AMERICAN AADVANTAGE FUNDS, 485APOS, 1998-10-15

AMERICAN AADVANTAGE FUNDS
485APOS, 1998-10-15

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<PAGE> 1
As filed with the Securities and Exchange Commission on October 15, 1998

1933 Act File No. 33-11387
1940 Act File No. 811-4984

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 25 [X]
----

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 26
----
(Check appropriate box or boxes.)

AMERICAN AADVANTAGE FUNDS
(Exact Name of Registrant as Specified in Charter)

4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (817) 967-3509

WILLIAM F. QUINN, PRESIDENT
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Name and Address of Agent for Service)

Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036

Approximate Date of Proposed Public Offering December 31, 1999
-------------------------

It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.

Registrant has adopted a master-feeder operating structure for each of its
series. This Post-Effective Amendment includes signature pages for the AMR
Investment Services Trust, the master trust, and the American AAdvantage Funds,
the feeder trust.

<PAGE> 2

AMERICAN AADVANTAGE FUNDS
CONTENTS OF REGISTRATION STATEMENT

This registration statement is comprised of the following:

Cover Sheet

Contents of Registration Statement

Prospectus for the AMR Class of the American AAdvantage Small
Cap Value Fund

Prospectus for the Institutional Class of the American
AAdvantage Small Cap Value Fund

Statement of Additional Information for the AMR Class and
Institutional Class of the American AAdvantage Small Cap
Value Fund

Part C

Signature Pages

Exhibits

The sole purpose of this filing is to add a new series to the American
AAdvantage Funds, the American AAdvantage Small Cap Value Fund ("Fund"). The
Fund will offer two classes of shares, the Institutional Class and the AMR
Class. This filing does not affect the current prospectuses and statements of
additional information for the remaining series of the American AAdvantage
Funds.

<PAGE> 3
[AMERICAN AADVANTAGE FUNDS LOGO]
Small Cap Value Fund
- AMR Class -

PROSPECTUS

January 1, 1999

Managed by AMR Investment Services, Inc.

THE SECURITIES AND EXCHANGE COMMISSION DOES NOT GUARANTEE THAT THE INFORMATION
IN THIS PROSPECTUS OR ANY OTHER MUTUAL FUND'S PROSPECTUS IS ACCURATE OR
COMPLETE, NOR DOES IT JUDGE THE INVESTMENT MERIT OF THESE FUNDS. TO STATE
OTHERWISE IS A CRIMINAL OFFENSE.

<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
ABOUT THE FUND

Investment Objectives, Strategies and Risks ..... X

The Manager ..................................... X

The Investment Advisers ......................... X

Valuation of Shares ............................. XX

Distribution of Fund Shares ..................... XX

ABOUT YOUR INVESTMENT
Purchase and Redemption of Shares ............... XX

Distributions and Taxes ......................... XX
ADDITIONAL INFORMATION
Master-Feeder Structure ......................... XX

Year 2000 ....................................... XX

Additional Information .......................... XX
</TABLE>

2
<PAGE> 5

ABOUT THE FUND

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

INVESTMENT OBJECTIVES
Long-term capital appreciation and current income primarily through
investments in U.S. stocks.

PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of the American AAdvantage
Small Cap Value Fund (the "Fund") will be invested in equity securities of
companies with market capitalizations of $1 billion or less at the time of
investment. The Fund's investments may include common stocks, preferred stocks,
securities convertible into common stocks, and U.S. dollar-denominated American
Depositary Receipts (collectively referred to as "stocks").

The investment advisers will select stocks which, in their opinion,
have most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.

Each of the investment advisers determines the growth prospects of
companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. AMR Investment Services, Inc.
(the "Manager") believes that this strategy will help the Fund outperform other
investment styles over the longer term while minimizing volatility and downside
risk. The Manager expects the portfolio turnover rate for the Fund to be less
than 100%.

Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.

The Fund seeks its investment objective by investing all of its
investable assets in the Small Cap Value Portfolio ("Portfolio") of the AMR
Investment Services Trust ("AMR Trust"). The Portfolio's investment objective is
identical to that of the Fund. Throughout this Prospectus, statements regarding
investments by the Fund refer to investments made by the Portfolio. For easier
reading, the term "Fund" is used throughout the Prospectus to refer to either
the Fund or the Portfolio, unless stated otherwise. See "Master-Feeder
Structure".

RISK FACTORS

o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility that
the value of the Fund's investments in stocks will decline due to drops
in the stock market. In general, the value of the Fund will move in the
same direction as the overall stock market, which will vary from day to
day in response to the activities of individual companies and general
market and economic conditions.

o Small Capitalization Companies
Investing in the securities of small capitalization companies involves
greater risk and the possibility of greater price volatility since
smaller companies may have limited operating history, product lines,
and financial resources, and the securities of these companies may lack
sufficient market liquidity.

3
<PAGE> 6

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

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund(1).

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

<TABLE>
<S> <C>
Management Fees......................................X.X%
Other Expenses.......................................X.X(2)
Total Annual Operating Expenses......................X.X%
Fee Waiver and/or Expense Reimbursement..............X.X%(3)
Net Expenses.........................................0.75%
</TABLE>

(1) The expense table and the Example below reflect the expenses
of both the Fund and the Portfolio.

(2) "Other Expenses" are based on estimates for the current fiscal
year.

(3) The Manager has contractually agreed to waive a portion of its
fee and to reimburse the Fund for other expenses through
October 31, 1999 to the extent that Total Operating Expenses
exceed 0.75%.

EXAMPLE

This example shows the expenses you would pay over time if you invested
$10,000 in the Fund. It assumes that you earn 5% total return each year that the
Fund's operating expenses remain the same and that you sell your shares at the
end of each period. The actual expenses and total return of the Fund will vary
over time and, therefore, this example is for comparison purposes only.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$77 $240
</TABLE>

PERFORMANCE OF SIMILAR SMALL CAP VALUE ACCOUNT

The Fund's investment advisers are Brandywine Asset Management, Inc.
("Brandywine") and Hotchkis and Wiley ("Hotchkis"). Brandywine and Hotchkis each
have experience managing other accounts with investment objectives, policies and
strategies similar to those of the Fund. Unlike the Fund, all of the accounts
managed by Brandywine include an allocation to micro-cap companies, which are
defined as companies with total market capitalization of less than $250 million.
Thus, the performance below consists of only the Hotchkis and Wiley Small Cap
Value Fund ("Hotchkis Fund"), an investment company which has investment
objectives, policies and strategies substantially similar to those of the Fund.
The data shown below reflects the total return for the periods shown, reduced by
the actual expenses of the Hotchkis Fund. Applying the Fund's expense structure
to the Hotchkis Fund would have lowered the performance results shown. THIS
PERFORMANCE OF THE HOTCHKIS FUND IS HISTORICAL AND DOES NOT REPRESENT PROJECTED
FUTURE INVESTMENT PERFORMANCE OF THE FUND.

[CHART]

4
<PAGE> 7

Highest Quarterly Return from 1/1/88 through 12/31/97............ 29.45%
Lowest Quarterly Return from 1/1/88 through 12/31/97............. -36.87%
Year-to-Date Return through 9/30/98.............................. -22.39%

<TABLE>
<CAPTION>
Average Annual Total Return
------------------------------------------
as of 12/31/97
------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Hotchkis Fund 39.52% 16.53% 15.77%
Russell 2000 Value Index 22.37% 16.41% 15.76%
</TABLE>

THE MANAGER

The American AAdvantage Funds ("Trust") has retained AMR Investment
Services, Inc. to serve as its Manager. The Manager, located at 4333 Amon Carter
Boulevard, Fort Worth, Texas 76155, is a wholly owned subsidiary of AMR
Corporation, the parent company of American Airlines, Inc. The Manager was
organized in 1986 to provide investment management, advisory, administrative and
asset management consulting services. As of October 31, 1998, the Manager had
approximately $X.X billion of assets under management, including approximately
$X.X billion under active management and $X.X billion as named fiduciary or
financial adviser. Of the total, approximately $X.X of assets are related to AMR
Corporation.

The Manager provides or oversees all administrative, investment
advisory and portfolio management services to the Fund. The Manager
o develops the investment programs for the Fund,
o selects and changes investment advisers (subject to requisite
approvals),
o allocates assets among investment advisers,
o monitors the investment advisers' investment programs and
results,
o coordinates the investment activities of the investment
advisers to ensure compliance with regulatory restrictions,
and
o oversees the Fund's securities lending activities and any
actions taken by the securities lending agent.

William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Fund. These responsibilities include oversight of
the investment advisers, regular review of their performance and asset
allocations among them. Mr. Quinn has served as President of the Manager since
its inception in 1986. Ms. Eckl has served as Vice President-Trust Investments
since May 1995. Prior to her current position, Ms. Eckl held the position of
Vice President-Finance and Compliance of the Manager from December 1990 through
April 1995.

THE INVESTMENT ADVISERS

Set forth below is a brief description of the investment advisers for
the Fund. The Fund's assets are allocated among the investment advisers by the
Manager. Each investment adviser has discretion to purchase and sell securities
for its segment of the Fund's assets in accordance with the Fund's objectives,
policies, restrictions and more specific strategies provided by the Manager.
Each investment adviser has entered into a separate investment advisory
agreement with the Manager to provide investment advisory services to the Fund
and the Portfolio. Pursuant to an exemptive order issued by the Securities and
Exchange Commission ("SEC"), the Manager is permitted to enter into new or
modified investment advisory agreements with existing or new investment advisers
without approval of Fund shareholders, but subject to approval of the Trust's
Board of Trustees ("Board") and the

5
<PAGE> 8

AMR Investment Services Trust Board ("AMR Trust Board"). The Prospectus will be
supplemented if additional investment advisers are retained or the contract with
any existing investment adviser is terminated.

BRANDYWINE ASSET MANAGEMENT, INC., 201 North Walnut Street, Wilmington,
Delaware 19801, is a professional investment counseling firm founded in 1986.
Brandywine is a wholly owned subsidiary of Legg Mason, Inc. Brandywine's
investment process involves both fundamental screening to identify stocks that
are undervalued and fundamental analysis to identify undervalued stocks which
have the ability to return to normal value. As of XXXXXX 31, 1998, Brandywine
had assets under management totaling approximately $X.X billion, including
approximately $X.X million of assets of AMR and its subsidiaries and affiliated
entities. The Manager has agreed to pay Brandywine an annualized fee equal to
0.50% on the first $100 million in Portfolio assets under its discretionary
management, 0.45% for assets ranging from $100 million to $250 million, and
0.40% on assets over $250 million.

HOTCHKIS AND WILEY, 725 South Figueroa # 4000, Los Angeles, California
90017, is a professional investment counseling firm which was founded in 1980 by
John F. Hotchkis and George Wiley. Hotchkis is a division of the Capital
Management Group of Merrill Lynch Asset Management, L.P., a wholly owned
indirect subsidiary of Merrill Lynch & Co., Inc. Hotchkis focuses on time proven
investment disciplines and extensive fundamental research to identify
significantly undervalued companies where, in their opinion, actual value
exceeds current market price. As of XXXXXXX 31, 1998, Hotchkis had assets under
management totaling approximately $X.X billion, which included approximately
$X.X billion of assets of AMR and its subsidiaries and affiliated entities.
Hotchkis will be paid an annualized fee equal to 0.5625% of Portfolio assets
under its discretionary management.

