------------ ------------ ----------- ----------
Total dividends and
distributions.................. (30,431,145) (22,697,651) (195,819) (10,925)
------------ ------------ ----------- ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold......... 23,627,560 42,695,225 6,338,383 2,380,798
Shares issued in connection with
payment of dividends and
distributions....................... 29,778,874 21,727,110 194,620 10,844
Cost of shares redeemed............... (72,438,773) (82,232,891) (1,222,885) (606,572)
------------ ------------ ----------- ----------
Net increase (decrease) in net
assets from Fund share
transactions................... (19,032,339) (17,810,556) 5,310,118 1,785,070
------------ ------------ ----------- ----------
Total increase (decrease) in net assets... (10,619,227) 3,335,707 5,551,983 1,987,197
NET ASSETS:
Beginning of period................... 185,873,812 182,538,105 1,987,197 --
------------ ------------ ----------- ----------
End of period*........................ $175,254,585 $185,873,812 $ 7,539,180 $1,987,197
============ ============ =========== ==========
*Including undistributed (distributions in
excess of) net investment income of: $ 52,825 $ 88,433 $ -- $ 1,699
============ ============ =========== ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold........................... 1,065,609 2,183,683 489,941 226,865
Shares issued in connection with
payment of dividends and
distributions....................... 1,451,197 1,142,942 15,545 942
Shares redeemed....................... (3,307,554) (4,228,482) (92,361) (57,207)
------------ ------------ ----------- ----------
Net increase (decrease).......... (790,748) (901,857) 413,125 170,600
============ ============ =========== ==========
** Commencement of operations
</TABLE>

See Notes to Financial Statements

40
<PAGE> 166

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

<TABLE>
<CAPTION>
SMALL CAP FUND INTERNATIONAL FUND GLOBAL EQUITY FUND
------------------------------ ------------------------------- --------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended January 2, 1997**
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998 through June 30, 1997
------------------------------ ------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ (154,400) $ 18,067 $ 27,073,883 $ 14,552,015 $ 111,802 $ 46,344
9,968,991 1,503,738 3,289,299 953,040 121,357 21,267
(3,968,125) 3,726,110 70,706,856 105,727,351 225,531 300,239
------------ ------------ -------------- ------------- ----------- ----------
5,846,466 5,247,915 101,070,038 121,232,406 458,690 367,850
------------ ------------ -------------- ------------- ----------- ----------
(111,869) (56,310) (32,976,929) (15,060,247) (175,171) (45,630)
(5,072,568) (2,033,874) -- (3,759,354) (91,582) --
------------ ------------ -------------- ------------- ----------- ----------
(5,184,437) (2,090,184) (32,976,929) (18,819,601) (266,753) (45,630)
------------ ------------ -------------- ------------- ----------- ----------
140,132,855 21,595,726 1,292,839,186 655,854,799 4,309,902 3,368,545
5,017,869 1,901,255 29,643,512 17,244,335 263,932 44,743
(78,429,678) (15,605,197) (802,298,868) (217,976,937) (1,150,082) (5,912)
------------ ------------ -------------- ------------- ----------- ----------
66,721,046 7,891,784 520,183,830 455,122,197 3,423,752 3,407,376
------------ ------------ -------------- ------------- ----------- ----------
67,383,075 11,049,515 588,276,939 557,535,002 3,615,689 3,729,596
27,530,201 16,480,686 888,528,445 330,993,443 3,729,596 --
------------ ------------ -------------- ------------- ----------- ----------
$ 94,913,276 $ 27,530,201 $1,476,805,384 $ 888,528,445 $ 7,345,285 $3,729,596
============ ============ ============== ============= =========== ==========
$ -- $ 18,067 $ (6,410,587) $ (1,195,950) $ (24,779) $ (453)
============ ============ ============== ============= =========== ==========
5,096,875 998,558 52,830,892 29,673,741 388,720 332,759
207,693 97,400 1,253,628 739,904 25,235 4,002
(2,875,106) (713,459) (32,528,515) (9,851,367) (104,646) (571)
------------ ------------ -------------- ------------- ----------- ----------
2,429,462 382,499 21,556,005 20,562,278 309,309 336,190
============ ============ ============== ============= =========== ==========
</TABLE>

See Notes to Financial Statements

41
<PAGE> 167

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

<TABLE>
<CAPTION>
BALANCED FUND
-----------------------------------
Year Ended Year Ended
June 30, 1998 June 30, 1997
-----------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 4,562,817 $ 3,580,837
Net realized gain (loss) on securities transactions.... 5,754,835 4,518,798
Net change in unrealized appreciation (depreciation) of
securities........................................... 2,122,314 3,306,702
------------ ------------
Net increase in net assets resulting from
operations...................................... 12,439,966 11,406,337
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (4,563,299) (3,999,551)
Net realized gain on securities transactions........... (5,598,223) (2,410,169)
------------ ------------
Total dividends and distributions................. (10,161,522) (6,409,720)
------------ ------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 34,493,608 39,290,919
Shares issued in connection with payment of dividends
and distributions.................................... 9,851,285 6,071,836
Cost of shares redeemed................................ (32,186,438) (30,799,051)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions.............................. 12,158,455 14,563,704
------------ ------------
Total increase (decrease) in net assets..................... 14,436,899 19,560,321
NET ASSETS:
Beginning of period.................................... 90,158,514 70,598,193
------------ ------------
End of period*......................................... $104,595,413 $ 90,158,514
============ ============
*Including undistributed (distributions in excess of) net
investment income of: $ 1,426 $ 50,696
============ ============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 1,728,761 2,119,226
Shares issued in connection with payment of dividends
and distributions.................................... 508,237 325,867
Shares redeemed........................................ (1,616,205) (1,658,360)
------------ ------------
Net increase (decrease)........................... 620,793 786,733
============ ============
</TABLE>

See Notes to Financial Statements

42
<PAGE> 168

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

<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND LOW DURATION FUND SHORT-TERM INVESTMENT FUND
----------------------------- ----------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,532,385 $ 1,964,962 $ 12,919,157 $ 10,574,255 $ 1,509,613 $ 1,058,876
318,597 (42,063) 1,052,667 1,057,714 (42,539) (46,704)
504,670 978,811 (221,716) 764,193 (20,572) (5,502)
----------- ------------ ------------ ------------- ------------ ------------
2,355,652 2,901,710 13,750,108 12,396,162 1,446,502 1,006,670
----------- ------------ ------------ ------------- ------------ ------------
(1,622,000) (1,964,962) (13,340,819) (10,574,255) (1,509,613) (1,058,876)
-- (241,973) (1,045,647) (176,195) -- --
----------- ------------ ------------ ------------- ------------ ------------
(1,622,000) (2,206,935) (14,386,466) (10,750,450) (1,509,613) (1,058,876)
----------- ------------ ------------ ------------- ------------ ------------
33,566,256 14,661,662 182,933,522 191,220,600 50,189,024 39,041,151
1,101,255 1,802,150 12,908,812 10,052,581 894,623 570,013
(4,460,475) (46,271,666) (113,269,472) (220,866,044) (44,698,826) (36,567,972)
----------- ------------ ------------ ------------- ------------ ------------
30,207,036 (29,807,854) 82,572,862 (19,592,863) 6,384,821 3,043,192
----------- ------------ ------------ ------------- ------------ ------------
30,940,688 (29,113,079) 81,936,504 (17,947,151) 6,321,710 2,990,986
14,307,113 43,420,192 171,214,031 189,161,182 21,716,768 18,725,782
----------- ------------ ------------ ------------- ------------ ------------
$45,247,801 $ 14,307,113 $253,150,535 $ 171,214,031 $ 28,038,478 $ 21,716,768
=========== ============ ============ ============= ============ ============
$ 34,272 $ 105,637 $ -- $ 446,351 $ (72,392) $ (17,486)
=========== ============ ============ ============= ============ ============
2,516,857 1,130,467 17,898,633 18,787,386 4,944,329 3,847,758
82,830 139,510 1,263,801 990,060 88,164 56,209
(334,936) (3,568,847) (11,074,513) (21,739,355) (4,404,554) (3,605,096)
----------- ------------ ------------ ------------- ------------ ------------
2,264,751 (2,298,870) 8,087,921 (1,961,909) 627,939 298,871
=========== ============ ============ ============= ============ ============
</TABLE>

See Notes to Financial Statements

43
<PAGE> 169

- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998

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 ten series of shares comprising the Balanced
Fund (formerly named 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, the Mid-Cap Fund, the Global
Equity 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 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), December 6, 1994 (the Total
Return Bond Fund), and January 2, 1997 (the Mid-Cap Fund and the Global Equity
Fund).

The Balanced 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 Mid-Cap Fund seeks to provide current income and long-term growth
of income, accompanied by growth of capital. The Global Equity Fund seeks to
provide current income and long-term growth of income, accompanied by growth 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 Stock Market ("NSM") 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 NSM. Unlisted securities that are not included in NSM
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

44
<PAGE> 170
- --------------------------------------------------------------------------------

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. 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.

FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are maintained
in U.S. dollars. For the International Fund and the Global Equity 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
and the Global Equity Fund do 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 and the Global Equity Fund do 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 arising from trade date and settlement date differences.

FORWARD CURRENCY EXCHANGE CONTRACTS: The International Fund and the Global
Equity Fund utilize forward currency exchange contracts for the purpose of
hedging foreign currency risk. At June 30, 1998 all of the open forward
contracts are hedging foreign currency risk on unsettled trades. Under these
contracts, they are 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 each Fund
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.

RESTRICTED SECURITIES: The Small Cap, Balanced, Total Return Bond, Low Duration,
and Short-Term Investment Funds own investment securities which are unregistered
and thus restricted as to resale.

45
<PAGE> 171
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998

These securities are valued by the Funds after giving due consideration to
pertinent factors including recent private sales, market conditions and the
issuer's financial performance. Where future disposition of these securities
requires registration under the Securities Act of 1933, the Funds have the right
to include these securities in such registration, generally without cost to the
Funds. The Funds have no right to require registration of unregistered
securities. At June 30, 1998, the Small Cap, Balanced, Total Return Bond, Low
Duration and Short-Term Investment Funds had restricted securities with an
aggregate market value of $1,593,900, $9,046,383, $3,858,938, $44,158,231, and
$8,416,029, respectively, representing 1.7%, 8.6%, 8.5%, 17.4%, and 30.0% of the
net assets of each Fund, respectively. Of these amounts, the Balanced, Total
Return Bond, Low Duration and Short-Term Investment Funds had restricted
securities that were determined to be illiquid pursuant to guidelines adopted by
the Board of Trustees with an aggregate market value of $3,435,970, $1,883,569,
$17,774,634 and $668,191, respectively, representing 3.3%, 4.2%, 7.0% and 2.4%
of the net assets of each Fund, respectively, for the year ended June 30, 1998.

WHEN-ISSUED SECURITIES: The Funds may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Funds record purchases of when-issued securities and reflect
the values of such securities in determining net asset value in the same manner
as other portfolio securities. The Funds segregate and maintain at all times
cash or other liquid assets in an amount at least equal to the amount of
outstanding commitments for when-issued securities.

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.

DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
daily and paid monthly for the Total Return Bond, Low Duration and Short-Term
Investment Funds, declared and paid quarterly for the Balanced and Equity Income
Funds, declared and paid semi-annually for the Mid-Cap, International and Global
Equity Funds and declared and paid annually for the Small Cap Fund.
Distributions of net realized capital gains, if any, will be declared at least
annually. Effective July 1, 1998, the Total Return Bond, Low Duration and
Short-Term Investment Funds will declare and pay dividends monthly.

OTHER: Security and shareholder transactions are recorded on 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

46
<PAGE> 172
- --------------------------------------------------------------------------------

principles require that permanent financial reporting and tax differences
relating to shareholder distributions be reclassified to paid in capital.

NOTE 2.