VALUATION OF SHARES

The price of Fund shares is based on the Fund's net asset value
("NAV"). The NAV of the Fund is computed by adding total assets, subtracting all
of the Fund's liabilities, and dividing the result by the total number of shares
outstanding. The Fund's investments are valued based on market value. Securities
for which market quotations are not readily available are valued at fair value,
as determined in good faith and pursuant to procedures approved by the AMR Trust
Board. The NAV of AMR Class shares will be determined based on a pro rata
allocation of investment income, expenses and total capital gains and losses.
The Fund's NAV is determined as of the close of the New York Stock Exchange
("Exchange"), generally 4:00 p.m. Eastern time, on each day it is open for
business.

DISTRIBUTION OF FUND SHARES

The Trust does not incur any direct distribution expenses related to
Institutional Class shares. However, the Trust has adopted a Distribution Plan
in accordance with Rule 12b-1 under the Investment Company Act of 1940 which
authorizes the use of any fees received by the Manager in accordance with the
Administrative Services and Management Agreements and any fees received by the
investment advisers pursuant to their Advisory Agreements with the Manager, to
be used for distribution purposes.

6
<PAGE> 9

ABOUT YOUR INVESTMENT

PURCHASE AND REDEMPTION OF SHARES

ELIGIBILITY

AMR Class shares are offered without a sales charge to tax exempt
retirement and benefit plans of AMR Corporation and its affiliates.

PURCHASE POLICIES

Shares of the Fund are offered and purchase orders accepted until the
close of the Exchange, generally 4:00 p.m. Eastern time, on each day on which
the Exchange is open for trading. If a purchase order is accepted and payment is
received prior to the deadline, the purchase price will be the NAV per share
next determined on that day. If a purchase order is accepted or payment is
received after the applicable deadline, the purchase price will be the NAV of
the following day that the Fund is open for business. Checks to purchase shares
are accepted subject to collection at full face value in U.S. funds and must be
drawn in U.S. dollars on a U.S. bank. The Fund reserves the right to reject any
order for the purchase of shares and to limit or suspend, without prior notice,
the offering of shares. Shares purchased through financial intermediaries may be
subject to transaction fees. No sales charges are assessed on the purchase or
sale of Fund shares.

OPENING AN ACCOUNT

A completed, signed application is required to open an account. Prospective
investors may request an application form by calling (800) 492-9063.

Complete the application, sign it and:

Mail to: or Fax to:
State Street Bank & Trust Co. (817) 967-0768
P.O. Box 1978
Boston, MA 02105-1978
Attn: American AAdvantage Funds

7
<PAGE> 10

HOW TO PURCHASE SHARES

<TABLE>
<CAPTION>
To Make an Initial Purchase To Add to an Existing Account
<S> <C>
BY CHECK-----------------------------------------------------------------------------------------------------------
Mail check to: Include shareholder's account number and name of the
Fund on the check. Mail check to:

State Street Bank & Trust Co. State Street Bank & Trust Co.
P.O. Box 1978 P.O. Box 1978
Boston, MA 02105-1978 Boston, MA 02105-1978
Attn: American AAdvantage Funds Attn: American AAdvantage Funds

BY WIRE------------------------------------------------------------------------------------------------------------
Send a bank wire to State Street Bank & Trust Co. Send a bank wire to State Street Bank & Trust Co. with
with these instructions: these instructions:
ABA# 0110-0002-8; AC-0002-888-6 ABA# 0110-0002-8; AC-0002-888-6
Attn: AAdvantage Funds-AMR Class Attn: AAdvantage Funds-AMR Class
Small Cap Value Fund Small Cap Value Fund
Call (800) 492-9063 to announce an incoming wire Call (800) 492-9063 to announce an incoming wire

BY EXCHANGE--------------------------------------------------------------------------------------------------------
Fund shares may be purchased by exchange from another
American AAdvantage Fund if the shareholder has owned
AMR Class shares of the other American AAdvantage Fund
for at least 15 days. Send a written request to the
address above or call (800) 492-9063 to exchange shares.
</TABLE>

REDEMPTION POLICIES

Fund shares may be redeemed by telephone or mail on any day that the
Fund is open for business. The redemption price will be the NAV next determined
after a redemption order is received in good order. Proceeds from redemption
orders received by 4:00 p.m. Eastern time generally will be transmitted to
shareholders on the next day that the Fund is open for business and by no later
than seven days after the receipt of a redemption request in good order.

The Fund, its officers, trustees, directors, employees, or agents are
not responsible for the authenticity of instructions provided by telephone, nor
for any loss, liability, cost or expense incurred for acting on them. The Fund
employs procedures reasonably designed to confirm that instructions communicated
by telephone are genuine.

The Fund reserves the right to suspend redemptions or postpone the date
of payment:
o when the Exchange is closed (other than for customary weekend
and holiday closings)
o when trading on the Exchange is restricted
o when the SEC determines that an emergency exists so that
disposal of the Fund's investments or determination of its NAV
is not reasonably practicable
o by order of the SEC for protection of the Fund's shareholders.

Shares purchased by check may not be redeemed until the check has
cleared, which may take up to 15 days. Shares redeemed through financial
intermediaries may be subject to transaction fees. Although the Fund intends to
redeem shares in cash, it reserves the right to pay the redemption price in
whole or in part by a distribution of readily marketable securities held by the
Portfolio.

If a shareholder's account balance falls below $500, the Fund may ask
the shareholder to increase the balance. If the account balance remains below
$500 after 45 days, the Fund may close the account and send the shareholder the
proceeds.

8
<PAGE> 11

HOW TO SELL SHARES

<TABLE>
<S> <C>
BY MAIL------------------------------------------------------------------------------------------------------------
Write a letter of instruction including
o the Fund name (American AAdvantage Small
Cap Fund-AMR Class)
o shareholder account number
o shares or dollar amount to be sold
o authorized signature
o how and where to send the proceeds
Mail to:
State Street Bank & Trust Co.
P.O. Box 1978
Boston, MA 02105-1978
Attn: American AAdvantage Funds

BY TELEPHONE-------------------------------------------------------------------------------------------------------
Call (800) 492-9063 to request a redemption. Proceeds from redemptions placed by telephone
generally will be transmitted by wire only, as
instructed on the Fund application.
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Shares of the Fund may be redeemed in exchange for another American AAdvantage
Fund if the shareholder has owned shares of the Fund for at least 15 days. Send
a written request to the address above or call (800) 492-9063 to exchange
shares.
</TABLE>

DISTRIBUTIONS AND TAXES

The Fund expects that its distributions, as a result of its investment
objectives and strategies, will consist primarily of net capital gains and
dividends from its net investment income. Usually, distributions received from
the Fund will be taxable, regardless of how long an investor has been a
shareholder or whether distributions are reinvested. Distributions in the form
of net capital gains may be taxable at different rates, depending on the length
of time the Fund holds its assets.

Each of the Fund's distributions is paid annually. Unless the account
application instructs otherwise, distributions will be reinvested in additional
Fund shares. An exchange of the Fund's shares for shares of another American
AAdvantage Fund will be treated as a sale of the Fund's shares, and any gain on
the transaction will be subject to federal income tax.

The qualified retirement and benefit plans of AMR Corporation and its
affiliates ("Plans") pay no federal income tax. Individual participants in the
Plans should consult the Plans' governing documents and their own tax advisers
for information on the tax consequences associated with participating in the
Plans.

This is only a summary of some of the important tax considerations that
may affect Fund shareholders. Shareholders should consult their tax adviser
regarding specific questions as to the effect of federal, state or local income
taxes on an investment in the Fund.

9
<PAGE> 12

ADDITIONAL INFORMATION

MASTER-FEEDER STRUCTURE

The Fund operates under a master-feeder structure. This means that the
Fund is a "feeder" fund that invests all of its investable assets in a "master"
fund with the same investment objective. The "master" fund purchases securities
for investment. The master-feeder structure works as follows:

-------------------------
Investor
-------------------------

purchases shares of

-------------------------
Feeder Fund
-------------------------

which invests in

-------------------------
Master Fund
-------------------------

which buys

-------------------------
Investment Securities
-------------------------

The Fund invests all of its investable assets in the Small Cap Value
Portfolio of the AMR Trust. The Fund can withdraw its investment in the
Portfolio at any time if the Board determines that it is in the best interest of
the Fund and its shareholders to do so. If this happens, the Fund's assets will
be invested according to the investment policies and restrictions described in
this Prospectus.

YEAR 2000

The Fund could be affected adversely if the computer systems used by
the Manager, the Fund's other service providers, or companies in which the Fund
invests do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. The Manager has taken steps that it
believes are reasonably designed to address the potential failure of computer
systems used by the Manager and the Fund's service providers to address the Year
2000 issue. However, due to the Fund's reliance on various service providers to
perform essential functions, the Fund could have difficulty calculating the NAV,
processing orders for share redemptions and delivering account statements and
other information to shareholders. There can be no assurance that these steps
will be sufficient to avoid any adverse impact.

10
<PAGE> 13

ADDITIONAL INFORMATION

The Statement of Additional Information ("SAI") contains more details
about the Fund and its investment policies. The SAI is incorporated in this
Prospectus by reference (it is legally part of this Prospectus). A current SAI
is on file with the SEC.

To obtain more information about the Funds or to request a free copy of
the SAI:

BY TELEPHONE:
Call (817) 967-3509

BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003

BY E-MAIL:
[email protected]

ON THE INTERNET:
Visit our website at http://www.aafunds.com
Visit the SEC website at http://www.sec.gov

Copies of these documents also may be obtained from the SEC Public
Reference Room in Washington, D.C. The Public Reference Room can be reached at
(800) 732-0330 or by mailing a request, including a duplicating fee to the SEC's
Public Reference Section, 450 5th. Street NW, Washington, D.C. 20549-6009.

Fund Service Providers

Custodian Transfer Agent
--------- --------------
State Street Bank and Trust Company State Street Bank and Trust Company
Boston, Massachusetts Boston, Massachusetts

Independent Auditors Distributor
-------------------- -----------
Ernst & Young LLP Brokers Transaction Services, Inc.
Dallas, Texas Dallas, Texas

[AMERICAN AADVANTAGE FUNDS LOGO]

SEC File Number 811-4984

American AAdvantage Funds is a registered service mark of AMR Corporation.
American AAdvantage Small Cap Value Fund is a service mark of AMR Investment
Services. American Airlines is not responsible for investments made in the
American AAdvantage Funds.

11
<PAGE> 14
[AMERICAN AADVANTAGE FUNDS LOGO]
Small Cap Value Fund
- Institutional Class -

PROSPECTUS

January 1, 1999

Managed by AMR Investment Services, Inc.

<PAGE> 15

TABLE OF CONTENTS

<TABLE>
<CAPTION>
ABOUT THE FUND
<S> <C> <C>
Investment Objectives, Strategies and Risks ..... X

The Manager ..................................... X

The Investment Advisers ......................... X

Valuation of Shares ............................. XX

Distribution of Fund Shares ..................... XX

ABOUT YOUR INVESTMENT
Purchase and Redemption of Shares ............... XX

Distributions and Taxes ......................... XX
ADDITIONAL INFORMATION
Master-Feeder Structure ......................... XX

Year 2000 ....................................... XX

Additional Information .......................... XX
</TABLE>

2
<PAGE> 16

ABOUT THE FUND

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

INVESTMENT OBJECTIVES
Long-term capital appreciation and current income primarily through
investments in U.S. stocks.

PRINCIPAL STRATEGIES

Ordinarily at least 80% of the total assets of the American AAdvantage
Small Cap Value Fund (the "Fund") will be invested in equity securities of
companies with market capitalizations of $1 billion or less at the time of
investment. The Fund's investments may include common stocks, preferred stocks,
securities convertible into common stocks, and U.S. dollar-denominated American
Depositary Receipts (collectively referred to as "stocks").

The investment advisers will select stocks which, in their opinion,
have most or all of the following characteristics:

o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.

RISK FACTORS

3
<PAGE> 17

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

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund(1).

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

(1) The expense table and the Example below reflect the expenses of
both the Fund and the Portfolio.
(2) "Other Expenses" are based on estimates for the current fiscal
year.
(3) The Manager has contractually agreed to waive a portion of its fee
and to reimburse the Fund for other expenses through October 31,
1999 to the extent that Total Operating Expenses exceed 0.99%.

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$101 $315
</TABLE>

PERFORMANCE OF SIMILAR SMALL CAP VALUE ACCOUNT

[CHART]

4
<PAGE> 18

<TABLE>
<S> <C>
Highest Quarterly Return from 1/1/88 through 12/31/97 ....... 29.45%
Lowest Quarterly Return from 1/1/88 through 12/31/97 ........ -36.87%
Year-to-Date Return through 9/30/98 ......................... -22.39%
</TABLE>

THE MANAGER

The Manager provides or oversees all administrative, investment
advisory and portfolio management services to the Fund. The Manager

o develops the investment programs for the Fund,
o selects and changes investment advisers (subject to requisite
approvals),
o allocates assets among investment advisers, monitors the investment
advisers' investment programs and results,
o coordinates the investment activities of the investment advisers to
ensure compliance with regulatory restrictions, and
o oversees the Fund's securities lending activities and any actions taken
by the securities lending agent.

As compensation for providing management services, the Fund pays the
Manager an annualized advisory fee that is calculated and accrued daily, equal
to the sum of 0.10% of the net assets of the Fund, plus all fees paid to the
investment advisers. The Manager also may receive up to 25% of the net annual
interest income or up to 25% of loan fees in regards to security lending
activities. Currently the Manager receives 10% of the net annual interest income
from the investment of cash collateral and 10% of the loan fees posted by
borrowers. In addition to management fees, the Fund pays fees to the Manager for
administrative and management services (other than investment advisory
services). As compensation for these services, the Institutional Class of the
Fund pays a quarterly fee at the annual rate of 0.25% of net assets.

THE INVESTMENT ADVISERS

5
<PAGE> 19

permitted to enter into new or modified investment advisory agreements with
existing or new investment advisers without approval of Fund shareholders, but
subject to approval of the Trust's Board of Trustees ("Board") and the AMR
Investment Services Trust Board ("AMR Trust Board"). The Prospectus will be
supplemented if additional investment advisers are retained or the contract with
any existing investment adviser is terminated.

BRANDYWINE ASSET MANAGEMENT, INC., 201 North Walnut Street, Wilmington,
Delaware 19801, is a professional investment counseling firm founded in 1986.
Brandywine is a wholly owned subsidiary of Legg Mason, Inc. Brandywine's
investment process involves both fundamental screening to identify stocks that
are undervalued and fundamental analysis to identify undervalued stocks which
have the ability to return to normal value. As of XXXXXXXX, 1998, Brandywine had
assets under management totaling approximately $X.X billion, including
approximately $X.X million of assets of AMR and its subsidiaries and affiliated
entities. The Manager has agreed to pay Brandywine an annualized fee equal to
0.50% on the first $100 million in Portfolio assets under its discretionary
management, 0.45% for assets ranging from $100 million to $250 million, and
0.40% on assets over $250 million.

HOTCHKIS AND WILEY, 725 South Figueroa # 4000, Los Angeles, California
90017, is a professional investment counseling firm which was founded in 1980 by
John F. Hotchkis and George Wiley. Hotchkis is a division of the Capital
Management Group of Merrill Lynch Asset Management, L.P., a wholly owned
indirect subsidiary of Merrill Lynch & Co., Inc. Hotchkis focuses on time proven
investment disciplines and extensive fundamental research to identify
significantly undervalued companies where, in their opinion, actual value
exceeds current market price. As of XXXXXXX, 1998, Hotchkis had assets under
management totaling approximately $X.X billion, which included approximately
$X.X billion of assets of AMR and its subsidiaries and affiliated entities.
Hotchkis will be paid an annualized fee equal to 0.5625% of Portfolio assets
under its discretionary management.

VALUATION OF SHARES

The price of Fund shares is based on the Fund's net asset value
("NAV"). The NAV of the Fund is computed by adding total assets, subtracting all
of the Fund's liabilities, and dividing the result by the total number of shares
outstanding. The Fund's investments are valued based on market value. Securities
for which market quotations are not readily available are valued at fair value,
as determined in good faith and pursuant to procedures approved by the AMR Trust
Board. The NAV of Institutional Class shares will be determined based on a pro
rata allocation of investment income, expenses and total capital gains and
losses. The Fund's NAV is determined as of the close of the New York Stock
Exchange ("Exchange"), generally 4:00 p.m. Eastern time, on each day it is open
for business.

DISTRIBUTION OF FUND SHARES

6
<PAGE> 20

ABOUT YOUR INVESTMENT

PURCHASE AND REDEMPTION OF SHARES

ELIGIBILITY

Institutional Class shares are offered without a sales charge to
investors who make an initial investment of at least $2 million, including :

o agents or fiduciaries acting on behalf of their clients (such
as employee benefit plans, personal trusts and other accounts
for which a trust company or financial advisor acts as agent
or fiduciary);
o endowment funds and charitable foundations;
o employee welfare plans which are tax-exempt under Section
501(c)(9) of the Internal Revenue Code of 1986, as amended
("Code");
o qualified pension and profit sharing plans,
o cash and deferred arrangements under Section 401(k) of the
Code;
o corporations; and
o other investors who make an initial investment of at least $2
million.

The Manager may allow a reasonable period of time after opening an
account for an investor to meet the initial investment requirement. In addition,
for investors such as trust companies and financial advisors who make
investments for a group of clients, the minimum initial investment can be met
through an aggregated purchase order for more than one client.

PURCHASE POLICIES

OPENING AN ACCOUNT

A completed, signed application is required to open an account. You may request
an application form by:

o calling (800) 967-9009, or

o visiting the Funds' website, http://www.aafunds.com and downloading an
account application.

Complete the application, sign it and:

Mail to: or Fax to:
American AAdvantage Funds (817) 967-0768 or (817) 931-4331
P.O. Box 619003, MD 5645
DFW Airport, TX 75261-9003

7
<PAGE> 21

HOW TO PURCHASE SHARES

American AAdvantage Funds American AAdvantage Funds
P.O. Box 419643 P.O. Box 419643
Kansas City, MO 64141-6643 Kansas City, MO 64141-6643

BY WIRE------------------------------------------------------------------------------------------------------------
Send a bank wire to State Street Bank & Trust Co. Send a bank wire to State Street Bank & Trust Co. with
with these instructions: these instructions:
ABA# 0110-0002-8; AC-9905-342-3 ABA# 0110-0002-8; AC-9905-342-3
Attn: AAdvantage Funds-Institutional Class Attn: AAdvantage Funds-Institutional Class
Small Cap Value Fund Small Cap Value Fund
Call (800) 658-5811 to announce an incoming wire Call (800) 658-5811 to announce an incoming wire

BY EXCHANGE--------------------------------------------------------------------------------------------------------
Fund shares may be purchased by exchange from the
another American AAdvantage Fund if the shareholder
has owned shares of the other American AAdvantage Fund
for at least 15 days. Send a written request to the
address above or call (800) 658-5811 to exchange shares.
</TABLE>

REDEMPTION POLICIES

8
<PAGE> 22

HOW TO SELL SHARES

<TABLE>
<S> <C>
BY MAIL------------------------------------------------------------------------------------------------------------
Write a letter of instruction including Other supporting documents may be required for
o the Fund name (American AAdvantage Small estates, trusts, guardianships, custodians,
o Cap Fund-Institutional Class) corporations, IRAs and welfare, pension and
o shareholder account number profit-sharing plans. Call (800) 658-5811 for
o shares or dollar amount to be sold instructions.
o authorized signature
o how and where to send the proceeds
Mail to:
American AAdvantage Funds
P.O. Box 419643
Kansas City, MO 64141-6643

BY TELEPHONE-------------------------------------------------------------------------------------------------------
Call (800) 658-5811 to request a redemption. Proceeds from redemptions placed by telephone
generally will be transmitted by wire only, as
instructed on the Fund application.
BY
EXCHANGE-----------------------------------------------------------------------------------------------------------
Shares of the Fund may be redeemed in exchange for another American AAdvantage
Fund if the shareholder has owned shares of the Fund for at least 15 days. Send
a written request to the address above or call (800) 658-5811 to exchange
shares.
</TABLE>

DISTRIBUTIONS AND TAXES

9
<PAGE> 23

ADDITIONAL INFORMATION

MASTER-FEEDER STRUCTURE

-------------------------
Investor
-------------------------

purchases shares of

-------------------------
Feeder Fund
-------------------------

which invests in

-------------------------
Master Fund
-------------------------

which buys

-------------------------
Investment Securities
-------------------------

YEAR 2000

10
<PAGE> 24

ADDITIONAL INFORMATION

To obtain more information about the Funds or to request a free copy of
the SAI:

BY TELEPHONE:
Call (817) 967-3509

BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003

BY E-MAIL:
[email protected]

ON THE INTERNET:
Visit our website at http://www.aafunds.com
Visit the SEC website at http://www.sec.gov

Fund Service Providers

Custodian Transfer Agent
--------- --------------
State Street Bank and Trust Company National Financial Data Services
Boston, Massachusetts Kansas City, Missouri

Independent Auditors Distributor
-------------------- -----------
Ernst & Young LLP Brokers Transaction Services, Inc.
Dallas, Texas Dallas, Texas

[AMERICAN AADVANTAGE FUNDS LOGO]

SEC File Number 811-4984

11
<PAGE> 25

STATEMENT OF ADDITIONAL INFORMATION

AMERICAN AADVANTAGE SMALL CAP VALUE FUND(SM)

-- AMR CLASS(SM) --
-- INSTITUTIONAL CLASS --

JANUARY 1, 1999

The American AAdvantage Small Cap Value Fund(SM) (the "Fund") is one of
ten separate investment portfolios of the American AAdvantage Funds (the
"Trust") a no-load, open-end, diversified management investment company
organized as a Massachusetts business trust on January 16, 1987. This Statement
of Additional Information ("SAI") relates to the AMR and Institutional Classes
of the Fund.

The Fund seeks its investment objective by investing all of its
investable assets in a corresponding portfolio of the AMR Investment Services
Trust ("AMR Trust") that has a similar name and an identical investment
objective to the Fund (the "Portfolio"). The AMR Trust is a separate investment
company managed by AMR Investment Services, Inc. (the "Manager").

This SAI should be read in conjunction with an AMR Class or an
Institutional Class prospectus for the Fund, dated January 1, 1999
(individually, a "Prospectus"), copies of which may be obtained without charge
by calling (800) 388-3344 for an Institutional Class Prospectus or (817)
967-3509 for an AMR Class Prospectus.

This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by a current Prospectus.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Non-Principal Investment Strategies and Risks.............................................

Investment Restrictions...................................................................

Trustees and Officers of the Trust and the AMR Trust......................................

Management, Administrative Services and Distribution Fees.................................

Redemptions in Kind.......................................................................

Investment Advisory Agreements............................................................

Portfolio Securities Transactions.........................................................

Net Asset Value...........................................................................