INVESTMENT ADVISORY AGREEMENTS. 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, 1998, the Advisor reimbursed the following
expenses:

<TABLE>
<CAPTION>
Equity Income Mid-Cap Small Cap International Global Equity Balanced
Fund Fund Fund Fund Fund Fund
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL ADVISORY RATE........ 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
ANNUAL CAP ON EXPENSES...... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
EXPENSES REIMBURSED......... $0 $92,525 $0 $0 $111,644 $0
</TABLE>

<TABLE>
<CAPTION>
Total Return Low Duration Short-Term
Bond Fund Fund Investment Fund
-----------------------------------------------------
<S> <C> <C> <C>
ANNUAL ADVISORY RATE............................ 0.55% 0.46% 0.40%
ANNUAL CAP ON EXPENSES.......................... 0.65% 0.58% 0.48%
EXPENSES REIMBURSED............................. $86,499 $144,309 $105,600
</TABLE>

The Equity Income, International and Global Equity Funds paid commissions on
Fund transactions to an affiliated broker in the amounts of $12,468, $302,055
and $414, respectively, during the year ended June 30, 1998.

As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Funds have adopted procedures which allow the Funds, under
certain conditions described in the Rule, to acquire newly-issued securities
from a member of an underwriting group in which an affiliated underwriter
participates.

47
<PAGE> 173
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998

NOTE 3.

SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended June 30, 1998 were as follows:

<TABLE>
<CAPTION>
Purchases Sales
---------------------------------- ----------------------------------
Fund U.S. Government Other U.S. Government Other
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INCOME FUND......... -- $ 42,665,881 -- $ 84,469,892
MID-CAP FUND............... -- 8,425,310 -- 3,617,487
SMALL CAP FUND............. -- 114,673,692 -- 53,477,227
INTERNATIONAL FUND......... -- 701,629,674 -- 219,348,442
GLOBAL EQUITY FUND......... -- 6,535,691 -- 3,046,569
BALANCED FUND.............. $ 63,339,502 69,212,096 $71,097,502 49,069,258
TOTAL RETURN BOND FUND..... 38,451,939 34,721,822 25,479,793 18,148,362
LOW DURATION FUND.......... 116,290,995 184,158,820 98,926,814 123,128,398
SHORT-TERM INVESTMENT
FUND..................... 13,194,366 14,060,334 10,630,619 13,361,625
</TABLE>

As of June 30, 1998, 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........................... $ 44,075,639 $ 46,310,456 $ (2,234,817)
MID-CAP FUND................................. (363,736) 420,412 (784,148)
SMALL CAP FUND............................... 606,223 9,237,435 (8,631,212)
INTERNATIONAL FUND........................... 174,358,554 283,091,074 (108,732,520)
GLOBAL EQUITY FUND........................... 441,254 957,282 (516,028)
BALANCED FUND................................ 8,999,148 9,951,376 (952,228)
TOTAL RETURN BOND FUND....................... 884,791 1,021,401 (136,610)
LOW DURATION FUND............................ 1,270,207 2,311,092 (1,040,885)
SHORT-TERM INVESTMENT FUND................... 38,815 76,043 (37,228)
</TABLE>

At June 30, 1998, the cost of investments for federal income tax purposes was
$130,557,210, $7,941,804, $92,226,846, $1,301,553,358, $6,991,194, $97,214,430,
$43,618,179, $248,703,951 and $28,433,142 for the Equity Income, Mid-Cap, Small
Cap, International, Global Equity, Balanced,

48
<PAGE> 174
- --------------------------------------------------------------------------------

Total Return Bond, Low Duration and Short-Term Investment Funds, respectively.
Any differences between book and tax are due primarily to wash sale losses and
REIT return of capital distributions. In addition, the cost basis differences in
the International Fund and Global Equity Fund are due to mark-to-market
adjustments for passive foreign investment companies.

At June 30, 1998, the Short-Term Investment Fund deferred, on a tax basis,
post-October losses of $6,520. Such amounts may be used to offset future capital
gains. Tax basis post-October losses from foreign currency related transactions
of $1,933,868 and $9,545 for the International and Global Equity Funds,
respectively, are not recognized for federal income tax purposes until fiscal
1999.

At June 30, 1998, the Short-Term Investment Fund had accumulated net realized
capital loss carryovers of $3,422 expiring in 2003, $63,545 expiring in 2004 and
$38,974 expiring in 2005. The Total Return Bond and Short-Term Investment Funds
utilized capital loss carryovers of $82,785 and $16,148, respectively, in 1998.
To the extent the Short-Term Investment Fund realizes future net capital gains,
those gains will be offset by any unused capital loss carryover.

NOTE 4.

FEDERAL TAX DISCLOSURE (UNAUDITED). For the year ended June 30, 1998, the
following percent of ordinary distributions paid qualifies for the dividend
received deduction available to corporate shareholders: Equity Income Fund 91%,
Mid-Cap Fund 15%, Small Cap Fund 3%, Global Equity Fund 17%, Balanced Fund 25%,
Total Return Bond Fund 5%, and Low Duration Fund 2%.

During the year ended June 30, 1998, the International Fund generated
$35,906,512 of foreign source income and paid $3,609,869 of foreign taxes. The
Fund elects to pass foreign taxes through to the Fund's shareholders for their
1998 tax returns. Updated data will be sent with 1998 Forms 1099-DIV to enable
shareholders to have information to claim either a foreign tax credit or to take
a foreign tax deduction on their 1998 income tax returns.

During the year ended June 30, 1998, the following Funds paid capital gain
dividends (taxable as long-term capital gains).

<TABLE>
<CAPTION>
% of
Capital Gain
Distribution at
Maximum Rate
Per Share of 20%
--------- ---------------
<S> <C> <C>
EQUITY INCOME FUND... $2.9033 37.44%
SMALL CAP FUND....... $0.8879 39.22%
BALANCED FUND........ $0.9877 62.45%
LOW DURATION FUND.... $0.0369 92.65%
</TABLE>

Information regarding these distributions was provided with the 1997 Forms
1099-DIV sent to shareholders in January 1998.

49
<PAGE> 175

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

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year................ $21.25 $18.91 $17.24 $15.07 $15.50
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income........................ 0.46 0.49 0.45(1) 0.49 0.46
Net realized and unrealized gain on
investments................................ 4.02 4.15 2.89 2.48 0.10
------ ------ ------ ------ ------
Total from investment operations............. 4.48 4.64 3.34 2.97 0.56
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)....... (0.46) (0.48) (0.57) (0.44) (0.46)
Distributions (from realized gains).......... (3.25) (1.82) (1.10) (0.36) (0.53)
------ ------ ------ ------ ------
Total distributions.......................... (3.71) (2.30) (1.67) (0.80) (0.99)
------ ------ ------ ------ ------
Net Asset Value, End of Year...................... $22.02 $21.25 $18.91 $17.24 $15.07
====== ====== ====== ====== ======
Total Return...................................... 22.60% 26.15% 20.04% 20.49% 3.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)................ $175.3 $185.9 $182.5 $127.1 $87.2
Ratio of expenses to average net assets:
Before expense reimbursement................. 0.87% 0.88% 0.98% 1.02% 1.05%
After expense reimbursement.................. 0.87% 0.88% 0.98% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement................. 1.99% 2.49% 2.56% 3.11% 2.85%
After expense reimbursement.................. 1.99% 2.49% 2.56% 3.14% 2.90%
Portfolio turnover rate........................... 23% 44% 24% 50% 36%
</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

50
<PAGE> 176

Financial Highlights
- --------------------------------------------------------------------------------
MID-CAP FUND

<TABLE>
<CAPTION>
Year Ended January 2, 1997*
June 30, through
1998 June 30, 1997
---------- ----------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $11.65 $10.00
------ ------
Income from Investment Operations:
Net investment income.................................. 0.13 0.07
Net realized and unrealized gain on investments........ 1.60 1.64
------ ------
Total from investment operations....................... 1.73 1.71
------ ------
Less Distributions:
Dividends (from net investment income)................. (0.14) (0.06)
Distributions (from realized gains).................... (0.32) --
------ ------
Total distributions.................................... (0.46) (0.06)
------ ------
Net Asset Value, End of Period.............................. $12.92 $11.65
====== ======
Total Return................................................ 15.00% 17.15%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $7.5 $2.0
Ratio of expenses to average net assets:
Before expense reimbursement........................... 2.72% 8.26%+
After expense reimbursement............................ 1.00% 1.00%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement........................... (0.52)% (5.39)%+
After expense reimbursement............................ 1.20% 1.87%+
Portfolio turnover rate..................................... 71% 23%++
</TABLE>

* Commencement of operations.
+ Annualized.
++ Not annualized.

See Notes to Financial Statements

51
<PAGE> 177

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

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year................. $23.83 $21.33 $21.53 $19.53 $19.88
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income (loss).................. (0.06)(1) 0.03 0.05(1) (0.06) (0.01)
Net realized and unrealized gain on
investments................................. 5.13 5.62 2.80 2.84 0.78
------ ------ ------ ------ ------
Total from investment operations.............. 5.07 5.65 2.85 2.78 0.77
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)........ (0.05) (0.09) -- -- (0.20)
Distributions (from realized gains)........... (2.37) (3.06) (3.05) (0.78) (0.92)
------ ------ ------ ------ ------
Total distributions........................... (2.42) (3.15) (3.05) (0.78) (1.12)
------ ------ ------ ------ ------
Net Asset Value, End of Year....................... $26.48 $23.83 $21.33 $21.53 $19.53
====== ====== ====== ====== ======
Total Return....................................... 22.24% 29.74% 14.24% 14.79% 3.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)................. $94.9 $27.5 $16.5 $20.5 $13.1
Ratio of expenses to average net assets:
Before expense reimbursement.................. 0.94% 1.30% 1.21% 1.49% 1.65%
After expense reimbursement................... 0.94% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average
net assets:
Before expense reimbursement.................. (0.23)% (0.20)% 0.03% (0.82)% (0.71)%
After expense reimbursement................... (0.23)% 0.10% 0.24% (0.34)% (0.06)%
Portfolio turnover rate............................ 85% 88% 119% 81% 44%
</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

52
<PAGE> 178

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

<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............. $ 24.17 $20.44 $17.70 $16.79 $14.63
-------- ------ ------ ------ ------
Income from Investment Operations:
Net investment income..................... 0.59 0.59(1) 0.56(1) 0.28 0.26
Net realized and unrealized gain on
investments............................. 1.23 3.78 2.51 1.52 2.19
-------- ------ ------ ------ ------
Total from investment operations.......... 1.82 4.37 3.07 1.80 2.45
-------- ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income).... (0.66) (0.48) (0.14) (0.44) (0.14)
Distributions (from realized gains)....... -- (0.16) (0.19) (0.45) (0.15)
-------- ------ ------ ------ ------
Total distributions....................... (0.66) (0.64) (0.33) (0.89) (0.29)
-------- ------ ------ ------ ------
Net Asset Value, End of Year................... $ 25.33 $24.17 $20.44 $17.70 $16.79
======== ====== ====== ====== ======
Total Return................................... 7.77% 21.59% 18.61% 11.08% 16.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)............. $1,476.8 $888.5 $331.0 $51.5 $26.0
Ratio of expenses to average net assets:
Before expense reimbursement.............. 0.89% 1.07% 1.11% 1.39% 1.61%
After expense reimbursement............... 0.89% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement.............. 2.32% 2.59% 2.67% 2.45% 2.01%
After expense reimbursement............... 2.32% 2.66% 2.78% 2.83% 2.62%
Portfolio turnover rate........................ 20% 18% 12% 24% 23%
</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

53
<PAGE> 179

Financial Highlights
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND

<TABLE>
<CAPTION>
Year Ended January 2, 1997*
June 30, through
1998 June 30, 1997
------------ ----------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $11.09 $10.00
------ ------
Income from Investment Operations:
Net investment income.................................. 0.28 0.14
Net realized and unrealized gain on investments........ 0.51 1.09
------ ------
Total from investment operations....................... 0.79 1.23
------ ------
Less Distributions:
Dividends (from net investment income)................. (0.32) (0.14)
Distributions (from realized gains).................... (0.18) --
------ ------
Total distributions.................................... (0.50) (0.14)
------ ------
Net Asset Value, End of Period.............................. $11.38 $11.09
====== ======
Total Return................................................ 7.61% 12.32%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $7.3 $3.7
Ratio of expenses to average net assets:
Before expense reimbursement........................... 2.88% 4.43%+
After expense reimbursement............................ 1.00% 1.00%+
Ratio of net investment income to average net assets:
Before expense reimbursement........................... 0.00% 0.07%+
After expense reimbursement............................ 1.88% 3.50%+
Portfolio turnover rate..................................... 54% 18%++
</TABLE>

* Commencement of operations.
+ Annualized.
++ Not annualized.