Tax Information...........................................................................

Yield and Total Return Quotations.........................................................

Description of the Trust..................................................................

Other Information.........................................................................
</TABLE>

<PAGE> 26

NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS

In addition to the investment strategies described in the Prospectus,
the Fund may:

1. Invest up to 20% of total assets in debt securities that are
investment grade at the time of purchase, including obligations of the
U.S. Government, its agencies and instrumentalities, corporate debt
securities, mortgage-backed securities, asset-backed securities,
master-demand notes, Yankeedollar and Eurodollar bank certificates of
deposit, time deposits, bankers' acceptances, commercial paper and
other notes, and other debt securities. Investment grade securities
include securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, as well as securities rated in one of
the four highest rating categories by all rating organizations rating
that security (such as Standard & Poor's or Moody's Investor Services,
Inc.). Obligations rated in the fourth highest rating category are
limited to 25% of the Fund's debt allocation. The Fund, at the
discretion of the investment advisers, may retain a debt security that
has been downgraded below the initial investment criteria.

2. Purchase or sell securities on a when-issued or forward commitment
basis.

3. Invest in other investment companies to the extent permitted by the
Investment Company Act of 1940 ("1940 Act") or exemptive relief granted
by the Securities and Exchange Commission ("SEC").

4. Loan securities to broker-dealers or other institutional investors.

5. Enter into repurchase agreements, and

6. Purchase securities in private placement offerings made in reliance
on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act
("Section 4(2) securities").

INVESTMENT RESTRICTIONS

The Fund has the following fundamental investment policy that enables
it to invest in the Portfolio:

Notwithstanding any other limitation, the Fund may invest all of
its investable assets in an open-end management investment company
with substantially the same investment objectives, policies and
limitations as the Fund. For this purpose, "all of the Fund's
investable assets" means that the only investment securities that
will be held by the Fund will be the Fund's interest in the
investment company.

All other fundamental investment policies and the non-fundamental
policies of the Fund and its corresponding Portfolio are identical. Therefore,
although the following discusses the investment policies of the Portfolio and
the AMR Trust's Board of Trustees ("AMR Trust Board"), it applies equally to the
Fund and the Trust's Board of Trustees ("Board").

In addition to the investment limitations noted above, the following
nine restrictions have been adopted by the Portfolio, and may be changed only by
the majority vote of that Portfolio's outstanding interests. "Majority of the
outstanding voting securities" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used herein means, with respect to the
Portfolio, the lesser of (a) 67% of the interests of the Portfolio present at
the meeting if the holders of more than 50% of the interests are present and
represented at the interest holders' meeting or (b) more than 50% of the
interests of the Portfolio. Whenever the Fund is requested to vote on a change
in the investment restrictions of the Portfolio, the Fund will hold a meeting of
its shareholders and will cast its votes as instructed by its shareholders. The
percentage of the Fund's votes representing the Fund's shareholders not voting
will be voted by the Board in the same proportion as the Fund shareholders who
do, in fact, vote.

<PAGE> 27

The Portfolio may not:

1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein when
consistent with the other policies and limitations described in the
Prospectus.

2. Purchase or sell commodities (including direct interests and/or
leases in oil, gas or minerals) or commodities contracts, except with
respect to forward foreign currency exchange contracts, foreign
currency futures contracts and when-issued securities when consistent
with the other policies and limitations described in the Prospectus.

3. Engage in the business of underwriting securities issued by others,
except to the extent that, in connection with the disposition of
securities, the Portfolio may be deemed an underwriter under federal
securities law.

4. Make loans to any person or firm, provided, however, that the making
of a loan shall not be construed to include (i) the acquisition for
investment of bonds, debentures, notes or other evidences of
indebtedness of any corporation or government which are publicly
distributed or (ii) the entry into repurchase agreements and further
provided, however, that each Portfolio may lend its portfolio
securities to broker-dealers or other institutional investors in
accordance with the guidelines stated in the Prospectus.

5. Purchase from or sell portfolio securities to its officers, Trustees
or other "interested persons" of the Trust, as defined in the 1940 Act,
including its investment advisers and their affiliates, except as
permitted by the 1940 Act and exemptive rules or orders thereunder.

6. Issue senior securities except that the Portfolio may engage in
when-issued securities and forward commitment transactions.

7. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed
10% of the value of its total assets at the time of borrowing. In
addition, although not a fundamental policy, the Portfolio intends to
repay any money borrowed before any additional portfolio securities are
purchased. See "Other Information" for a further description regarding
reverse repurchase agreements.

8. Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than obligations issued by the U.S.
Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer, with respect to 75% of
the Portfolio's total assets; or

9. Invest more than 25% of its total assets in the securities of
companies primarily engaged in any one industry, provided that: (i)
this limitation does not apply to obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities; (ii)
municipalities and their agencies and authorities are not deemed to be
industries; and (iii) financial service companies are classified
according to the end users of their services (for example, automobile
finance, bank finance, and diversified finance will be considered
separate industries).

The above percentage limits are based upon asset values at the time of
the applicable transaction; accordingly, a subsequent change in asset values
will not affect a transaction that was in compliance with the investment
restrictions at the time such transaction was effected.

The following non-fundamental investment restrictions may be changed
with respect to the Fund by a vote of a majority of the Board or with respect to
the Portfolio by a vote of a majority of the AMR Trust Board. The Portfolio may
not:

1. Invest more than 15% of its net assets in illiquid securities,
including time deposits and repurchase agreements that mature in more
than seven days; or

3
<PAGE> 28

2. Purchase securities on margin, effect short sales (except that the
Portfolio may obtain such short term credits as may be necessary for
the clearance of purchases or sales of securities) or purchase or sell
call options or engage in the writing of such options.

The Portfolio may invest up to 10% of its total assets in the
securities of other investment companies to the extent permitted by law. The
Portfolio may incur duplicate advisory or management fees when investing in
another mutual fund.

TRUSTEES AND OFFICERS OF THE TRUST AND THE AMR TRUST

The Board provides broad supervision over the Trust's affairs. The
Manager is responsible for the management of Trust assets, and the Trust's
officers are responsible for the Trust's operations. The Trustees and officers
of the Trust and AMR Trust are listed below, together with their principal
occupations during the past five years. Unless otherwise indicated, the address
of each person listed below is 4333 Amon Carter Boulevard, MD 5645, Fort Worth,
Texas 76155.

<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ------------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (51) Trustee and President President, AMR Investment Services, Inc. (1986-Present);
Chairman, American Airlines Employees Federal Credit Union
(1989-Present); Trustee, American Performance Funds
(1990-1994); Director, Crescent Real Estate Equities, Inc.
(1994-Present); Trustee, American AAdvantage Mileage Funds
(1995-Present).

Alan D. Feld (61) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP
1700 Pacific Avenue (1960-Present)#; Director, Clear Channel Communications
Suite 4100 (1984-Present); Director, CenterPoint Properties, Inc.
Dallas, Texas 75201 (1994-Present); Trustee, American AAdvantage Mileage Funds
(1996-Present).

Ben J. Fortson (66) Trustee President and CEO, Fortson Oil Company (1958-Present);
301 Commerce Street Director, Kimbell Art Foundation (1964-Present); Director,
Suite 3301 Burnett Foundation (1987-Present); Honorary Trustee, Texas
Fort Worth, Texas 76102 Christian University(1986-Present); Trustee, American
AAdvantage Mileage Funds (1996-Present).

John S. Justin (82) Trustee Chairman and Chief Executive Officer, Justin Industries,
2821 West Seventh Street Inc. (a diversified holding company) (1969-Present);
Fort Worth, Texas 76107 Executive Board Member, Blue Cross/Blue Shield of Texas
(1985-Present); Board Member, Zale Lipshy Hospital (1993-Present);
Trustee, Texas Christian University (1980-Present); Director and
Executive Board Member, Moncrief Radiation Center (1985-Present);
Director, Texas New Mexico Enterprises (1984-1993); Director,
Texas New Mexico Power Company (1979-1993); Trustee, American
AAdvantage Mileage Funds (1995-Present).

Stephen D. O'Sullivan (63) Trustee Consultant (1994-Present); Vice President and Controller
(1985-1994), American Airlines, Inc.; Trustee, American
AAdvantage Mileage Funds (1995-Present).
</TABLE>

4
<PAGE> 29

<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ------------- ----------------------------------------
<S> <C> <C>
Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer of The
6750 LBJ Freeway Staubach Company (a commercial real estate company)
Dallas, Texas 75240 (1982-Present); Director, Halliburton Company
(1991-Present); Director, Brinker International
(1993-Present); Director, International Home Foods, Inc.
(1997-Present); National Advisory Board, The Salvation
Army; Trustee, Institute for Aerobics Research; Member,
Executive Council, Daytop/Dallas; Member, National Board
of Governors, United Way of America; former quarterback of
the Dallas Cowboys professional football team; Trustee,
American AAdvantage Mileage Funds (1995-Present).

Kneeland Youngblood (42) Trustee President, Youngblood Enterprises, Inc. (a private
2305 Cedar Springs Road business management firm) (1983-Present); Trustee,
Suite 401 Teachers Retirement System of Texas (1993-Present);
Dallas, Texas 75201 Director, United States Enrichment Corporation
(1993-Present), Director, Just For the Kids
(1995-Present); Director, Starwood Financial Trust
(1998-Present); Member, Council on Foreign Relations
(1995-Present); Trustee, American AAdvantage Mileage Funds
(1996-Present).

Nancy A. Eckl (36) Vice President Vice President, AMR Investment Services, Inc.
(1990-Present).

Michael W. Fields (45) Vice President Vice President, AMR Investment Services, Inc.
(1988-Present).

Barry Y. Greenberg (35) Vice President and Director, Legal and Compliance, AMR Investment Services,
Assistant Secretary Inc. (1995-Present); Branch Chief (1992-1995) and Staff
Attorney (1988-1992), Securities and Exchange Commission.

Rebecca L. Harris (32) Treasurer Director of Finance (1995-Present), Controller (1991-
1995), AMR Investment Services, Inc.

John B. Roberson (40) Vice President Vice President, AMR Investment Services, Inc.
(1991-Present).

Robert J. Zutz (46) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
Washington, D.C. 20036
</TABLE>

* Mr. Quinn, by virtue of his current position, is deemed to be an
"interested person" of the Trust and AMR Trust as defined by the 1940
Act.

# The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump")
provides legal services to American Airlines, Inc., an affiliate of the
Manager. Mr. Feld has advised the Trusts that he has had no material
involvement in the services provided by Akin, Gump to American Airlines,
Inc. and that he has received no material benefit in connection with
these services. Akin, Gump does not provide legal services to the Manager
or AMR Corporation.

All Trustees and officers as a group own less than 1% of the outstanding
shares of any of the Funds.

As compensation for their service to the Trust and the AMR Trust, the
Independent Trustees and their spouses receive free air travel from American
Airlines, Inc., an affiliate of the Manager. The Trust and the AMR

5
<PAGE> 30

Trust do not pay for these travel arrangements. However, the Trusts compensate
each Trustee with payments in an amount equal to the Trustees' income tax on the
value of this free airline travel. Mr. O'Sullivan, who as a retiree of American
Airlines, Inc. already receives free airline travel, receives compensation
annually of up to three round-trip airline tickets for each of his three adult
children. Trustees are also reimbursed for any expenses incurred in attending
Board meetings. These amounts (excluding reimbursements) are reflected in the
following table for the fiscal year ended October 31, 1998.

<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement From American
Compensation Benefits Accrued as Part Estimated Annual AAdvantage Funds
From the of the Benefits Upon Complex
Name of Trustee Trust Trust's Expenses Retirement (27 Funds)
- --------------- ------------ ------------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
William F. Quinn $ 0 $0 $0 $ 0
Alan D. Feld $XX,XXX $0 $0 $XX,XXX
Ben J. Fortson $XX,XXX $0 $0 $XX,XXX
John S. Justin $XX,XXX $0 $0 $XX,XXX
Stephen D. O'Sullivan $XX,XXX $0 $0 $XX,XXX
Roger T. Staubach $XX,XXX $0 $0 $XX,XXX
Kneeland Youngblood $XX,XXX $0 $0 $XX,XXX
</TABLE>

MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES

The Manager is paid a management fee as compensation for paying
investment advisory fees and for providing the Trust and the AMR Trust with
advisory and asset allocation services. Pursuant to management and
administrative services agreements, the Manager provides the Trust and the AMR
Trust with office space, office equipment and personnel necessary to manage and
administer the Trusts' operations. This includes

o complying with reporting requirements;
o corresponding with shareholders;
o maintaining internal bookkeeping, accounting and auditing services and
o records; and supervising the provision of services to the Trusts by
third parties.

In addition to its oversight of the investment advisers, the Manager
invests the portion of Fund assets which the investment advisers determine to be
allocated to high quality short-term debt obligations.

In addition to the management fee, the Manager is paid an
administrative service fee for providing administrative and management services
(other than investment advisory services) to the Fund. The Manager also receives
compensation for administrative and oversight functions with respect to
securities lending of the Portfolio.

Brokers Transaction Services, Inc. ("BTS"), located at 7001 Preston
Road, Dallas, Texas 75205, is the principal underwriter of the Fund's shares,
and, as such, receives an annualized fee of $50,000 from the Manager for
distributing the shares of the Trust and the American AAdvantage Mileage Funds.

REDEMPTIONS IN KIND

Although the Fund intends to redeem shares in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the Portfolio. However, shareholders
always will be entitled to redeem shares for cash up to the lesser of $250,000
or 1% of the Fund's net asset value during any 90-day period. Redemption in kind
is not as liquid as a cash redemption. In addition, if redemption is made in
kind, shareholders who receive securities and sell them could receive less than
the redemption value of their securities and could incur certain transactions
costs.

INVESTMENT ADVISORY AGREEMENTS

Separate amendments to the existing Investment Advisory Agreements
("Advisory Agreements") with Brandywine Asset Management, Inc. and Hotchkis and
Wiley regarding the Small Cap Fund were approved and will become effective as of
January 1, 1999. The Manager has agreed to pay Brandywine an annualized fee

6
<PAGE> 31

equal to 0.50% on the first $100 million in Portfolio assets under its
discretionary management, 0.45% for assets ranging from $100 million to $250
million, and 0.40% on assets over $250 million. Hotchkis will be paid an
annualized fee equal to 0.5625% of Portfolio assets under its discretionary
management. To the extent that the Fund invests all of its investable assets in
the Portfolio, investment advisers receive a fee on behalf of the Portfolio, and
not the Fund.

Each Advisory Agreement will automatically terminate if assigned, and may
be terminated without penalty at any time by the Manager, by a vote of a
majority of the Trustees or by a vote of a majority of the outstanding voting
securities of the Fund on no less than thirty (30) days' nor more than sixty
(60) days' written notice to the investment adviser, or by the investment
adviser upon sixty (60) days' written notice to the Trust. The Advisory
Agreements will continue in effect provided that annually such continuance is
specifically approved by a vote of the Trustees, including the affirmative votes
of a majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of considering such approval, or by
the vote of shareholders.

The Manager recommends investment advisers to the Board and the AMR Trust
Board based upon its continuing quantitative and qualitative evaluation of the
investment advisers' skill in managing assets using specific investment styles
and strategies. The allocation of assets among investment advisers may be
changed at any time by the Manager. Allocations among investment advisers will
vary based upon a variety of factors, including the overall investment
performance of each investment adviser, the Portfolio's cash flow needs and
market conditions. The Manager need not allocate assets to each investment
adviser designated for a Portfolio. The investment advisers can be terminated
without penalty to the AMR Trust by the Manager, the AMR Trust Board or the
interest holders of the applicable Portfolio. Short-term investment performance,
by itself, is not a significant factor in selecting or terminating an investment
adviser, and the Manager does not expect to recommend frequent changes of
investment advisers.

PORTFOLIO SECURITIES TRANSACTIONS

Each investment adviser will place its own orders to execute securities
transactions which are designed to implement the applicable Portfolio's
investment objective and policies. In placing such orders, each investment
adviser will seek the best available price and most favorable execution. The
full range and quality of services offered by the executing broker or dealer
will be considered when making these determinations. Pursuant to written
guidelines approved by the AMR Trust Board, as appropriate, an investment
adviser of the Portfolio, or its affiliated broker-dealer, may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 of the 1940 Act) for doing so. The Portfolio's turnover
rate, or the frequency of portfolio transactions, will vary from year to year
depending on market conditions and the Portfolio's cash flows. High portfolio
activity increases the Portfolio's transaction costs, including brokerage
commissions and may result in a greater number of taxable transactions.

The Advisory Agreements provide, in substance, that in executing
portfolio transactions and selecting brokers or dealers, the principal objective
of each investment adviser is to seek the best net price and execution
available. It is expected that securities ordinarily will be purchased in the
primary markets, and that in assessing the best net price and execution
available, each investment adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.

In selecting brokers or dealers to execute particular transactions,
investment advisers are authorized to consider "brokerage and research services"
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), provision of statistical quotations (including the quotations necessary
to determine a Portfolio's net asset value), the sale of Trust shares by such
broker-dealer or the servicing of Trust shareholders by such broker-dealer, and
other information provided to the Portfolio, to the Manager and/or to the
investment advisers (or their affiliates), provided, however, that the
investment adviser determines that it has received the best net price and
execution available. The investment advisers are also authorized to cause the
Portfolio to pay a commission to a broker or dealer who provides such brokerage
and research services for executing a portfolio transaction which is in excess
of the amount of the commission another broker or dealer would have charged for
effecting that transaction. The Trustees, the Manager or the investment
advisers, as appropriate, must determine in good faith, however, that such
commission was reasonable in relation to the value of the brokerage

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<PAGE> 32

and research services provided viewed in terms of that particular transaction or
in terms of all the accounts over which the Manager or the investment adviser
exercises investment discretion.

NET ASSET VALUE

Equity securities listed on securities exchanges are valued at the last
quoted sales price on a designated exchange prior to the close of trading on the
Exchange or, lacking any sales, on the basis of the last current bid price prior
to the close of trading on the Exchange. Over-the-counter equity securities are
valued on the basis of the last bid price on that date prior to the close of
trading. Debt securities (other than short-term securities) will normally be
valued on the basis of prices provided by a pricing service and may take into
account appropriate factors such as institution-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. In some cases, the prices of debt
securities may be determined using quotes obtained from brokers. Securities for
which market quotations are not readily available are valued at fair value, as
determined in good faith and pursuant to procedures approved by the AMR Trust
Board for the AMR Trust Portfolios.

TAX INFORMATION

TAXATION OF THE FUNDS

The Fund (which is treated as a separate corporation for these purposes)
intends to qualify as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended. To do so, the Fund must, among other
requirements:

o Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of securities or foreign currencies,
or certain other income, including gains from options, futures or forward
contracts ("Income Requirement");

o Diversify its investments in securities within certain statutory limits
("Diversification Requirement"); and

o Distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, taxable net investment income plus net
short-term capital gain).

The Fund, as an investor in the Portfolio, will be deemed to own a
proportionate share of the Portfolio's assets and to earn the income on that
share for purposes of determining whether the Fund satisfies the Income and
Diversification Requirements. If the Fund failed to qualify as a RIC for any
taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all those distributions as
dividends (that is, ordinary income) to the extent of the Fund's earnings and
profits.

TAXATION OF THE PORTFOLIO

The Portfolio should be classified as a separate partnership for federal
income tax purposes and should not be a "publicly traded partnership." As a
result, the Portfolio should not be subject to federal income tax; instead, each
investor in the Portfolio, such as the Fund, is required to take into account in
determining its federal income tax liability its share of the Portfolio's
income, gains, losses and deductions, without regard to whether it has received
any cash distributions from the Portfolio.

Because, as noted above, the Fund is deemed to own a proportionate share
of the Portfolio's assets and to earn a proportionate share of the Portfolio's
income for purposes of determining whether the Fund satisfies the Income and
Diversification Requirements to qualify as a RIC, the Portfolio intends to
conduct its operations so that the Fund will be able to satisfy those
requirements.

Distributions to the Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) will not result in the Fund's
recognition of any gain or loss for federal income tax purposes, except that (1)
gain will be recognized to the extent any cash that is distributed exceeds the
Fund's basis for its interest in the Portfolio before the distribution, (2)
income or gain will be recognized if the distribution is in liquidation of the
Fund's entire interest in the Portfolio and includes a disproportionate share of
any unrealized receivables held by

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<PAGE> 33

the Portfolio and (3) loss will be recognized if a liquidation distribution
consists solely of cash and/or unrealized receivables. The Fund's basis for its
interest in the Portfolio generally will equal the amount of cash and the basis
of any property the Fund invests in the Portfolio, increased by the Fund's share
of the Portfolio's net income and gains and decreased by (a) the amount of cash
and the basis of any property the Portfolio distributes to the Fund and (b) the
Fund's share of the Portfolio's losses.

TAXATION OF THE FUND'S SHAREHOLDERS

A portion of the dividends from the Fund's investment company taxable
income, whether received in cash or paid in additional Fund shares, may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the Fund's share of the aggregate dividends
received by the Portfolio from U.S. corporations. However, dividends received by
a corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the alternative minimum tax.

The foregoing is only a summary of some of the important federal tax
considerations affecting the Fund and its shareholders and is not intended as a
substitute for careful tax planning. Accordingly, prospective investors are
advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state and local
taxes.

YIELD AND TOTAL RETURN QUOTATIONS

The advertised yields for each class of the Fund are computed by dividing
the net investment income per share earned during a 30-day (or one month) period
less the aggregate fees that are charged to all shareholder accounts of the
class in proportion to the 30-day (or one month) period and the weighted average
size of an account in that class of the Fund by the maximum offering price per
share of the class on the last day of the period, according to the following
formula:
6
YIELD = 2[((a-b)/CD +1) - 1]

where, with respect to a particular class of the Fund, "a" is the dividends and
interest earned during the period; "b" is the sum of the expenses accrued for
the period (net of reimbursement, if any) and the aggregate fees that are
charged to all shareholder accounts in proportion to the 30-day (or one month)
period and the weighted average size of an account in the class; "c" is the
average daily number of class shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per class
share on the last day of the period.

The advertised total return for a class of the Fund is calculated by
equating an initial amount invested in a class of the Fund to the ending
redeemable value, according to the following formula:
n
P(1 + T) = ERV

where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the class; "n" is the number of years involved; and "ERV" is
the ending redeemable value of a hypothetical $1,000 payment made in the class
at the beginning of the investment period covered.

Each class of the Fund also may use "aggregate" total return figures for
various periods which represent the cumulative change in value of an investment
in a class of the Fund for the specific period. Such total returns reflect
changes in share prices of a class of the Fund and assume reinvestment of
dividends and other distributions.