See Notes to Financial Statements

54
<PAGE> 180

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

<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.............. $19.38 $ 18.27 $ 16.74 $15.71 $16.69
------ ------- ------- ------ ------
Income from Investment Operations:
Net investment income...................... 0.89 0.90(1) 0.94 0.89 0.89
Net realized and unrealized gain (loss) on
investments.............................. 1.58 1.86 1.53 1.53 (0.27)
------ ------- ------- ------ ------
Total from investment operations........... 2.47 2.76 2.47 2.42 0.62
------ ------- ------- ------ ------
Less Distributions:
Dividends (from net investment income)..... (0.90) (0.99) (0.92) (0.80) (0.94)
Distributions (from realized gains)........ (1.11) (0.66) (0.02) (0.57) (0.66)
Return of capital.......................... -- -- -- (0.02) --
------ ------- ------- ------ ------
Total distributions........................ (2.01) (1.65) (0.94) (1.39) (1.60)
------ ------- ------- ------ ------
Net Asset Value, End of Year.................... $19.84 $ 19.38 $ 18.27 $16.74 $15.71
====== ======= ======= ====== ======
Total Return.................................... 13.29% 15.75% 15.04% 16.40% 3.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).............. $104.6 $90.2 $70.6 $32.1 $36.0
Ratio of expenses to average net assets:
Before expense reimbursement............... 0.93% 0.98% 1.06% 1.19% 1.20%
After expense reimbursement................ 0.93% 0.98% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement............... 4.49% 4.77% 5.20% 5.44% 5.04%
After expense reimbursement................ 4.49% 4.77% 5.26% 5.63% 5.24%
Portfolio turnover rate......................... 121% 117% 92% 51% 97%
</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

55
<PAGE> 181

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

<TABLE>
<CAPTION>
Year Ended June 30, December 6, 1994*
------------------------------ through
1998 1997 1996 June 30, 1995
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................ $13.04 $12.78 $12.94 $12.00
------ ------ ------ ------
Income from Investment Operations:
Net investment income.......................... 0.89 0.99 0.84(1) 0.46
Net realized and unrealized gain on
investments.................................. 0.50 0.30 0.06 0.94
------ ------ ------ ------
Total from investment operations............... 1.39 1.29 0.90 1.40
------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)......... (0.97) (0.92) (0.93) (0.46)
Distributions (from realized gains)............ -- (0.11) (0.13) --
------ ------ ------ ------
Total distributions............................ (0.97) (1.03) (1.06) (0.46)
------ ------ ------ ------
Net Asset Value, End of Period...................... $13.46 $13.04 $12.78 $12.94
====== ====== ====== ======
Total Return........................................ 11.04% 10.48% 7.05% 11.88%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)................ $45.2 $14.3 $43.4 $15.3
Ratio of expenses to average net assets:
Before expense reimbursement................... 1.02% 0.95% 0.98% 2.93%+
After expense reimbursement.................... 0.65% 0.65% 0.68% 0.80%+
Ratio of net investment income to average net
assets:
Before expense reimbursement................... 6.28% 6.78% 6.86% 4.92%+
After expense reimbursement.................... 6.65% 7.08% 7.16% 7.05%+
Portfolio turnover rate............................. 195% 173% 51% 68%++
</TABLE>

* Commencement of operations.
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
+ Annualized.
++ Not annualized.

See Notes to Financial Statements

56
<PAGE> 182

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

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.................... $10.23 $10.12 $10.15 $ 9.93 $10.00
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income............................ 0.66 0.66 0.68 0.75 0.77
Net realized and unrealized gain on
investments.................................... 0.05 0.10 0.06 0.23 0.11
------ ------ ------ ------ ------
Total from investment operations................. 0.71 0.76 0.74 0.98 0.88
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)........... (0.68) (0.64) (0.72) (0.75) (0.77)
Distributions (from realized gains).............. (0.06) (0.01) (0.05) (0.01) (0.18)
------ ------ ------ ------ ------
Total distributions.............................. (0.74) (0.65) (0.77) (0.76) (0.95)
------ ------ ------ ------ ------
Net Asset Value, End of Year.......................... $10.20 $10.23 $10.12 $10.15 $ 9.93
====== ====== ====== ====== ======
Total Return.......................................... 7.19% 7.79% 7.47% 10.23% 9.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).................... $253.2 $171.2 $189.2 $123.3 $36.5
Ratio of expenses to average net assets:
Before expense reimbursement..................... 0.65% 0.66% 0.60% 0.75% 1.10%
After expense reimbursement...................... 0.58% 0.58% 0.58% 0.58% 0.58%
Ratio of net investment income to average net assets:
Before expense reimbursement..................... 6.39% 6.26% 7.07% 7.43% 6.82%
After expense reimbursement...................... 6.46% 6.34% 7.09% 7.61% 7.34%
Portfolio turnover rate............................... 119% 202% 50% 71% 254%
</TABLE>

See Notes to Financial Statements

57
<PAGE> 183

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

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year..................... $10.15 $10.17 $10.12 $10.21 $10.00
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income............................. 0.63 0.58 0.66 0.66 0.53
Net realized and unrealized gain (loss) on
investments..................................... 0.00 (0.01) 0.05 (0.09) 0.21
------ ------ ------ ------ ------
Total from investment operations.................. 0.63 0.57 0.71 0.57 0.74
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)............ (0.65) (0.59) (0.66) (0.66) (0.53)
Return of capital................................. -- -- (0.00) -- --
------ ------ ------ ------ ------
Total distributions............................... (0.65) (0.59) (0.66) (0.66) (0.53)
------ ------ ------ ------ ------
Net Asset Value, End of Year........................... $10.13 $10.15 $10.17 $10.12 $10.21
====== ====== ====== ====== ======
Total Return........................................... 6.37% 5.77% 7.23% 5.78% 7.47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)..................... $28.0 $21.7 $18.7 $19.8 $10.5
Ratio of expenses to average net assets:
Before expense reimbursement...................... 0.92% 0.96% 0.88% 1.26% 2.06%
After expense reimbursement....................... 0.48% 0.48% 0.48% 0.48% 0.48%
Ratio of net investment income to average net assets:
Before expense reimbursement...................... 5.92% 5.34% 6.15% 5.74% 4.16%
After expense reimbursement....................... 6.36% 5.82% 6.55% 6.52% 5.74%
Portfolio turnover rate................................ 121% 154% 60% 81% 135%
</TABLE>

See Notes to Financial Statements

58
<PAGE> 184
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
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 Mid-Cap
Fund, the Small Cap Fund, the International Fund, the Global Equity Fund, the
Balanced Fund, the Total Return Bond Fund, the Low Duration Fund and the
Short-Term Investment Fund (nine of the ten portfolios of Hotchkis and Wiley
Funds, the "Funds") at June 30, 1998, the results of each of their operations,
the changes in each of their net assets and the 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, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

Milwaukee, WI
August 12, 1998

59
<PAGE> 185

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998

<TABLE>
<CAPTION>
COMMON STOCKS--99.4% SHARES VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE--3.6%
Lockheed Martin Corporation............................ 2,700 $ 285,862
Northrop Grumman Corporation........................... 8,800 907,500
Rockwell International Corporation..................... 6,000 288,375
-----------
1,481,737
-----------
APPAREL & TEXTILES--1.0%
Russell Corporation.................................... 13,300 401,494
-----------
AUTO PARTS--1.6%
Dana Corporation....................................... 11,000 588,500
Meritor Automotive, Inc. .............................. 2,000 48,000
-----------
636,500
-----------
AUTOS & TRUCKS--6.3%
Ford Motor Company..................................... 24,500 1,445,500
General Motors Corporation............................. 17,000 1,135,813
-----------
2,581,313
-----------
BANKS--6.7%
Banc One Corporation................................... 3,400 189,763
First Chicago NBD Corporation.......................... 10,000 886,250
First Union Corporation................................ 11,070 644,827
Fleet Financial Group, Inc. ........................... 6,000 501,000
KeyCorp................................................ 14,200 505,875
-----------
2,727,715
-----------
BEVERAGES--0.8%
Anheuser-Busch Companies, Inc. ........................ 7,000 330,312
-----------
BUILDING & FOREST PRODUCTS--2.2%
Georgia-Pacific (Timber Group)......................... 9,700 223,706
Weyerhaeuser Company................................... 14,500 669,719
-----------
893,425
-----------
CHEMICALS--4.3%
The Dow Chemical Company............................... 7,600 734,825
duPont (E.I.) de Nemours & Company..................... 6,000 447,750
Eastman Chemical Company............................... 8,100 504,225
Millennium Chemicals, Inc. ............................ 2,214 74,999
-----------
1,761,799
-----------
</TABLE>

See Notes to Financial Statements.
1
<PAGE> 186
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1998

<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
CONGLOMERATES--1.6%
Tenneco, Inc. ......................................... 17,300 $ 658,481
-----------
CONSUMER PRODUCTS--0.9%
Tupperware Corporation................................. 13,600 382,500
-----------
DRUGS--1.0%
American Home Products Corporation..................... 8,000 414,000
-----------
ENGINEERING & CONSTRUCTION--0.8%
Harsco Corporation..................................... 7,400 339,013
-----------
FINANCIAL SERVICES--4.5%
Associates First Capital Corporation--Class A.......... 6,421 493,614
Beneficial Corporation................................. 3,300 505,519
Household International, Inc. ......................... 9,000 447,750
Transamerica Corporation............................... 3,300 379,912
-----------
1,826,795
-----------
HOUSEHOLD FURNISHINGS & APPLIANCES--2.4%
Whirlpool Corporation.................................. 14,000 962,500
-----------
INSURANCE--5.5%
American General Corporation........................... 6,087 433,318
Lincoln National Corporation........................... 5,200 475,150
Safeco Corporation..................................... 14,000 635,250
St. Paul Companies, Inc. .............................. 9,400 395,388
TIG Holdings, Inc. .................................... 13,300 305,900
-----------
2,245,006
-----------
LEISURE/TOYS--1.0%
Fortune Brands, Inc. .................................. 10,000 384,375
-----------
MACHINERY--1.5%
New Holland N.V........................................ 30,500 598,563
-----------
MEDICAL PRODUCTS & SUPPLIES--0.9%
Baxter International, Inc. ............................ 6,700 360,543
-----------
METALS & MINING--2.7%
Aluminum Company of America............................ 8,300 547,281
Phelps Dodge Corporation............................... 3,200 183,000
Reynolds Metals Company................................ 6,600 369,188
-----------
1,099,469
-----------
</TABLE>

See Notes to Financial Statements.
2
<PAGE> 187
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1998

<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
NATURAL GAS--1.4%
Eastern Enterprises.................................... 13,600 $ 583,100
-----------
OIL--DOMESTIC--8.4%
Atlantic Richfield Company............................. 8,500 664,063
Occidental Petroleum Corporation....................... 33,700 909,900
Phillips Petroleum Company............................. 20,000 963,750
USX-Marathon Group, Inc. .............................. 13,900 476,944
Ultramar Diamond Shamrock Corporation.................. 13,000 410,312
-----------
3,424,969
-----------
PAPER--2.5%
Georgia-Pacific Group.................................. 4,600 271,112
International Paper Company............................ 12,400 533,200
Union Camp Corporation................................. 4,200 208,425
-----------
1,012,737
-----------
PHOTOGRAPHY & OPTICAL--1.7%
Eastman Kodak Company.................................. 9,200 672,175
-----------
POLLUTION CONTROL--2.5%
Browning-Ferris Industries, Inc. ...................... 10,072 350,002
Waste Management, Inc. ................................ 18,800 658,000
-----------
1,008,002
-----------
RAILROADS--1.6%
CSX Corporation........................................ 1,900 86,450
Norfolk Southern Corporation........................... 19,100 569,419
-----------
655,869
-----------
RETAIL--5.0%
Intimate Brands, Inc. ................................. 9,700 267,356
J.C. Penney Company, Inc. ............................. 8,200 592,963
May Department Stores Company.......................... 10,300 674,650
Sears, Roebuck & Company............................... 8,000 488,500
-----------
2,023,469
-----------
SAVINGS & LOANS--4.1%
Fannie Mae............................................. 12,300 747,225
H.F. Ahmanson & Company................................ 12,800 908,800
-----------
1,656,025
-----------
STEEL--1.4%
USX-U.S. Steel Group, Inc. ............................ 17,000 561,000
-----------
</TABLE>