In reports or other communications to shareholders or in advertising
material, each class of the Fund may from time to time compare its performance
with that of other mutual funds in rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar
independent services which monitor the performance of mutual funds or
publications such as the "New York Times," "Barrons" and the "Wall Street
Journal." Each class of the Fund may also compare its performance with various
indices prepared by independent services such as Standard & Poor's, Morgan
Stanley or Lehman Brothers or to unmanaged indices that may assume reinvestment
of dividends but generally do not reflect deductions for administrative and
management costs.

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<PAGE> 34

The Fund may advertise the standard deviation of its returns for various
time periods and compare its standard deviation to that of various indices.
Standard deviation of returns over time is a measure of volatility. It indicates
the spread of the Fund's returns about its central tendency or mean. In theory,
a Fund that is more volatile should receive a higher return in exchange for
taking extra risk. Standard deviation is a well-accepted statistic to gauge the
riskiness of an investment strategy and measure its historical volatility as a
predictor of risk, although the measure is subject to time selection bias.

Advertisements for the Fund may compare the Fund to federally insured
investments such as bank certificates of deposit and credit union deposits,
including the long-term effects of inflation on these types of investments.
Advertisements may also compare the historical rate of return of different types
of investments. Information concerning broker-dealers who sell the Fund may also
appear in advertisements for the Fund, including their ranking as established by
various publications compared to other broker-dealers.

From time to time, the Manager may use contests as a means of promoting
the American AAdvantage Funds. Prizes may include free air travel and/or hotel
accommodations. Listings for the Fund may be found in newspapers under the
heading "Amer AAdvant."

DESCRIPTION OF THE TRUST

Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for its obligations. However, the
Trust's Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss due to shareholder
liability is limited to circumstances in which both inadequate insurance existed
and the Trust itself was unable to meet its obligations. The Trust has not
engaged in any other business.

The Trust currently is comprised of ten separate investment portfolios.
The Fund is currently comprised of two classes of shares, which can be issued in
an unlimited number. Each share represents an equal proportionate beneficial
interest in the Fund and is entitled to one vote. Only shares of a particular
class may vote on matters affecting that class. Only shares of the Fund may vote
on matters affecting the Fund. All shares of the Trust vote on matters affecting
the Trust as a whole. Share voting rights are not cumulative, and shares have no
preemptive or conversion rights. Shares of the Trust are nontransferable. Each
series in the Trust will not be involved in any vote involving a Portfolio in
which it does not invest its assets. Shareholders of all of the series of the
Trust, however, will vote together to elect Trustees of the Trust and for
certain other matters. Under certain circumstances, the shareholders of one or
more series could control the outcome of these votes.

On most issues subjected to a vote of the Portfolio's interest holders,
as required by the 1940 Act, the Fund will solicit proxies from its shareholders
and will vote its interest in the Portfolio in proportion to the votes cast by
the Fund's shareholders. Because the Portfolio interest holder's votes are
proportionate to its percentage interests in the Portfolio, one or more other
Portfolio investors could, in certain instances, approve an action against which
a majority of the outstanding voting securities of the Fund had voted. This
could result in the Fund's redemption of its investment in the Portfolio, which
could result in increased expenses for the Fund. Whenever the shareholders of
the Fund are called to vote on matters related to the Portfolio, the Board shall
vote shares for which they receive no voting instructions in the same proportion
as the shares for which they do receive voting instructions. Any information
received from the Portfolio in the Portfolio's report to shareholders will be
provided to the shareholders of the Fund.

As a Massachusetts business trust, the Trust is not obligated to conduct
annual shareholder meetings. However, the Trust will hold special shareholder
meetings whenever required to do so under the federal securities laws or the
Trust's Declaration of Trust or By-Laws. Trustees can be removed by a
shareholder vote at special shareholder meetings.

The Portfolio utilizes a multi-manager approach designed to reduce
volatility by diversifying assets over multiple investment management firms.
Each adviser is carefully chosen by the Manager through a rigorous screening
process.

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<PAGE> 35

OTHER INFORMATION

American Depositary Receipts (ADRs)-ADRs are depositary receipts for
foreign issuers in registered form traded in U.S. securities markets. These
securities are not denominated in the same currency as the securities into which
they may be converted. Investing in ADRs involves greater risks than are
normally present in domestic investments. There is generally less publicly
available information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. In addition, such companies may use different accounting and
financial standards (and certain currencies may become unavailable for transfer
from a foreign currency), resulting in the Fund's possible inability to convert
immediately into U.S. currency proceeds realized upon the sale of portfolio
securities of the affected foreign companies.

Bank Deposit Notes-Bank deposit notes are obligations of a bank, rather
than bank holding company corporate debt. The only structural difference between
bank deposit notes and certificates of deposit is that interest on bank deposit
notes is calculated on a 30/360 basis as are corporate notes/bonds. Similar to
certificates of deposit, deposit notes represent bank level investments and,
therefore, are senior to all holding company corporate debt.

Bankers' Acceptances-Bankers' acceptances are short-term credit
instruments designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.

Cash Equivalents-Cash equivalents include certificates of deposit, bearer
deposit notes, bankers' acceptances, government obligations, commercial paper,
short-term corporate debt securities and repurchase agreements.

Certificates of Deposit-Certificates of deposit are issued against funds
deposited in an eligible bank (including its domestic and foreign branches,
subsidiaries and agencies), are for a definite period of time, earn a specified
rate of return and are normally negotiable.

Commercial Paper-Commercial paper refers to promissory notes representing
an unsecured debt of a corporation or finance company with a fixed maturity of
no more than 270 days. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.

Debentures-Debentures are unsecured debt securities. The holder of a
debenture is protected only by the general creditworthiness of the issuer.

Derivatives-Generally, a derivative is a financial arrangement, the value
of which is based on, or "derived" from, a traditional security, asset or market
index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses.

Full Faith and Credit Obligations of the U.S. Government-Securities
issued or guaranteed by the U.S. Treasury, backed by the full taxing power of
the U.S. Government or the right of the issuer to borrow from the U.S. Treasury.

Illiquid Securities - Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities that are otherwise not
readily marketable and repurchase agreements having a remaining maturity of
longer than seven calendar days. Securities that have not been registered under
the 1933 Act are referred to as private placements or restricted securities and
are purchased directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the

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<PAGE> 36

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 redemptions within
seven calendar days. A mutual fund also might 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 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. However, the
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.

Loan Participation Interests-Loan participation interests represent
interests in bank loans made to corporations. The contractual arrangement with
the bank transfers the cash stream of the underlying bank loan to the
participating investor. Because the issuing bank does not guarantee the
participations, they are subject to the credit risks generally associated with
the underlying corporate borrower. In addition, because it may be necessary
under the terms of the loan participation for the investor to assert through the
issuing bank such rights as may exist against the underlying corporate borrower,
in the event the underlying corporate borrower fails to pay principal and
interest when due, the investor may be subject to delays, expenses and risks
that are greater than those that would have been involved if the investor had
purchased a direct obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation, the investor may be
regarded as a creditor of the issuing bank (rather than of the underlying
corporate borrower), so that the issuer may also be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the bankruptcy or
insolvency of the corporate borrower, the loan participation may be subject to
certain defenses that can be asserted by such borrower as a result of improper
conduct by the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations purchased by the
investor are regarded as illiquid.

Loan Transactions-Loan transactions involve the lending of securities to
a broker-dealer or institutional investor for its use in connection with short
sales, arbitrages or other security transactions. The purpose of a qualified
loan transaction is to afford a lender the opportunity to continue to earn
income on the securities loaned and at the same time earn fee income or income
on the collateral held by it.

Securities loans will be made in accordance with the following
conditions: (1) the Portfolio must receive at least 100% collateral in the form
of cash or cash equivalents, securities of the U.S. Government and its agencies
and instrumentalities, and approved bank letters of credit; (2) the borrower
must increase the collateral whenever the market value of the loaned securities
(determined on a daily basis) rises above the level of collateral; (3) the
Portfolio must be able to terminate the loan after notice, at any time; (4) the
Portfolio must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest or other
distributions on the securities loaned, and any increase in market value of the
loaned securities; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the securities loaned may
pass to the borrower, provided, however, that if a material event affecting the
investment occurs, the AMR Trust Board must be able to terminate the loan and
vote proxies or enter into an alternative arrangement with the borrower to
enable the AMR Trust Board to vote proxies.

Securities loans will not be made if, as a result, the aggregate amount
of all outstanding securities loans by the Portfolio exceeds 33 1/3% of its
total assets (including the market value of collateral received). For purposes
of complying with the Portfolio's investment policies and restrictions,
collateral received in connection with securities loans is deemed an asset of
the Portfolio to the extent required by law. The Manager receives compensation
for administrative and oversight functions with respect to securities lending.
The amount of such compensation depends on the income generated by the loan of
the securities. The SEC has granted exemptive relief that permits the Portfolio
to invest cash collateral received from securities lending transactions in
shares of one or more private investment companies managed by the Manager.
Subject to receipt of exemptive relief from the SEC, the Portfolio also may
invest cash collateral received from securities lending transactions in shares
of one or more registered investment companies managed by the Manager.

The Portfolio continues to receive interest on the securities loaned and
simultaneously earns either interest on the investment of the cash collateral or
fee income if the loan is otherwise collateralized. While there may be delays in
recovery of loaned securities or even a loss of rights in collateral supplied
should the

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<PAGE> 37

borrower fail financially, loans will be made only to firms deemed by the AMR
Trust Board to be of good financial standing and will not be made unless the
consideration to be earned from such loans would justify the risk. If the
borrower of the securities fails financially, there is a risk of delay in
recovery of the securities loaned or loss of rights in the collateral. Such loan
transactions are referred to in this Statement of Additional Information as
"qualified" loan transactions.

Mortgage-Backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.

Collateralized Mortgage Obligations ("CMOs")-CMOs and interests in
real estate mortgage investment conduits ("REMICs") are debt securities
collateralized by mortgages, or mortgage pass-through securities. CMOs divide
the cash flow generated from the underlying mortgages or mortgage pass-through
securities into different groups referred to as "tranches," which are then
retired sequentially over time in order of priority. The principal governmental
issuers of such securities are the Federal National Mortgage Association
("FNMA"), a government sponsored corporation owned entirely by private
stockholders and the Federal Home Loan Mortgage Corporation ("FHLMC"), a
corporate instrumentality of the United States created pursuant to an act of
Congress which is owned entirely by Federal Home Loan Banks. The issuers of CMOs
are structured as trusts or corporations established for the purpose of issuing
such CMOs and often have no assets other than those underlying the securities
and any credit support provided. A REMIC is a mortgage securities vehicle that
holds residential or commercial mortgages and issues securities representing
interests in those mortgages. A REMIC may be formed as a corporation,
partnership, or segregated pool of assets. The REMIC itself is generally exempt
from federal income tax, but the income from the mortgages is reported by
investors. For investment purposes, interests in REMIC securities are virtually
indistinguishable from CMOs.

Mortgage Pass-Through Certificates-Mortgage pass-through certificates
are issued by governmental, government-related and private organizations which
are backed by pools of mortgage loans.