See Notes to Financial Statements.
3
<PAGE> 188
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1998

<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
TOBACCO--3.2%
Philip Morris Companies, Inc. ......................... 33,000 $ 1,299,375
-----------
TRUCKING--0.6%
Ryder System, Inc. .................................... 8,000 252,500
-----------
UTILITY--ELECTRIC--10.9%
CMS Energy Corporation................................. 12,000 528,000
Central & South West Corporation....................... 7,000 188,125
DTE Energy Company..................................... 4,000 161,500
Edison International................................... 6,000 177,375
Entergy Corporation.................................... 7,400 212,750
GPU, Inc. ............................................. 5,400 204,188
Illinova Corporation................................... 27,200 816,000
PECO Energy Company.................................... 12,900 376,519
P P & L Resources, Inc. ............................... 26,000 589,875
PacifiCorp............................................. 8,600 194,575
Public Service Enterprises Group, Inc. ................ 11,000 378,812
SCANA Corporation...................................... 13,200 393,525
Texas Utilities Company................................ 5,502 229,021
-----------
4,450,265
-----------
UTILITY--TELEPHONE--6.8%
AT&T Corporation....................................... 16,600 948,275
ALLTEL Corporation..................................... 13,600 632,400
Bell Atlantic Corporation.............................. 11,980 546,587
SBC Communications, Inc. .............................. 16,090 643,600
-----------
2,770,862
-----------
Total common stocks (cost $28,457,258)................. 40,455,888
-----------

PRINCIPAL
VARIABLE RATE DEMAND NOTES#--0.1% AMOUNT
- --------------------------------------------------------------------------------------

General Mills, Inc., 5.2651%........................... $49,892 49,892
-----------
Total variable rate demand notes (cost $49,892)........ 49,892
-----------
Total investments--99.5% (cost $28,507,150)................. 40,505,780
Other assets in excess of liabilities--0.5%................. 219,675
-----------
TOTAL NET ASSETS--100.0%............................... $40,725,455
===========
</TABLE>

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

# Variable rate demand notes are considered short-term
obligations and are payable on demand. Interest rates change
periodically on specified dates. The rate listed is as of
June 30, 1998.

See Notes to Financial Statements.

4
<PAGE> 189

HOTCHKIS
AND WILEY FUNDS Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998

<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $28,507,150)............... $40,505,780
Cash................................................... 22,857
Dividends and interest receivable...................... 99,332
Receivable for investments sold........................ 164,200
Prepaid expenses....................................... 152
-----------
Total assets...................................... 40,792,321
-----------
LIABILITIES:
Payable to Advisor..................................... 4,278
Payable for investments purchased...................... 30,095
Accrued expenses and other liabilities................. 32,493
-----------
Total liabilities................................. 66,866
-----------
Net assets........................................ $40,725,455
===========
NET ASSETS CONSIST OF:
Paid in capital........................................ $25,310,831
Undistributed net investment income.................... 310
Undistributed net realized gains on investments........ 3,415,684
Net unrealized appreciation on investments............. 11,998,630
-----------
Net assets........................................ $40,725,455
===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)........................................... 2,195,850
Net asset value per share (offering and redemption
price)................................................ $ 18.55
===========
</TABLE>

See Notes to Financial Statements.
5
<PAGE> 190

HOTCHKIS
AND WILEY FUNDS Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year ended June 30, 1998

<TABLE>
<S> <C>
INVESTMENT INCOME
Income *
Dividends.............................................. $1,035,546
Interest............................................... 18,385
----------
Total income...................................... 1,053,931
----------
Expenses
Advisory fee........................................... 196,908
Legal and auditing fees................................ 16,138
Custodian fees and expenses............................ 13,066
Accounting fee......................................... 18,243
Administration fee..................................... 5,403
Trustees' fees and expenses............................ 6,190
Reports to shareholders................................ 16,993
Other expenses......................................... 2,576
----------
Total expenses.................................... 275,517
Less, expense reimbursement............................ (78,609)
----------
Net expenses...................................... 196,908
----------
Net investment income..................................... 857,023
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on securities transactions........... 3,890,091
Net change in unrealized appreciation of securities.... 3,049,489
----------
Net gain on investments........................... 6,939,580
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $7,796,603
==========
- ---------------
* Net of Foreign Taxes withheld............................. $ 7,828
==========
</TABLE>

See Notes to Financial Statements.
6
<PAGE> 191

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

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 857,023 $ 761,065
Net realized gain on securities transactions........... 3,890,091 2,210,721
Net change in unrealized appreciation of securities.... 3,049,489 4,166,465
----------- -----------
Net increase in net assets resulting from
operations...................................... 7,796,603 7,138,251
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (862,305) (766,577)
Net realized gain on securities transactions........... (2,201,788) (922,992)
----------- -----------
Total dividends and distributions................. (3,064,093) (1,689,569)
----------- -----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 0 1,201,572
Shares issued in connection with payment of dividends
and distributions.................................... 3,064,093 1,689,569
Cost of shares redeemed................................ (30,000) (30,000)
----------- -----------
Net increase in net assets from Fund share
transactions.................................... 3,034,093 2,861,141
----------- -----------
Total increase in net assets................................ 7,766,603 8,309,823
NET ASSETS:
Beginning of year...................................... 32,958,852 24,649,029
----------- -----------
End of year*........................................... $40,725,455 $32,958,852
=========== ===========
*Including undistributed net investment income of:.......... $ 310 $ 5,592
=========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 0 81,632
Shares issued in connection with payment of dividends
and distributions.................................... 178,122 116,057
Shares redeemed........................................ (1,656) (2,141)
----------- -----------
Net increase...................................... 176,466 195,548
=========== ===========
</TABLE>

See Notes to Financial Statements.
7
<PAGE> 192

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998

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. The sole shareholder of the Fund is The Prudential Insurance
Company of America. The Fund seeks to provide current income and
long-term growth of income, accompanied by growth of capital. In
addition to the Fund, the Trust also offers the Balanced Fund, the
Small Cap Fund, the Equity Income Fund, the International Fund, the
Low Duration Fund, the Short-Term Investment Fund, the Total Return
Bond Fund, the Mid-Cap Fund, and the Global Equity Fund
(collectively, the "Funds"). 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 Stock
Market ("NSM") 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
NSM. Unlisted securities that are not included in NSM 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 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. 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.

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

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.

8
<PAGE> 193
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1998

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.

DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income are declared and paid quarterly. Distributions of net realized
capital gains, if any, will be declared at least annually.

OTHER: Security and shareholder transactions are recorded on
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 daily net assets, and 0.50% of the
average daily 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, 1998, the
Advisor paid $78,609 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, 1998 were $9,220,708 and $7,666,568, respectively. There
were no purchases or sales of long-term U.S. government securities.

At June 30, 1998 (for financial reporting and federal income tax
purposes), net unrealized appreciation aggregated $11,998,630, of
which $12,377,033 related to appreciated securities and $378,403
related to depreciated securities. At June 30, 1998, the cost of
investments for book and federal income tax purposes was $28,507,150.

9
<PAGE> 194

HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $16.32 $13.51 $11.53 $ 9.89 $10.31
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income................................... 0.41 0.39 0.34 0.41 0.40
Net realized and unrealized gain (loss) on
investments........................................... 3.31 3.30 2.26 1.59 (0.24)
------ ------ ------ ------ ------
Total from investment operations........................ 3.72 3.69 2.60 2.00 0.16
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income).................. (0.41) (0.40) (0.40) (0.34) (0.38)
Distributions (from realized gains)..................... (1.08) (0.48) (0.22) (0.02) (0.20)
------ ------ ------ ------ ------
Total distributions..................................... (1.49) (0.88) (0.62) (0.36) (0.58)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $18.55 $16.32 $13.51 $11.53 $ 9.89
====== ====== ====== ====== ======
Total Return................................................ 23.69% 28.20% 22.93% 20.62% 1.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $40.7 $33.0 $24.6 $17.4 $10.5
Ratio of expenses to average net assets:
Before expense reimbursement............................ 0.73% 0.75% 0.76% 1.05% 1.20%
After expense reimbursement............................. 0.52% 0.53% 0.54% 0.58% 0.60%
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 2.06% 2.50% 2.78% 3.58% 3.32%
After expense reimbursement............................. 2.27% 2.72% 3.00% 4.03% 3.91%
Portfolio turnover.......................................... 21% 22% 21% 29% 26%
</TABLE>

See Notes to Financial Statements.
10
<PAGE> 195

HOTCHKIS
AND WILEY FUNDS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders of the Hotchkis and Wiley 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 Hotchkis and Wiley Equity Fund
for Insurance Companies (one of the ten portfolios of Hotchkis and Wiley Funds,
the "Fund") at June 30, 1998, 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 five years in the period
then ended, 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, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

Milwaukee, WI
August 12, 1998

11
<PAGE> 196
PART C
OTHER INFORMATION

ITEM 23. EXHIBITS.

(a)(1) Restated Declaration of Trust2
(2) Certificate of Designation2
(3) Amended and Restated Certificate of Designation*
(b) By-Laws4
(d) (1) Investment Advisory Agreement relating to the
Balanced Fund2
(2) Investment Advisory Agreement relating to the
Equity Income Fund2
(3) Investment Advisory Agreement relating to the
International Fund2
(4) Investment Advisory Agreement relating to the
Equity Fund for Insurance Companies2
(5) Investment Advisory Agreement relating to the
Low Duration Fund2
(6) Investment Advisory Agreement relating to the
Total Return Bond Fund2
(7) Investment Advisory Agreement relating to the
Small Cap Fund2
(8) Investment Advisory Agreement relating to the
Short-Term Investment Fund2
(9) Investment Advisory Agreement
relating to the Mid-Cap Fund3
(10) Investment Advisory Agreement
relating to the Global Equity Fund3
(11) Sub-advisory Agreement with Mercury Asset
Management International Limited and Merrill
Lynch Asset Management U.K. Limited for the
International Fund*
(12) Sub-advisory Agreement with Mercury Asset
Management International Limited and Merrill
Lynch Asset Management U.K. Limited for the
Global Equity Fund*

(e) Agreement with Merrill Lynch Funds Distributor, Inc.4
(g) (1) Custodian Agreement with First Wisconsin Trust
Company4

C-1
<PAGE> 197

(2) Global Custody Tri-Party Agreement4
(3) Amendment to Foreign Subcustodian Agreement**
(h) (1) Fund Administration Servicing Agreement1
(2) License Agreement with Merrill Lynch & Co., Inc.2
(3) Shareholder Servicing Agent Agreement4
(4) Expense Cap Agreement*
(j) Consents of PricewaterhouseCoopers LLP*
(m) Form of Distribution Plan under Rule 12b-1*
(n)
(1) Financial Data Schedule Balanced Fund*
(2) Financial Data Schedule Small Cap Fund*
(3) Financial Data Schedule Equity Income Fund*
(4) Financial Data Schedule International Fund*
(5) Financial Data Schedule Equity Fund For
Insurance Companies*
(6) Financial Data Schedule Low Duration Fund*
(7) Financial Data Schedule Short-Term Investment
Fund*
(8) Financial Data Schedule Total Return Bond Fund*
(9) Financial Data Schedule Mid-Cap Fund*
(10) Financial Data Schedule Global Equity Fund*
(o) Rule 18f-3 Plan.*

1Incorporated 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.

2Incorporated herein by reference and previously filed as an exhibit to
Post-effective Amendment No. 23 to the Registration Statement on Form N-1A filed
via EDGAR on December 17, 1996.

3Incorporated herein by reference and previously filed as an exhibit to
Post-effective Amendment No. 24 to the Registration Statement on Form N-1A filed
via EDGAR on July 30, 1997.

4Incorporated herein by reference and previously filed as an exhibit to
Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A
filed via EDGAR on August 28, 1998.

- --------------------------
* Filed herewith.
** To be filed by amendment.

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

See "General Information About the Trust's Shareholders" in the
Statement of Additional Information.

C-2
<PAGE> 198

ITEM 25. 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 employee of the Trust, any
present or former Trustee or officer of another trust or
corporation whose securities are or were owned by the Trust or
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 advisor, sub-advisor 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 of 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 disabling conduct by (i) a final decision
of the court or other body before which the 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-3
<PAGE> 199
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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

See "The Advisor and Portfolio Managers" in the Prospectuses
constituting Part A of this Registration Statement and "Management--The Advisor"
in the Statement of Additional Information constituting Part B of this
Registration Statement. Information as to Hotchkis and Wiley, a division of
Merrill Lynch Asset Management, L.P., is included in its Form ADV filed with the
Securities and Exchange Commission (File No. 801-11583), as most recently
amended, the text of which is incorporated herein by reference.

ITEM 27. PRINCIPAL UNDERWRITERS.

(a) The Registrant's principal underwriter, Princeton Funds
Distributor, Inc. ("PFD"), also acts as principal underwriter for the following
open-end registered investment companies:

Financial Institutions Series Trust, Merrill Lynch Adjustable Rate
Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch
Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill
Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch California Municipal Series Trust, Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch Developing Capital
Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging
Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Federal Securities
Trust, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Funds for
Institutions Series, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value
Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility
Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc., and Merrill Lynch
World Income Fund, Inc.

PFD also acts as the principal underwriter for the following
closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Program, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. A separate division of PFD acts
as the principal underwriter of a number of other investment companies.

C-4
<PAGE> 200

(b) Set forth below is information concerning each director and
officer of Princeton Funds Distributor. The principal business address of each
such person is P.O. Box 9081, Princeton, New Jersey 08543-9011, except that the
address of Messrs. Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd
Floor, Boston, Massachusetts 02111-2665.

<TABLE>
<CAPTION>
Position(s) and Office(s) Position and Offices
Name with Princeton Funds Distributor with Registrant
---- -------------------------------- --------------------
<S> <C> <C>
Terry K. Glenn............. President and Director None
Michael G. Clark........... Director None
Thomas J. Verage........... Director None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
Gerald M. Richard.......... Vice President and Treasurer None
Salvatore Venezia.......... Vice President None
William Wasel.............. Vice President None
Robert Harris.............. Secretary Assistant Secretary
</TABLE>

ITEM 28. 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, 725 S. Figueroa Street, Suite 4000, Los
Angeles, California 90017, Registrant's custodian and administrator, Firstar
Mutual Fund Services, LLC, 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 29. MANAGEMENT SERVICES.

Not applicable.

ITEM 30. UNDERTAKINGS.

Not applicable.

C-5
<PAGE> 201
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, duly
authorized, in the City of Los Angeles and State of California on the 28th day
of January, 1999.

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 January 28, 1999
- ----------------------------------------
Nancy D. Celick

/s/ GRACIE FERMELIA Principal Financial and Accounting January 28, 1999
- ---------------------------------------- Officer
Gracie Fermelia

/s/ ROBERT L. BURCH III Trustee January 28, 1999
- ----------------------------------------
Robert L. Burch III

/s/ JOHN GAVIN Trustee January 28, 1999
- ----------------------------------------
John Gavin

/s/ JOE GRILLS Trustee January 28, 1999
- ----------------------------------------
Joe Grills

/s/ JOHN F. HOTCHKIS Trustee January 28, 1999
- ----------------------------------------
John F. Hotchkis

/s/ ROBERT B. HUTCHINSON Trustee January 28, 1999
- ----------------------------------------
Robert B. Hutchinson

Trustee January 28, 1999
- ----------------------------------------
Michael L. Quinn

/s/ MERLE T. WELSHANS Trustee January 28, 1999
- ----------------------------------------
Merle T. Welshans

/s/ RICHARD R. WEST Trustee January 28, 1999
- ----------------------------------------
Richard R. West

</TABLE>

<PAGE> 202
HOTCHKIS AND WILEY FUNDS

EXHIBIT INDEX

Exhibit
Number Description
- ------- ----------

(a) (1) Restated Declaration of Trust2
(2) Certificate of Designation2
(3) Amended and Restated Certificate of
Designation.*

(b) By-Laws4

(d) (1) Investment Advisory Agreement relating to the
Balanced Fund2
(2) Investment Advisory Agreement relating to the Equity
Income Fund2
(3) Investment Advisory Agreement relating to the
International Fund2
(4) Investment Advisory Agreement relating to the Equity
Fund for Insurance Companies2
(5) Investment Advisory Agreement relating to the Low
Duration Fund2
(6) Investment Advisory Agreement to the Total Return
Bond Fund2
(7) Investment Advisory Agreement relating to the Small
Cap Fund2
(8) Investment Advisory Agreement relating to the
Short-Term Investment Fund2
(9) Investment Advisory Agreement relating to the Mid-Cap
Fund3
(10) Investment Advisory Agreement relating to the Global
Equity Fund3

(11) Sub-advisory Agreement with Mercury Asset Management
International Limited and Merrill Lynch Asset
Management U.K. Limited for the International Fund*

(12) Sub-advisory Agreement with Mercury Asset Management
International Limited and Merrill Lynch Asset
Management U.K. Limited for the Global Equity Fund*

(e) Agreement with Merrill Lynch Funds Distributor, Inc.4

(g) (1) Custodian Agreement with First Wisconsin Trust
Company4
(2) Global Custody Tri-Party Agreement4
(3) Amendment to Foreign Subcustodian Agreement**

(h) (1) Fund Administration Servicing Agreement1
(2) License Agreement with Merrill Lynch & Co., Inc.2
(3) Shareholder Servicing Agent Agreement4
(4) Expense Cap Agreement*

(j) Consents of PricewaterhouseCoopers LLP*

<PAGE> 203
Exhibit
Number Description
- ------- -----------

(m) Form of Distribution Plan under Rule 12b-1*

(n) (1) Financial Data Schedule Balanced Fund*
(2) Financial Data Schedule Small Cap Fund*
(3) Financial Data Schedule Equity Income Fund*
(4) Financial Data Schedule International Fund*
(5) Financial Data Schedule Equity Fund For Insurance Companies*
(6) Financial Data Schedule Low Duration Fund*
(7) Financial Data Schedule Short-Term Investment Fund*
(8) Financial Data Schedule Total Return Bond Fund*
(9) Financial Data Schedule Mid-Cap Fund*
(10) Financial Data Schedule Global Equity Fund*

(o) Rule 18f-3 Plan*

1Incorporated 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.

2Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 23 to the Registration Statement on Form N-1A
filed via EDGAR on December 17, 1996.

3Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 24 to the Registration Statement on Form N-1A
filed via EDGAR on July 30, 1997.

4Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 25 to the Registration Statement on Form N-1A
filed via EDGAR on August 28, 1998.

- --------------------------
* Filed herewith
** To be filed by amendment

<PAGE> 1
Exhibit (a)(3)

Amended and Restated Certificate of Designation

HOTCHKIS AND WILEY FUNDS

The undersigned, being the Secretary of Hotchkis and Wiley Funds
(hereinafter referred to as the "Trust"), a trust with transferable shares of
the type commonly called a Massachusetts business trust, DOES HEREBY CERTIFY
that, pursuant to the authority conferred upon the Trustees of the Trust by
Article FOURTH, paragraph 1(b) of the Declaration of Trust dated August 22,
1984, and amended and restated by a Restated Declaration of Trust filed on
October 29, 1996, as amended to date (hereinafter referred to as the
"Declaration of Trust"), and by the affirmative vote of a majority of the
Trustees at a meeting duly called and held on January 26, 1999, the Amended
Certificate of Designation dated October 20, 1997 and filed with the Secretary
of The Commonwealth of Massachusetts on November 17, 1997 amending and restating
the Trust's Certificate of Designation dated October 11, 1996 and filed on
October 17, 1996 is amended and restated effective as of April 1, 1999 as
follows:

The shares of beneficial interest of the Trust are divided into ten
separate series, each series to have the following special and relative rights:

(1) The series shall be designated as follows:

<TABLE>
<S> <C>
Equity Income Series Low Duration Series
Small Cap Series Short-Term Investment Series
International Series Equity Fund for Insurance Companies Series
Balanced Series Mid-Cap Series
Total Return Bond Series Global Equity Series
</TABLE>

(2) Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of
1933. Each share of beneficial interest of each series ("share") shall be
redeemable, shall be entitled to one vote or fraction thereof in respect of a

<PAGE> 2

fractional share on matters on which shares of that series shall be entitled to
vote and shall represent a pro rata beneficial interest in the assets allocated
to that series, and shall be entitled to receive its pro rata share of net
assets of that series upon liquidation of that series, all as provided in the
Declaration of Trust.

(3) The shares of beneficial interest of the Small Cap Series, the
International Series, the Balanced Series, the Total Return Bond Series and the
Low Duration Series shall be classified into two classes (each, a "Class"),
designated Distributor Class Shares and Investor Class Shares, of which an
unlimited number may be issued. Shares outstanding on the date on which the
amendments provided for herein become effective shall be and shall continue to
be Investor Class Shares. The shares of beneficial interest of each other series
of the Trust shall consist of a single Class designated the Investor Class;
provided, however, that the Trustees reserve the right to hereafter create one
or more Classes of shares of any series of the Trust. An unlimited number of
shares of each series may be issued.

(4) The holders of Distributor Class Shares and Investor Class Shares of
each series shall be considered shareholders of such series, and shall have the
relative rights and preferences set forth herein and in the Declaration of Trust
with respect to shares of such series, and shall also be considered shareholders
of the Trust for all other purposes (including, without limitation, for purposes
of receiving reports and notices and the right to vote) and, for matters
reserved to the shareholders of one or more other Classes or series by the
Declaration of Trust or by any instrument establishing and designating a
particular Class or series, or as required by the Investment Company Act of 1940
and/or the rules and regulations of the Securities and Exchange Commission
thereunder (collectively, as from time to time in effect, the "1940 Act") or
other applicable laws. The holders of shares of each Class shall be entitled to
one vote per share and to a fraction of a vote proportional to each fractional
share held, on all matters on which shares of that Class shall be entitled to
vote, all as provided in the Declaration of Trust.

(5) The Distributor Class Shares and the Investor Class Shares of each
series shall represent an equal proportionate interest in the share of such
Class in the Trust Property

<PAGE> 3

belonging to that series, adjusted for any liabilities specifically allocable to
the shares of that Class, and each share of any such Class shall have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that the expenses related directly or indirectly to the
distribution of the shares of a Class paid under a plan of distribution under
Rule 12b-1 under the 1940 Act (a "Plan") shall be borne solely by such Class,
and such expenses shall be appropriately reflected in the determination of net
asset value and the dividend, distribution and liquidation rights of such Class.

(6) (a) Distributor Class Shares of each series shall be subject to an
asset-based sales charge pursuant to a Plan, in such amounts as shall be
determined from time to time.

(b) Investor Class Shares of each series shall not be subject to
an asset-based sales charge pursuant to a Plan.

(7) Shareholders of each series and Class shall vote as a separate
series or Class, as the case may be, on any matter to the extent required by,
and any matter shall be deemed to have been effectively acted upon with respect
to any series or Class as provided in, Rule 18f-2, as from time to time in
effect, under the 1940 Act, or any successor rule and by the Declaration of
Trust. Except as otherwise required by the 1940 Act, the shareholders of each
Class of any series having more than one Class of shares, voting as a separate
class, shall have sole and exclusive voting rights with respect to the
provisions of any Plan applicable to shares of such Class.