(1) Government National Mortgage Association ("GNMA") Mortgage
Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. Ginnie Maes
represent an undivided interest in a pool of mortgages that are insured by the
Federal Housing Administration or the Farmers Home Administration or guaranteed
by the Veterans Administration. Ginnie Maes entitle the holder to receive all
payments (including prepayments) of principal and interest owed by the
individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the mortgage pool and passes through the monthly mortgage payments to
the certificate holders (typically, a mortgage banking firm), regardless of
whether the individual mortgagor actually makes the payment. Because payments
are made to certificate holders regardless of whether payments are actually
received on the underlying mortgages, Ginnie Maes are of the "modified
pass-through" mortgage certificate type. The GNMA is authorized to guarantee the
timely payment of principal and interest on the Ginnie Maes. The GNMA guarantee
is backed by the full faith and credit of the United States, and the GNMA has
unlimited authority to borrow funds from the U.S. Treasury to make payments
under the guarantee. The market for Ginnie Maes is highly liquid because of the
size of the market and the active participation in the secondary market of
security dealers and a variety of investors.

(2) FHLMC Mortgage Participation Certificates ("Freddie Macs")-Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgages underwritten and owned by the FHLMC. Freddie Macs entitle
the holder to timely payment of interest, which is guaranteed by the FHLMC. The
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where the FHLMC has not
guaranteed timely payment of principal, the FHLMC may remit the amount due
because of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for Freddie
Macs is highly liquid because of the size of the market and the active
participation in the secondary market of the FHLMC, security dealers and a
variety of investors.

(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes")-Fannie Maes represent an undivided interest in a pool of conventional
mortgage loans secured by first mortgages or deeds of trust, on one family or
two to four family, residential properties. The FNMA is obligated to distribute
scheduled monthly installments of principal and interest on the mortgages in the
pool, whether or not received, plus full principal of

13
<PAGE> 38

any foreclosed or otherwise liquidated mortgages. The obligation of the FNMA
under its guarantee is solely its obligation and is not backed by, nor entitled
to, the full faith and credit of the United States.

(4) Mortgage-Related Securities Issued by Private Organizations-Pools
created by non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or
indirect government guarantees of payments in such pools. However, timely
payment of interest and principal of these pools is often partially supported by
various enhancements such as over-collateralization and senior/subordination
structures and by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance. The insurance and guarantees are issued
by government entities, private insurers or the mortgage poolers. Although the
market for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable.

Ratings of Long-Term Obligations-The Portfolio utilizes ratings provided
by the following nationally recognized statistical rating organizations ("Rating
Organizations") in order to determine eligibility of long-term obligations.

The four highest Moody's Investors Service, Inc. ("Moody's") ratings for
long-term obligations (or issuers thereof) are Aaa, Aa, A and Baa. Obligations
rated Aaa are judged by Moody's to be of the best quality. Obligations rated Aa
are judged to be of high quality by all standards. Together with the Aaa group,
such debt comprises what is generally known as high-grade debt. Moody's states
that debt rated Aa is rated lower than Aaa debt because margins of protection or
other elements make long-term risks appear somewhat larger than for Aaa debt.
Obligations which are rated A by Moody's possess many favorable investment
attributes and are considered "upper medium-grade obligations." Obligations
which are rated Baa by Moody's are considered to be medium grade obligations,
i.e., they are neither highly protected or 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. Moody's also supplies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.

The four highest Standard & Poor's ratings for long-term obligations are
AAA, AA, A and BBB. Obligations rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong. Obligations rated AA have a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a small
degree. Obligations rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions. Obligations rated BBB by
Standard & Poor's are regarded as having 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.

Duff & Phelps' four highest ratings for long-term obligations are AAA,
AA, A and BBB. Obligations rated AAA have the highest credit quality with risk
factors being negligible. Obligations rated AA are of high credit quality and
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions. Obligations rated A have average but
adequate protection factors. However, risk factors are more variable and greater
in periods of economic stress. Obligations rated BBB have below average
protection factors with considerable variability in risk during economic cycles,
but are still considered sufficient for prudent investment.

Thomson BankWatch ("BankWatch") long-term debt ratings apply to specific
issues of long-term debt and preferred stock. They specifically assess the
likelihood of an untimely repayment of principal or interest over the term to
maturity of the rated instrument. BankWatch's four highest ratings for long-term
obligations are AAA, AA, A and BBB. Obligations rated AAA indicate that the
ability to repay principal and interest on a timely basis is very high.
Obligations rated AA indicate a superior ability to repay principal and interest
on a timely basis, with limited incremental risk compared to issues rated in the
highest category. Obligations rated A indicate the ability to repay principal
and interest is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB is the lowest investment grade category and indicates an acceptable capacity
to repay principal and interest. Issues rated BBB are, however, more vulnerable
to adverse developments (both internal and external) than obligations with
higher ratings.

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<PAGE> 39

Fitch IBCA, Inc. ("Fitch") investment grade bond ratings provide a guide
to investors in determining the credit risk associated with a particular
security. The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt in a timely
manner. Obligations rated AAA are 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 reasonable
foreseeable events. Bonds rated AA are 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. Bonds
rated A are 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. Bonds rated BBB are 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.

Standard & Poor's, Duff & Phelps and Fitch apply indicators, such as
"+","-," or no character, to indicate relative standing within the major rating
categories.

Ratings of Short-Term Obligations-The rating P-1 is the highest
short-term rating assigned by Moody's. Among the factors considered by Moody's
in assigning ratings are the following: (1) evaluations of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.

Short-term obligations (or issuers thereof) rated A-1 by Standard &
Poor's have the following characteristics. Liquidity ratios are adequate to meet
cash requirements. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's short-term obligation is rated
A-1, A-2, or A-3.

The distinguishing feature of Duff & Phelps Credit Ratings' short-term
rating is the refinement of the traditional 1 category. The majority of
short-term debt issuers carry the highest rating, yet quality differences exist
within that tier. Obligations rated D-1+ indicate the highest certainty of
timely payment. Safety is just below risk-free U.S. Treasury obligations.
Obligations rated D-1 have a very high certainty of timely payment. Risk factors
are minor. Obligations rated D-1- have a high certainty of timely payment. Risk
factors are very small. Obligations rated D-2 have 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.

Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or interest.
Obligations rated TBW-1 indicate a very high likelihood that principal and
interest will be paid on a timely basis. While the degree of safety regarding
timely payment of principal and interest is strong for an obligation rated
TBW-2, the relative degree of safety is not as high as for issues rated TBW-1.

Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. A rating of F-1+ indicates exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment. Obligations rated F-1 have very strong credit
quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2
indicate good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.

Repurchase Agreements-A repurchase agreement, which provides a means to
earn income on funds for periods as short as overnight, is an arrangement under
which the purchaser (e.g., a Portfolio) purchases

15
<PAGE> 40

securities and the seller agrees, at the time of sale, to repurchase the
securities at a specified time and price. The repurchase price will be higher
than the purchase price, the difference being income to the purchaser, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to the purchaser together with the repurchase price on repurchase. In either
case, the income to the purchaser is unrelated to the interest rate on the
securities subject to the repurchase agreement.

Each Portfolio may enter into repurchase agreements with any bank or
registered broker-dealer who, in the opinion of the AMR Trust Board presents a
minimum risk of bankruptcy during the term of the agreement based upon
guidelines that periodically are reviewed by the AMR Trust Board. Each Portfolio
may enter into repurchase agreements as a short-term investment of its idle cash
in order to earn income. The securities will be held by a custodian (or agent)
approved by the AMR Trust Board during the term of the agreement. However, if
the market value of the securities subject to the repurchase agreement becomes
less than the repurchase price (including interest), the Portfolio will direct
the seller of the securities to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price.

In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before the repurchase of the
securities under a repurchase agreement, a Portfolio may encounter a delay and
incur costs before being able to sell the security being held as collateral.
Delays may involve loss of interest or decline in price of the securities. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the securities, in which case a Portfolio
may incur a loss if the proceeds to the Portfolio from the sale of the
securities to a third party are less than the repurchase price.

Reverse Repurchase Agreements-The Portfolios may borrow funds for
temporary purposes by entering into reverse repurchase agreements. Pursuant to
such agreements, a Portfolio would sell portfolio securities to financial
institutions such as banks and broker/dealers and agree to repurchase them at a
mutually agreed-upon date and price. The Portfolios intend to enter into reverse
repurchase agreements only to avoid selling securities to meet redemptions
during market conditions deemed unfavorable by the investment adviser possessing
investment authority. At the time a Portfolio enters into a reverse repurchase
agreement, it will place in a segregated custodial account assets such as liquid
high quality debt securities having a value not less than 100% of the repurchase
price (including accrued interest), and will subsequently monitor the account to
ensure that such required value is maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the price at which such Portfolio is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings by an
investment company under the 1940 Act.

Rights and Warrants-Rights are short-term warrants issued in conjunction
with new stock issues. Warrants are options to purchase an issuer's securities
at a stated price during a stated term. There is no specific limit on the
percentage of assets a Portfolio may invest in rights and warrants, although the
ability of some of the Portfolios to so invest is limited by their investment
objectives or policies.

Section 4(2) Securities- Section 4(2) securities are restricted as to
disposition under the federal securities laws, and generally are sold to
institutional investors, such as the Portfolio, that agree they are purchasing
the securities for investment and not with an intention to distribute to the
public. Any resale by the purchaser must be pursuant to an exempt transaction
and may be accomplished in accordance with Rule 144A. Section 4(2) securities
normally are resold to other institutional investors through or with the
assistance of the issuer or dealers that make a market in the Section 4(2)
securities, thus providing liquidity.

The AMR Trust Board and the applicable investment adviser will carefully
monitor the Portfolio's investments in Section 4(2) securities offered and sold
under Rule 144A, focusing on such important factors, among others, as valuation,
liquidity, and availability of information. Investments in Section 4(2)
securities could have the effect of reducing the Portfolio's liquidity to the
extent that qualified institutional buyers no longer wish to purchase these
restricted securities.

Separately Traded Registered Interest and Principal Securities and Zero
Coupon Obligations-Separately traded registered interest and principal
securities or "STRIPS" and zero coupon obligations are securities that do not
make regular interest payments. Instead they are sold at a discount from their
face value. Each Portfolio will take into account as income a portion of the
difference between these obligations' purchase prices and their

16
<PAGE> 41

face values. Because they do not pay coupon income, the prices of STRIPS and
zero coupon obligations can be very volatile when interest rates change. STRIPS
are zero coupon bonds issued by the U.S. Treasury.

U.S. Government Securities-U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.

U. S. Government agencies or instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.

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 are
supported 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 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.

U.S. Treasury Obligations-U.S. Treasury obligations include bills, notes
and bonds issued by the U.S. Treasury and Separately Traded Registered Interest
and Principal component parts of such obligations known as STRIPS.

When-Issued and Forward Commitment Transactions- For purchases on a
when-issued basis, the price of the security is fixed at the date of purchase,
but delivery of and payment for the securities is not set until after the
securities are issued (generally one to two months later). The value of
when-issued securities is subject to market fluctuation during the interim
period and no income accrues to a Portfolio until settlement takes place.
Forward commitment transactions involve a commitment to purchase or sell
securities with payment and delivery to take place at some future date, normally
one to two months after the date of the transaction. The payment obligation and
interest rate are fixed at the time the buyer enters into the forward
commitment. Forward commitment transactions are typically used as a hedge
against anticipated changes in interest rates and prices. The Portfolio
maintains with the Custodian a segregated account containing high grade liquid
securities in an amount at least equal to the when-issued or forward commitment
transaction. Forward commitment transactions are executed for existing
obligations, whereas in a when-issued transaction, the obligations have not yet
been issued. When entering into a when-issued or forward commitment transaction,
the Portfolio will rely on the other party to consummate the transaction; if the
other party fails to do so, the Portfolio may be disadvantaged.