(8) The assets and liabilities of the Trust shall be allocated among the
above-referenced series as set forth in paragraph 6 of Article FOURTH of the
Declaration of Trust, except that the liabilities, expenses, costs, charges or
reserves of the Trust which are not readily identifiable as belonging to any
particular series shall be allocated among the series (a) on the basis of their
relative average daily net assets, (b) as incurred on a specific identification
basis or (c) evenly among the series, depending on the nature of the
expenditure.

(9) The Trustees (including any successor Trustees) shall have the right
at any time and from time to time to reallocate assets and expenses or to change
the designation of any series

<PAGE> 4

now or hereafter created, or otherwise to change the special and relative rights
of any such series provided that such change shall not adversely affect the
rights of holders of shares of a series.

IN WITNESS WHEREOF, the undersigned has set her hand and seal this 27th
day of January, 1999.

/s/ GRACIE FERMELIA

--------------------------------------
Gracie V. Fermelia, Secretary

<PAGE> 5

ACKNOWLEDGMENT

STATE OF CALIFORNIA )
) SS January 27, 1999
COUNTY OF LOS ANGELES )

Then personally appeared before me the above named Gracie V. Fermelia,
Secretary, and acknowledged the foregoing instrument to be her free act and
deed.

/s/ KAREN L. BYNUM II
--------------------------------------
Notary Public

<PAGE> 1
Exhibit (d)(11)

SUB-ADVISORY AGREEMENT

AGREEMENT made as of the 21st day of July, 1998, by and among HOTCHKIS AND
WILEY, a division of Merrill Lynch Asset Management, L.P., a Delaware limited
partnership ("HOTCHKIS AND WILEY"), MERCURY ASSET MANAGEMENT INTERNATIONAL
LIMITED, a corporation organized under the laws of England and Wales
("MERCURY"), and MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a corporation
organized under the laws of England and Wales ("MLAM U.K."). (MERCURY and MLAM
U.K. are collectively referred to herein as the "SUB-ADVISORS.")

W I T N E S S E T H:

WHEREAS, HOTCHKIS AND WILEY and the SUB-ADVISORS are engaged principally
in rendering investment advisory services and are registered as investment
advisers under the U.S. Investment Advisers Act of 1940, as amended; and

WHEREAS, HOTCHKIS AND WILEY renders investment advisory services under
an investment advisory agreement ("Advisory Agreement") with the Hotchkis and
Wiley International Fund (the "Fund"), a portfolio of Hotchkis and Wiley Funds,
a registered investment company (the "Company") under the U.S. Investment
Company Act of 1940, as amended ("Investment Company Act"); and

WHEREAS, the SUB-ADVISORS are regulated by the Investment Management
Regulatory Organization ("IMRO"), a self-regulating organization recognized
under the Financial Services Act of 1986 of the United Kingdom, and the conduct
of their investment business is regulated by IMRO; and

WHEREAS, the SUB-ADVISORS are willing to provide investment advisory
services to HOTCHKIS AND WILEY in connection with the Fund's operations on the
terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, HOTCHKIS AND WILEY and the SUB-ADVISORS hereby agree as
follows:

ARTICLE I
Duties of the SUB-ADVISORS

HOTCHKIS AND WILEY hereby engages each SUB-ADVISOR to act as investment
adviser to HOTCHKIS AND WILEY and to furnish, or arrange for affiliates to
furnish, the investment advisory services described below, subject to the broad
supervision of HOTCHKIS AND WILEY and the Fund, for the period and on the terms
and conditions set forth in this Agreement. Each SUB-ADVISOR hereby accepts such
engagement and agrees during such period to render, or arrange for the rendering
of, such services and to assume the obligations herein set forth for the
compensation provided for herein. HOTCHKIS AND WILEY and the Fund shall for all
purposes herein be deemed Non Private Customers as defined under the rules
promulgated by IMRO (the "IMRO Rules"). The SUB-ADVISORS and their affiliates
shall for

-1-
<PAGE> 2

all purposes herein be deemed to be independent contractors and shall, unless
otherwise expressly provided or authorized, have no authority to act for or
represent the Fund in any way or otherwise be deemed agents of the Fund.

Each SUB-ADVISOR shall have the right to make unsolicited calls on
HOTCHKIS AND WILEY and shall provide HOTCHKIS AND WILEY with such investment
research, advice and supervision as the latter may from time to time consider
necessary for the proper supervision of the assets of the Fund; shall make
recommendations from time to time as to which securities shall be purchased or
sold and what portion of the assets of the Fund shall be held in various
investments, including options, futures, options on futures or cash; shall make
recommendations and effect transactions with respect to foreign currency
matters, including foreign exchange contracts, foreign currency options, foreign
currency futures and related options on foreign currency futures and forward
foreign currency transactions; and shall also make recommendations or take
action as to the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities of the Fund
shall be exercised; all of the foregoing subject always to the restrictions of
the Declaration of Trust and By-Laws of the Company, as they may be amended
and/or restated from time to time, the provisions of the Investment Company Act
and the statements relating to the Fund's investment objective, investment
policies and investment restrictions as the same are set forth in the currently
effective Prospectus and Statement of Additional Information relating to the
shares of the Fund under the U.S. Securities Act of 1933, as amended.

The SUB-ADVISORS will not hold money on behalf of HOTCHKIS AND WILEY or
the Fund, nor will the SUB-ADVISORS be the registered holders of the registered
investments of HOTCHKIS AND WILEY or the Fund or be the custodian of documents
or other evidence of title.

ARTICLE II
Allocation of Charges and Expenses

Each SUB-ADVISOR assumes and shall pay the expenses of maintaining the
staff and personnel necessary to perform its obligations under this Agreement
and shall at its own expense provide the office space, equipment and facilities
necessary in connection with the services which it is obligated to provide under
Article I hereof.

ARTICLE III
Compensation of the SUB-ADVISORS

For the services rendered, the facilities furnished and expenses assumed
by the SUB-ADVISORS, HOTCHKIS AND WILEY shall pay to each SUB-ADVISOR a fee in
an amount to be determined from time to time by HOTCHKIS AND WILEY and such
SUB-ADVISOR, but in no event shall such fee be in excess of the amount that
HOTCHKIS AND WILEY actually receives for providing services to the Fund pursuant
to the Advisory Agreement.

-2-
<PAGE> 3

ARTICLE IV
Limitation of Liability of the SUB-ADVISORS

Neither SUB-ADVISOR shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the performance of sub-advisory services rendered by such SUB-ADVISOR with
respect to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Article IV, SUB-ADVISOR
shall include any affiliates of the SUB-ADVISOR performing services for HOTCHKIS
AND WILEY contemplated hereby and directors, officers and employees of the
SUB-ADVISOR and such affiliates.

ARTICLE V
Activities of the SUB-ADVISORS

The services of the SUB-ADVISORS to the Fund are not to be deemed to be
exclusive, the SUB-ADVISORS and any person controlled by or under common control
with the SUB-ADVISORS (for purposes of this Article V referred to as
"affiliates") being free to render services to others. It is understood that
Trustees, officers, employees and shareholders of the Company are or may become
interested in the SUB-ADVISORS and their affiliates, as directors, officers,
employees and shareholders or otherwise, and that directors, officers, employees
and shareholders of the SUB-ADVISORS and their affiliates are or may become
similarly interested in the Fund as shareholders or otherwise.

ARTICLE VI
SUB-ADVISOR Statements Pursuant to IMRO Rules

Any complaints concerning a SUB-ADVISOR should be in writing addressed
to the attention of the Managing Director of such SUB-ADVISOR. HOTCHKIS AND
WILEY has the right to obtain from each SUB-ADVISOR a copy of the IMRO
complaints procedure and to approach IMRO and the Investment Ombudsman directly.

Each SUB-ADVISOR may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by each SUB-ADVISOR may be subject to exchange rate fluctuations
which may have favorable or unfavorable effects on investments.

Each SUB-ADVISOR may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
swaps (but not contracts for differences). Markets can be highly volatile and
such investments carry a high degree of risk of loss exceeding the original
investment and any margin on deposit.

-3-
<PAGE> 4

ARTICLE VII
Duration and Termination of this Agreement

This Agreement shall become effective as of the date first above written
and shall remain in force until July 21, 2000, and thereafter, but only so long
as such continuance is specifically approved at least annually by (i) the
Trustees of the Company or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) a majority of those Trustees who are not parties
to this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.

This Agreement may be terminated with respect to a SUB-ADVISOR at any
time, without the payment of any penalty, by HOTCHKIS AND WILEY or by vote of a
majority of the outstanding voting securities of the Fund, or with respect to a
particular SUB-ADVISOR by the SUB-ADVISOR, on not more than sixty days' written
notice to HOTCHKIS AND WILEY. This Agreement shall automatically terminate with
respect to a SUB-ADVISOR in the event of its assignment by such SUB-ADVISOR or
in the event of the termination of the Advisory Agreement. Any termination shall
be without prejudice to the completion of transactions already initiated.

ARTICLE VIII
Amendments of this Agreement

This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Trustees of the Company or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Trustees who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.

ARTICLE IX
Definitions of Certain Terms

The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.

ARTICLE X
Governing Law

This Agreement shall be construed in accordance with the laws of the
State of California and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of California, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.

-4-
<PAGE> 5

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.

HOTCHKIS AND WILEY
a division of Merrill Lynch Asset
Management, L.P.

By: /s/ Nancy D. Celick
-------------------------------------------

Title: CAO
---------------------------------------

MERCURY ASSET MANAGEMENT INTERNATIONAL LIMITED

By: /s/ James Stratford /s/ Peter J. Gibbs
-------------------------------------------

Title: Compliance Officer Managing Director
---------------------------------------

MERRILL LYNCH ASSET MANAGEMENT
U.K. LIMITED

By: /s/ Alan Albert
-------------------------------------------

Title: Senior Managing Director
---------------------------------------

-5-

<PAGE> 1
Exhibit (d)(12)
SUB-ADVISORY AGREEMENT

W I T N E S S E T H:

WHEREAS, HOTCHKIS AND WILEY renders investment advisory services under
an investment advisory agreement ("Advisory Agreement") with the Hotchkis and
Wiley Global Equity Fund (the "Fund"), a portfolio of Hotchkis and Wiley Funds,
a registered investment company (the "Company") under the U.S. Investment
Company Act of 1940, as amended ("Investment Company Act"); and

WHEREAS, the SUB-ADVISORS are willing to provide investment advisory
services to HOTCHKIS AND WILEY in connection with the Fund's operations on the
terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, HOTCHKIS AND WILEY and the SUB-ADVISORS hereby agree as
follows:

ARTICLE I
Duties of the SUB-ADVISORS

-1-
<PAGE> 2

all purposes herein be deemed Non Private Customers as defined under the rules
promulgated by IMRO (the "IMRO Rules"). The SUB-ADVISORS and their affiliates
shall for all purposes herein be deemed to be independent contractors and shall,
unless otherwise expressly provided or authorized, have no authority to act for
or represent the Fund in any way or otherwise be deemed agents of the Fund.

ARTICLE II
Allocation of Charges and Expenses

ARTICLE III
Compensation of the SUB-ADVISORS

-2-
<PAGE> 3

ARTICLE IV
Limitation of Liability of the SUB-ADVISORS

ARTICLE V
Activities of the SUB-ADVISORS

ARTICLE VI
SUB-ADVISOR Statements Pursuant to IMRO Rules

-3-
<PAGE> 4

ARTICLE VII
Duration and Termination of this Agreement

ARTICLE VIII
Amendments of this Agreement

ARTICLE IX
Definitions of Certain Terms

ARTICLE X
Governing Law

-4-
<PAGE> 5

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.

HOTCHKIS AND WILEY
a division of Merrill Lynch Asset
Management, L.P.

By: /s/ Nancy D. Celick
------------------------------------------

Title: CAO
---------------------------------------

MERCURY ASSET MANAGEMENT INTERNATIONAL LIMITED

By: /s/ James Stratford /s/ Peter J. Gibbs
------------------------------------------

Title: Compliance Officer
------------------------------------------

MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED

By: /s/ Alan Albert
------------------------------------------

Title: Senior Managing Director
---------------------------------------

-5-

<PAGE> 1

Exhibit (h)(4)

EXPENSE CAP AGREEMENT

Agreement made this 26th day of January, 1999, between Hotchkis and
Wiley, as investment advisor (the "Advisor"), and the Hotchkis and Wiley Funds
(individually, a "Fund" and collectively, the "Funds").

WHEREAS, the Advisor has been reimbursing some of the Funds for expenses
that exceed certain voluntary expense limits, and

WHEREAS, the Advisor wishes to change its voluntary agreement to limit
expenses of some of the Funds and commit to those limits for a period of time,
and

WHEREAS, shareholders of the Funds benefit from any expense limits
agreed to by the Advisor.

NOW, THEREFORE, the Funds and the Advisor agree to expense limits on the
annual operating expenses of the Funds, as follows:

<TABLE>
<CAPTION>
Expense Limit
Effective April 1, 1999
(as a percentage of
Expense Limit Effective average net assets)
March 1, 1999 ----------------------------------
Fund (as a percentage of Distributor
average net assets) Investor Class Class
- ---- ----------------------- -------------- -----------
<S> <C> <C> <C>
Equity Income 0.95% 0.95% N/A
Mid-Cap 1.15% 1.15% N/A
Global Equity 1.25% 1.25% N/A
Balanced 0.95% 0.95% 1.20%
Total Return Bond 0.65% 0.65% 0.90%
Low Duration 0.58% 0.58% 0.83%
Short-Term Investment 0.48% 0.48% N/A
</TABLE>

The Advisor's voluntary agreement to limit the annual operating expenses of the
Small Cap Fund and the International Fund to 1.00% of each such Fund's average
net assets is terminated as of 11:59 p.m. on February 28, 1999. The Advisor
agrees to continue the foregoing expense limits through February 29, 2000 and
thereafter may change any of them only upon 30 days' prior notice to the
applicable Fund shareholders.

-1-

<PAGE> 2

IN WITNESS WHEREOF, the parties have signed this agreement as of the day
and year first above written.

HOTCHKIS AND WILEY, a
division of Merrill Lynch
Asset Management L.P.

By /s/ NANCY D. CELICK

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

HOTCHKIS AND WILEY FUNDS

By /s/ NANCY D. CELICK
---------------------------------
Nancy D. Celick
President

-2-

<PAGE> 1

EXHIBIT(j)

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 27 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
August 12, 1998, relating to the financial statements and financial highlights
of the Equity Income Fund, the Mid-Cap Fund, the Small Cap Fund, the
International Fund, the Global Equity Fund, the Balanced Fund, the Total Return
Bond Fund, the Low Duration Fund and the Short-Term Investment Fund (nine of
the ten portfolios of Hotchkis and Wiley Funds), which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading "Other
Service Providers" in such Statement of Additional Information and to the
reference to us under the heading "Financial Highlights" in such Prospectus.

/s/ PRICEWATERHOUSECOOPERS LLP
- ----------------------------------------
PricewaterhouseCoopers LLP

Milwaukee, Wisconsin
January 26, 1999
<PAGE> 2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to use in the Statement of Additional Information constituting
part of this Post-Effective Amendment No. 27 to the registration statement on
Form N-1A (the "Registration Statement") of our report dated August 12, 1998,
relating to the financial statements and financial highlights of the Equity Fund
for Insurance Companies (one of the ten portfolios of Hotchkis and Wiley Funds),
which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement. We also consent to the reference to us
under the heading "Other Service Providers" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.

/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP

Milwaukee, Wisconsin
January 26, 1999

<PAGE> 1
Exhibit (m)

DISTRIBUTION PLAN

HOTCHKIS AND WILEY FUNDS

PURSUANT TO RULE 12b-1

DISTRIBUTION PLAN made as of the 1st day of April, 1999, by and
between HOTCHKIS AND WILEY FUNDS, a Massachusetts business trust (the "Trust"),
and PRINCETON FUNDS DISTRIBUTOR, INC., a Delaware corporation ("PFD").

W I T N E S S E T H:

WHEREAS, the Trust engages in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and

WHEREAS, the Trust comprises ten separate funds (the "Funds"), each of
which pursues its own investment objective through separate investment policies,
and may in the future comprise one or more additional funds; and

WHEREAS, PFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and

WHEREAS, the Trust has entered into a Distribution Agreement with PFD,
pursuant to which PFD acts as the exclusive distributor and representative of
the Trust in the offer and sale of Distributor Class shares of certain Funds
(collectively, the "Distributor Class Shares"); and

WHEREAS, the Trust desires to adopt this Distribution Plan pursuant to
Rule 12b-1 under the Investment Company Act, pursuant to which the Trust will
pay a distribution fee to, or at the direction of, PFD in connection with the
distribution of Distributor Class Shares of the Funds; and

WHEREAS, Distributor Class Shares are sold to administrators,
broker-dealers, or other institutions that provide accounting, recordkeeping,
and/or other services to investors and that have an administrative services
agreement with the Trust and/or the Trust's investment advisor to make
Distributor Class Shares available to their clients (the "Recipients"); and

WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of this Distribution Plan will benefit the
Trust and its Distributor Class shareholders.

NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby
agrees to the terms of, this Distribution Plan (the "Plan") in accordance with
Rule 12b-1 under the Investment Company Act on the following terms and
conditions:

<PAGE> 2

1. Upon effectiveness of this Plan with respect to the Distributor Class
Shares of a Fund, the Trust, on behalf of such Fund, shall pay to each of the
Recipients a distribution fee under the Plan at the end of each quarter of 0.25%
on an annualized basis of the average daily net asset value of the Distributor
Class Shares of such Fund invested through such Recipient as compensation for
providing distribution related services to the Trust's shareholders, including,
but not limited to, the following:

(a) costs of printing and mailing of Trust prospectuses, statements of
additional information, any supplements thereto and shareholder reports
for prospective Fund shareholders;

(b) services relating to the development, preparation, printing and
mailing of Trust advertisements, sales literature and other promotional
materials describing and/or relating to the Trust and including
materials intended for broker-dealer only use or retail use;

(c) holding seminars and sales meetings designed to promote the
distribution of the Distributor Class Shares of the Funds;

(d) obtaining information and providing explanations to prospective Fund
shareholders regarding the investment objectives and policies and other
information about the Trust and its Funds, including the performance of
the Funds;

(e) training sales personnel regarding the Trust and the Funds; and

(f) financing any other activity that the Trust's Board of Trustees
determines is primarily intended to result in the sale of the
Distributor Class Shares.

Only distribution expenditures properly attributable to the sale of Distributor
Class Shares of a Fund will be used to justify any fee paid by the Trust with
respect to that Fund pursuant to this Plan, and, to the extent that such
expenditures relate to more than one Fund, the expenditures will be allocated
between or among the affected Funds in a manner deemed appropriate by the Board
of Trustees of the Trust.

2. PFD shall provide the Trust for review by the Board of Trustees, and
the Trustees shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 under the Investment Company Act regarding the
disbursement of the distribution fee during such period.

3. This Plan shall not take effect until it has been approved, together
with the provisions of any related agreements, by the initial Distributor Class
shareholder of each Fund and by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Trustees"), cast in person at a meeting called
for the purpose of voting on this Plan and such related agreements.

<PAGE> 3

4. This Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in Paragraph 3.

5. This Plan may be terminated with respect to a Fund at any time by
vote of a majority of the Rule 12b-1 Trustees or by vote of a majority of the
outstanding Distributor Class Shares of that Fund.

6. This Plan may not be amended to increase materially the rate of
distribution payments provided for in Paragraph 1 unless such amendment is
approved in the manner provided for initial approval in Paragraph 3 and by a
vote of at least a majority, as defined in the Investment Company Act, of the
outstanding Distributor Class Shares of each Fund affected by the amendment, and
no material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal of Paragraph 3.

7. While this Plan is in effect, the selection and nomination of
Trustees who are not interested persons, as defined in the Investment Company
Act, of the Trust shall be committed to the discretion of the Trustees who are
not interested persons and a majority of the Trustees shall be Rule 12b-1
Trustees.

8. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 2 hereof, for a period of
not less than six years from the date of this Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.

9. PFD understands that the obligations of this Agreement are not
binding upon any shareholder of the Trust personally, but bind only the Trust's
property; PFD represents that it has notice of the provisions of the Trust's
Declaration of Trust disclaiming shareholder liability for acts or obligations
of the Trust.

<PAGE> 4

IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.

HOTCHKIS AND WILEY FUNDS

By:
--------------------------------

PRINCETON FUNDS DISTRIBUTOR, INC.