17
<PAGE> 42
AMERICAN AADVANTAGE FUNDS

PART C. OTHER INFORMATION

Item 23. Exhibits

(a) Declaration of Trust - (iv)

(b) Bylaws - (iv)

(d)(i)(A) Fund Management Agreement between American AAdvantage Funds
and AMR Investment Services, Inc. dated April 3, 1987 - (iv)

(i)(B) Supplement to Fund Management Agreement dated October 1, 1990
- (iv)

(i)(C) Supplement to Fund Management Agreement dated August 1, 1994 -
(iv)

(i)(D) Supplement to Fund Management Agreement dated August 1, 1995 -
(iv)

(i)(E) Amendment to Schedule A of Fund Management Agreement dated
December 1, 1995 - (i)

(i)(F) Supplement to Fund Management Agreement dated December 16,
1996 - (ii)

(i)(G) Supplement to Fund Management Agreement dated July 15, 1997
- (iii)

(i)(H) Amendment to Schedule A of Fund Management Agreement dated
September 1, 1998 - filed herewith

(ii)(A) Investment Advisory Agreement between AMR Investment Services,
Inc. and Independence Investment Associates, Inc. dated
November 1, 1995 - (iv)

(ii)(B) Investment Advisory Agreement between AMR Investment Services,
Inc. and Morgan Stanley Asset Management Inc. dated November
1, 1995 - (iv)

(ii)(C) Investment Advisory Agreement between AMR Investment Services,
Inc. and Templeton Investment Counsel, Inc. dated November 1,
1995 - (iv)

(ii)(D) Investment Advisory Agreement between AMR Investment Services,
Inc. and Barrow, Hanley, Mewhinney & Strause, Inc. dated
November 1, 1995 - (iv)

(ii)(E) Investment Advisory Agreement between AMR Investment Services,
Inc. and GSB Investment Management, Inc. dated November 1,
1995 - (iv)

(ii)(F) Investment Advisory Agreement between AMR Investment Services,
Inc. and Brandywine Asset Management, Inc. dated January 16,
1998 - (v)

(ii)(G) Investment Advisory Agreement between AMR Investment Services,
Inc. and Hotchkis and Wiley, a division of the Capital
Management Group of Merrill Lynch Asset Management, L.P. dated
November 12, 1996 - (ii)

(ii)(H) Amendment to Schedule A of Advisory Agreement between AMR
Investment Services, Inc. and Brandywine Asset Management,
Inc. dated October 15, 1998 - filed herewith

<PAGE> 43

(ii)(I) Amendment to Schedule A to of Advisory Agreement between AMR
Investment Services, Inc. and Hotchkis and Wiley, a division
of the Capital Management Group of Merrill Lynch Asset
Management, L.P. dated October 15, 1998 - filed herewith

(iii)(A) Administrative Services Agreement between the American
AAdvantage Funds and AMR Investment Services, Inc. dated
November 21, 1997 - (iv)

(iii)(B) Supplement to Administrative Services Agreement dated
September 1, 1998 - filed herewith

(iv) Administrative Services Plan for the Platinum Class - (iv)

(v) Administrative Agreement with S&P 500 Index Fund - (iv)

(e) Distribution Agreement among the American AAdvantage Funds,
the American AAdvantage Mileage Funds and Brokers Transaction
Services, Inc. dated September 1, 1995 - (iv)

(f) Bonus, profit sharing or pension plans - none

(g) Custodian Agreement between the American AAdvantage Funds
and State Street Bank and Trust Company dated December 1, 1997
- (v)

(h)(i) Transfer Agency and Service Agreement between the American
AAdvantage Funds-and State Street Bank and Trust Company dated
January 1, 1998 - (v)

(ii) Securities Lending Authorization Agreement between American
AAdvantage Funds and State Street Bank and Trust Company dated
January 2, 1998 - (v)

(iii) Service Plan Agreement for the American AAdvantage Funds
PlanAhead Class dated August 1, 1994 - (iv)

(i) Opinion and consent of counsel - filed herewith

(j) Consent of Independent Auditors - (v)

(k) Financial statements omitted from prospectus - none

(l) Letter of investment intent - (iv)

(m)(i) Plan pursuant to Rule 12b-1 for the Institutional, PlanAhead
and AMR Classes - (iv)

(ii) Plan pursuant to Rule 12b-1 for the Platinum Class - (iv)

(n) Financial Data Schedules - none

(o) Amended and Restated Plan pursuant to Rule 18f-3 - (iv)

Other Exhibits - Powers of Attorney for all Trustees - (ii)
- -------------------------

(i) Incorporated by reference to PEA No. 15 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on December 22, 1995.

(ii) Incorporated by reference to PEA No. 19 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on February 13, 1997.

C-2
<PAGE> 44

(iii) Incorporated by reference to PEA No. 20 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on July 1, 1997.

(iv) Incorporated by reference to PEA No. 23 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on December 18, 1997.

(v) Incorporated by reference to PEA No. 24 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on February 27, 1998.

Item 24. Persons Controlled by or under Common Control with Registrant

None.

Item 25. Indemnification

Article XI, Section 2 of the Declaration of Trust of the Trust provides
that:

(a) Subject to the exceptions and limitations contained in paragraph
(b) below:

(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as "Covered Person") shall be indemnified by the
appropriate portfolios to the fullest extent permitted by law against liability
and against all expenses reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement thereof;

(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.

(b) No indemnification shall be provided hereunder to a Covered Person:

(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Trust; or

(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
any such determination by the Trustees, or by independent counsel.

C-3
<PAGE> 45

(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.

(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Portfolio from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that:

(i) such Covered Person shall have provided appropriate security
for such undertaking;

(ii) the Trust is insured against losses arising out of any such
advance payments; or

(iii) either a majority of the Trustees who are neither interested
persons of the Trust nor parties to the matter, or independent legal counsel in
a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full investigation), that
there is reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.

According to Article XII, Section 1 of the Declaration of Trust, the
Trust is a trust, not a partnership. Trustees are not liable personally to any
person extending credit to, contracting with or having any claim against the
Trust, a particular Portfolio or the Trustees. A Trustee, however, is not
protected from liability due to willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office.

Article XII, Section 2 provides that, subject to the provisions of
Section 1 of Article XII and to Article XI, the Trustees are not liable for
errors of judgment or mistakes of fact or law, or for any act or omission in
accordance with advice of counsel or other experts or for failing to follow such
advice.

Item 26. I. Business and Other Connections of Investment Manager

AMR Investment Services, Inc. (the "Manager"), 4333 Amon Carter
Boulevard, MD 5645, Fort Worth, Texas 76155, offers investment management and
administrative services. Information as to the officers and directors of the
Manager is included in its current Form ADV filed with the SEC and is
incorporated by reference herein.

C-4

<PAGE> 46

II. Business and Other Connections of Investment Advisers

The investment advisers listed below provide investment advisory
services to the Trust.

Barrow, Hanley, Mewhinney & Strauss, 3232 McKinney Avenue, 15th Floor,
Dallas, Texas 75204.

Brandywine Asset Management, Inc., 201 North Walnut Street, Wilmington,
Delaware 19801.

GSB Investment Management, Inc., 301 Commerce Street, Suite 1501, Fort
Worth, Texas 76102.

Hotchkis and Wiley, 725 South Figueroa # 4000, Los Angeles, California
90017.

Independence Investment Associates, Inc., 53 State Street, Boston,
Massachusetts 02109.

Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas, 21st
Floor, New York, New York 10020.

Templeton Investment Counsel, Inc. 500 East Broward Blvd., Ft.
Lauderdale, Florida 33394.

Information as to the officers and directors of each of the above
investment advisers is included in that adviser's current Form ADV filed with
the SEC and is incorporated by reference herein.

Item 27. Principal Underwriter

(a) Brokers Transaction Services, Inc., 7001 Preston Road, Dallas, TX
75205 is the principal underwriter for the Trust and the American AAdvantage
Mileage Funds.

(b) The directors and officers of the Trust's principal underwriter
are:

<TABLE>
<CAPTION>
Positions & Offices Position
Name with Underwriter with Registrant
- ---- ------------------- ---------------
<S> <C> <C>
Don A. Buckholz Chairman, Director None

Raymond E. Wooldridge Chief Executive Officer, None
Director

William D. Felder Executive Vice None
President, Director

Sue H. Peden President None
</TABLE>

C-5

<PAGE> 47

The address of the above named directors and officers is 7001 Preston
Road, Dallas, TX 75205.

Item 28. Location of Accounts and Records

The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained as follows:
31a-1(b)(1) - in the physical possession of the Trust's custodian;
31a-1(b)(2)(i),(ii)&(iii) - in the physical possession of the Trust's custodian
31a-1(b)(2)(iv) - in the physical possession of the Trust's transfer agent
31a-1(b)(4) - in the physical possession of the Trust's Manager
31a-1(b)(5) - in the physical possession of the Trust's investment advisers
31a-1(b)(6) - A record of other purchases or sales etc. - in the physical
possession of the Trust's Manager, investment advisers and custodian
31a-1(b)(7) - in the physical possession of the Trust's custodian
31a-1(b)(8) - in the physical possession of the Trust's custodian 31a-1(b)(9) -
in the physical possession of the Trust's investment advisers 31a-1(b)(10) - in
the physical possession of the Trust's Manager 31a-1(b)(11) - in the physical
possession of the Trust's Manager
31a-1(b)(12) - in the physical possession of the Trust's Manager, investment
advisers and custodian

Item 29. Management Services

All substantive provisions of any management-related service contract
are discussed in Part A or Part B.

Item 30. Undertakings

Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to Shareholders,
upon request and without charge.

Registrant hereby undertakes to carry out all indemnification
provisions of its Declaration of Trust in accordance with Investment Company Act
Release No. 11330 (September 4, 1980) and successor releases.

Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended ("1933 Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the provisions under Item 27
herein, or otherwise, the Registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the 1933 Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the 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, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling

C-6

<PAGE> 48

precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication.

C-7

<PAGE> 49

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 25 to its Registration Statement on
Form N-1A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Worth and the State of Texas on October 15,
1998.

AMERICAN AADVANTAGE FUNDS

By: /s/ WILLIAM F. QUINN
-----------------------------
William F. Quinn
President
Attest:

/s/ BARRY Y. GREENBERG
- -----------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 25 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ WILLIAM F. QUINN President and October 15, 1998
- -----------------------------
William F. Quinn Trustee

Alan D. Feld* Trustee October 15, 1998
- -----------------------------
Alan D. Feld

Ben J. Fortson* Trustee October 15, 1998
- -----------------------------
Ben J. Fortson

John S. Justin* Trustee October 15, 1998
- -----------------------------
John S. Justin

Stephen D. O'Sullivan* Trustee October 15, 1998
- -----------------------------
Stephen D. O'Sullivan

Roger T. Staubach* Trustee October 15, 1998
- -----------------------------
Roger T. Staubach

Dr. Kneeland Youngblood * Trustee October 15, 1998
- -----------------------------
Dr. Kneeland Youngblood

*By /s/ William F. Quinn
-----------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>

<PAGE> 50

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, AMR Investment Services
Trust has duly caused this Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A as it relates to the AMR Investment Services Trust to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Fort Worth and the State of Texas on October 15, 1998.

AMR INVESTMENT SERVICES TRUST

By: /s/ WILLIAM F. QUINN
------------------------
William F. Quinn
President
Attest:

/s/ BARRY Y. GREENBERG
- -------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 25 to the Registration Statement for the
American AAdvantage Funds as it relates to the AMR Investment Services Trust has
been signed below by the following persons in the capacities and on the dates
indicated.