By:
--------------------------------

<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> BALANCED FUND
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 97,214
<INVESTMENTS-AT-VALUE> 106,213
<RECEIVABLES> 896
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 107,118
<PAYABLE-FOR-SECURITIES> 2,379
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 144
<TOTAL-LIABILITIES> 2,523
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 91,284
<SHARES-COMMON-STOCK> 5,273
<SHARES-COMMON-PRIOR> 4,652
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,311
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,999
<NET-ASSETS> 104,595
<DIVIDEND-INCOME> 1,314
<INTEREST-INCOME> 4,195
<OTHER-INCOME> 0
<EXPENSES-NET> 946
<NET-INVESTMENT-INCOME> 4,563
<REALIZED-GAINS-CURRENT> 5,755
<APPREC-INCREASE-CURRENT> 2,122
<NET-CHANGE-FROM-OPS> 12,440
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,563
<DISTRIBUTIONS-OF-GAINS> 5,598
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,729
<NUMBER-OF-SHARES-REDEEMED> 1,616
<SHARES-REINVESTED> 508
<NET-CHANGE-IN-ASSETS> 14,437
<ACCUMULATED-NII-PRIOR> 51
<ACCUMULATED-GAINS-PRIOR> 4,106
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 761
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 946
<AVERAGE-NET-ASSETS> 101,538
<PER-SHARE-NAV-BEGIN> 19.38
<PER-SHARE-NII> 0.89
<PER-SHARE-GAIN-APPREC> 1.58
<PER-SHARE-DIVIDEND> 0.90
<PER-SHARE-DISTRIBUTIONS> 1.11
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.84
<EXPENSE-RATIO> 0.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> SMALL CAP FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 91,954
<INVESTMENTS-AT-VALUE> 92,833
<RECEIVABLES> 2,137
<ASSETS-OTHER> 124
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 95,094
<PAYABLE-FOR-SECURITIES> 15
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 166
<TOTAL-LIABILITIES> 181
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 87,940
<SHARES-COMMON-STOCK> 3,585
<SHARES-COMMON-PRIOR> 1,155
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,094
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 879
<NET-ASSETS> 94,913
<DIVIDEND-INCOME> 299
<INTEREST-INCOME> 163
<OTHER-INCOME> 0
<EXPENSES-NET> 616
<NET-INVESTMENT-INCOME> (154)
<REALIZED-GAINS-CURRENT> 9,969
<APPREC-INCREASE-CURRENT> (3,968)
<NET-CHANGE-FROM-OPS> 5,847
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 112
<DISTRIBUTIONS-OF-GAINS> 5,073
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,097
<NUMBER-OF-SHARES-REDEEMED> 2,875
<SHARES-REINVESTED> 208
<NET-CHANGE-IN-ASSETS> 67,383
<ACCUMULATED-NII-PRIOR> 18
<ACCUMULATED-GAINS-PRIOR> 1,446
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 491
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 616
<AVERAGE-NET-ASSETS> 65,739
<PER-SHARE-NAV-BEGIN> 23.83
<PER-SHARE-NII> (0.06)
<PER-SHARE-GAIN-APPREC> 5.13
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 2.37
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 26.48
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> EQUITY INCOME FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 130,504
<INVESTMENTS-AT-VALUE> 174,633
<RECEIVABLES> 976
<ASSETS-OTHER> 14
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 175,623
<PAYABLE-FOR-SECURITIES> 177
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 191
<TOTAL-LIABILITIES> 368
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 110,272
<SHARES-COMMON-STOCK> 7,958
<SHARES-COMMON-PRIOR> 8,749
<ACCUMULATED-NII-CURRENT> 53
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20,801
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44,129
<NET-ASSETS> 175,255
<DIVIDEND-INCOME> 5,351
<INTEREST-INCOME> 77
<OTHER-INCOME> 0
<EXPENSES-NET> 1,652
<NET-INVESTMENT-INCOME> 3,776
<REALIZED-GAINS-CURRENT> 29,878
<APPREC-INCREASE-CURRENT> 5,190
<NET-CHANGE-FROM-OPS> 38,844
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,812
<DISTRIBUTIONS-OF-GAINS> 26,619
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,066
<NUMBER-OF-SHARES-REDEEMED> 3,308
<SHARES-REINVESTED> 1,451
<NET-CHANGE-IN-ASSETS> (10,619)
<ACCUMULATED-NII-PRIOR> 88
<ACCUMULATED-GAINS-PRIOR> 21,804
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,424
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,652
<AVERAGE-NET-ASSETS> 189,877
<PER-SHARE-NAV-BEGIN> 21.25
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 4.02
<PER-SHARE-DIVIDEND> 0.46
<PER-SHARE-DISTRIBUTIONS> 3.25
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.02
<EXPENSE-RATIO> 0.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> INTERNATIONAL FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 1,282,680
<INVESTMENTS-AT-VALUE> 1,475,912
<RECEIVABLES> 23,858
<ASSETS-OTHER> 100
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,499,870
<PAYABLE-FOR-SECURITIES> 4,879
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,186
<TOTAL-LIABILITIES> 23,065
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,288,778
<SHARES-COMMON-STOCK> 58,310
<SHARES-COMMON-PRIOR> 36,754
<ACCUMULATED-NII-CURRENT> (6,411)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,163
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 193,275
<NET-ASSETS> 1,476,805
<DIVIDEND-INCOME> 33,084
<INTEREST-INCOME> 4,377
<OTHER-INCOME> 0
<EXPENSES-NET> 10,387
<NET-INVESTMENT-INCOME> 27,074
<REALIZED-GAINS-CURRENT> 3,289
<APPREC-INCREASE-CURRENT> 70,707
<NET-CHANGE-FROM-OPS> 101,070
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 32,977
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 52,831
<NUMBER-OF-SHARES-REDEEMED> 32,529
<SHARES-REINVESTED> 1,254
<NET-CHANGE-IN-ASSETS> 588,277
<ACCUMULATED-NII-PRIOR> (1,196)
<ACCUMULATED-GAINS-PRIOR> (1,438)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,732
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,387
<AVERAGE-NET-ASSETS> 1,166,271
<PER-SHARE-NAV-BEGIN> 24.17
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 1.23
<PER-SHARE-DIVIDEND> 0.66
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 25.33
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> EQUITY FUND FOR INSURANCE COMPANIES
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 28,507
<INVESTMENTS-AT-VALUE> 40,506
<RECEIVABLES> 263
<ASSETS-OTHER> 23
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,792
<PAYABLE-FOR-SECURITIES> 30
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37
<TOTAL-LIABILITIES> 67
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,311
<SHARES-COMMON-STOCK> 2,196
<SHARES-COMMON-PRIOR> 2,019
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,415
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,999
<NET-ASSETS> 40,725
<DIVIDEND-INCOME> 1,036
<INTEREST-INCOME> 18
<OTHER-INCOME> 0
<EXPENSES-NET> 197
<NET-INVESTMENT-INCOME> 857
<REALIZED-GAINS-CURRENT> 3,890
<APPREC-INCREASE-CURRENT> 3,050
<NET-CHANGE-FROM-OPS> 7,797
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 862
<DISTRIBUTIONS-OF-GAINS> 2,202
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 1
<SHARES-REINVESTED> 178
<NET-CHANGE-IN-ASSETS> 7,767
<ACCUMULATED-NII-PRIOR> 6
<ACCUMULATED-GAINS-PRIOR> 1,727
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 197
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 276
<AVERAGE-NET-ASSETS> 37,802
<PER-SHARE-NAV-BEGIN> 16.32
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 3.31
<PER-SHARE-DIVIDEND> 0.41
<PER-SHARE-DISTRIBUTIONS> 1.08
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.55
<EXPENSE-RATIO> 0.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> LOW DURATION FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 248,662
<INVESTMENTS-AT-VALUE> 249,974
<RECEIVABLES> 5,088
<ASSETS-OTHER> 16
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 255,078
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,927
<TOTAL-LIABILITIES> 1,927
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 251,084
<SHARES-COMMON-STOCK> 24,826
<SHARES-COMMON-PRIOR> 16,738
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 755
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,312
<NET-ASSETS> 253,151
<DIVIDEND-INCOME> 313
<INTEREST-INCOME> 13,764
<OTHER-INCOME> 0
<EXPENSES-NET> 1,158
<NET-INVESTMENT-INCOME> 12,919
<REALIZED-GAINS-CURRENT> 1,053
<APPREC-INCREASE-CURRENT> (222)
<NET-CHANGE-FROM-OPS> 13,750
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13,341
<DISTRIBUTIONS-OF-GAINS> 1,046
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,899
<NUMBER-OF-SHARES-REDEEMED> 11,075
<SHARES-REINVESTED> 1,264
<NET-CHANGE-IN-ASSETS> 81,937
<ACCUMULATED-NII-PRIOR> 446
<ACCUMULATED-GAINS-PRIOR> 723
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 918
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,302
<AVERAGE-NET-ASSETS> 199,937
<PER-SHARE-NAV-BEGIN> 10.23
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> 0.68
<PER-SHARE-DISTRIBUTIONS> 0.06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.20
<EXPENSE-RATIO> 0.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> SHORT-TERM INVESTMENT FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 28,433
<INVESTMENTS-AT-VALUE> 28,472
<RECEIVABLES> 742
<ASSETS-OTHER> 10
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 29,224
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,186
<TOTAL-LIABILITIES> 1,186
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,184
<SHARES-COMMON-STOCK> 2,768
<SHARES-COMMON-PRIOR> 2,140
<ACCUMULATED-NII-CURRENT> (72)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (113)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 39
<NET-ASSETS> 28,038
<DIVIDEND-INCOME> 7
<INTEREST-INCOME> 1,616
<OTHER-INCOME> 0
<EXPENSES-NET> 113
<NET-INVESTMENT-INCOME> 1,510
<REALIZED-GAINS-CURRENT> (42)
<APPREC-INCREASE-CURRENT> (21)
<NET-CHANGE-FROM-OPS> 1,447
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,510
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,944
<NUMBER-OF-SHARES-REDEEMED> 4,404
<SHARES-REINVESTED> 88
<NET-CHANGE-IN-ASSETS> 6,322
<ACCUMULATED-NII-PRIOR> (18)
<ACCUMULATED-GAINS-PRIOR> (125)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 95
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 219
<AVERAGE-NET-ASSETS> 23,700
<PER-SHARE-NAV-BEGIN> 10.15
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.65
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.13
<EXPENSE-RATIO> 0.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> TOTAL RETURN BOND FUND
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 43,602
<INVESTMENTS-AT-VALUE> 44,503
<RECEIVABLES> 1,016
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45,528
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 280
<TOTAL-LIABILITIES> 280
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 44,088
<SHARES-COMMON-STOCK> 3,362
<SHARES-COMMON-PRIOR> 1,097
<ACCUMULATED-NII-CURRENT> 34
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 225
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 901
<NET-ASSETS> 45,248
<DIVIDEND-INCOME> 100
<INTEREST-INCOME> 1,581
<OTHER-INCOME> 0
<EXPENSES-NET> 149
<NET-INVESTMENT-INCOME> 1,532
<REALIZED-GAINS-CURRENT> 319
<APPREC-INCREASE-CURRENT> 505
<NET-CHANGE-FROM-OPS> 2,356
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,622
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,517
<NUMBER-OF-SHARES-REDEEMED> 335
<SHARES-REINVESTED> 83
<NET-CHANGE-IN-ASSETS> 30,941
<ACCUMULATED-NII-PRIOR> 106
<ACCUMULATED-GAINS-PRIOR> (76)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 126
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 235
<AVERAGE-NET-ASSETS> 23,027
<PER-SHARE-NAV-BEGIN> 13.04
<PER-SHARE-NII> 0.89
<PER-SHARE-GAIN-APPREC> 0.50
<PER-SHARE-DIVIDEND> 0.97
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.46
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> MID-CAP FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 7,939
<INVESTMENTS-AT-VALUE> 7,578
<RECEIVABLES> 10
<ASSETS-OTHER> 18
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,606
<PAYABLE-FOR-SECURITIES> 45
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22
<TOTAL-LIABILITIES> 67
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,095
<SHARES-COMMON-STOCK> 584
<SHARES-COMMON-PRIOR> 171
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 805
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (361)
<NET-ASSETS> 7,539
<DIVIDEND-INCOME> 104
<INTEREST-INCOME> 14
<OTHER-INCOME> 0
<EXPENSES-NET> 54
<NET-INVESTMENT-INCOME> 64
<REALIZED-GAINS-CURRENT> 929
<APPREC-INCREASE-CURRENT> (555)
<NET-CHANGE-FROM-OPS> 438
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 66
<DISTRIBUTIONS-OF-GAINS> 129
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 490
<NUMBER-OF-SHARES-REDEEMED> 92
<SHARES-REINVESTED> 15
<NET-CHANGE-IN-ASSETS> 5,552
<ACCUMULATED-NII-PRIOR> 2
<ACCUMULATED-GAINS-PRIOR> 6
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 146
<AVERAGE-NET-ASSETS> 5,382
<PER-SHARE-NAV-BEGIN> 11.65
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 1.60
<PER-SHARE-DIVIDEND> 0.14
<PER-SHARE-DISTRIBUTIONS> 0.32
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.92
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> GLOBAL EQUITY FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 6,907
<INVESTMENTS-AT-VALUE> 7,432
<RECEIVABLES> 19
<ASSETS-OTHER> 88
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,539
<PAYABLE-FOR-SECURITIES> 33
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 161
<TOTAL-LIABILITIES> 194
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,831
<SHARES-COMMON-STOCK> 646
<SHARES-COMMON-PRIOR> 336
<ACCUMULATED-NII-CURRENT> (25)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 526
<NET-ASSETS> 7,345
<DIVIDEND-INCOME> 169
<INTEREST-INCOME> 2
<OTHER-INCOME> 0
<EXPENSES-NET> 59
<NET-INVESTMENT-INCOME> 112
<REALIZED-GAINS-CURRENT> 121
<APPREC-INCREASE-CURRENT> 226
<NET-CHANGE-FROM-OPS> 459
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 175
<DISTRIBUTIONS-OF-GAINS> 92
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 389
<NUMBER-OF-SHARES-REDEEMED> 104
<SHARES-REINVESTED> 25
<NET-CHANGE-IN-ASSETS> 3,616
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 23
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 171
<AVERAGE-NET-ASSETS> 5,944
<PER-SHARE-NAV-BEGIN> 11.09
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 0.51
<PER-SHARE-DIVIDEND> 0.32
<PER-SHARE-DISTRIBUTIONS> 0.18
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.38
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE> 1

Exhibit (o)

HOTCHKIS AND WILEY FUNDS

PLAN PURSUANT TO RULE 18f-3 UNDER THE INVESTMENT COMPANY ACT

The Small Cap, International, Balanced, Total Return Bond and Low
Duration Funds (individually a "Fund" and, collectively, the "Funds") of the
Hotchkis and Wiley Funds offer Distributor Class Shares and Investor Class
Shares as follows:

Distribution Fees

Distributor Class Shares bear the expenses of the ongoing Rule 12b-1
Plan distribution fees applicable to the Class.

Voting Rights

The Distributor Class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its ongoing distribution fees.
Each Class shall have separate voting rights on any matter submitted to
shareholders in which the interests of one Class differ from the interests of
the other Class.

Dividends

Dividends paid on each Class will be calculated in the same manner at
the same time and will differ only to the extent that any distribution fee
relates only to the Distributor Class.

Exchange Privileges

Holders of Distributor Class Shares and Investor Class Shares shall have
such exchange privileges as set forth in the Funds' current prospectus. Exchange
privileges may vary between Classes and among holders of a Class.

Other Rights and Obligations

Except as otherwise described above, in all respects, each Class shall
have the same rights and obligations as each other Class.

Adopted: January 26, 1999; Effective April 1, 1999