SMITH BREEDEN TRUST, 485APOS, 1999-05-28

SMITH BREEDEN TRUST
485APOS, 1999-05-28

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As filed with the Securities and Exchange Commission
on May 28, 1999

File No. 33-44909
File No. 811-6520

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

F O R M N-1A
Registration Statement Under the Securities Act of 1933
Post-Effective Amendment No. 17
and
Registration Statement Under the Investment Company
Act of 1940
Amendment No. 19
_____________________

SMITH BREEDEN TRUST
(Exact Name of Registrant as Specified in Charter)

100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514
(Address of Principal Executive Office)

(919) 967-7221
(Registrant's Telephone Number, Including Area Code)

MICHAEL J. GIARLA
100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514
(Name and Address of Agent for Service)
_______________
Please Send Copy of Communications to:

MARIANTHE S. MEWKILL
Smith Breeden Associates, Inc.
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
(919)-967-7221

It is proposed that this filing shall become effective
on July 31, 1999 pursuant to paragraph (a)(1) of Rule 485
under the Securities Act of 1933.

The Registrant has previously registered an indefinite
number of shares of beneficial interest pursuant to Rule
24f-2 under the Investment Company Act of 1940, as amended.
The Rule 24f-2 notice for the Registrant's most recent
fiscal year will be filed before June 30, 1999.

SMITH BREEDEN TRUST
SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
(THE "U.S. EQUITY MARKET PLUS FUND")
SMITH BREEDEN FINANCIAL SERVICES FUND
(THE "FINANCIAL SERVICES FUND")
SMITH BREEDEN HIGH YIELD BOND FUND
(THE "HIGH YIELD BOND FUND")
SMITH BREEDEN ASIAN/PACIFIC EQUITY MARKET FUND
(THE "ASIAN/PACIFIC EQUITY MARKET FUND")
SMITH BREEDEN EUROPEAN EQUITY MARKET FUND
(THE "EUROPEAN EQUITY MARKET FUND")

CROSS REFERENCE SHEET
FORM N-1A

Part A: Information Required in Prospectus

N-1A
Item No. Item Location in the
Registratation Statement
by Prospectus Heading

1. Front & Back Front & Back
Cover Pages Cover Pages

2. Risk/Return Summary: Smith Breeden Equity Funds:
Investments, Risk Investment Objectives,
and Performance Principal Investments
Strategies, Principal
Investment Risks, Annual
Performance; Smith Breeden
High Yield Bond Fund:
Investment Objectives,
Principal Investment
Strategies, Principal
Investment Risks, Annual
Performance; Smith Breeden
Financial Services Fund:
Investment Objectives,
Principal Investment
Strategies, Principal
Investment Risks, Annual
Performance.

3. Risk/Return Summary: Smith Breeden Equity Funds:
Fee Table Your Expenses; Smith
Breeden High Yield Bond
Fund: Your Expenses;
Smith Breeden Financial
Services Fund: Your
Expenses

4. Investment Objectives, Summary of Principal Risks
Principal Investment and Investment Strategies
Strategies, and
Related Risks

5. Management's Discussion Contained in the Funds'
of Fund's Performance Annual Report to
Shareholders

6. Management, Organization, Management of the Funds
and Capital Structure

7. Shareholder Information Pricing of Fund Shares,
How to Purchase Shares,
How to Exchange Shares,
How to Redeem Shares,
Dividends and
Distributions,
Shareholder Reports and
Information, Taxes

8. Distribution Arrangements How to Purchase Shares,
Service and Distribution
Plans

9. Financial Highlights Financial Highlights
Information

SMITH BREEDEN MUTUAL FUNDS

Smith Breeden Short Duration U.S. Government Fund

Smith Breeden Intermediate Duration U.S. Government Fund

Smith Breeden High Yield Bond Fund

Smith Breeden U.S. Equity Market Plus Fund

Smith Breeden Asian/Pacific Equity Market Fund

Smith Breeden European Equity Market Fund

Smith Breeden Financial Services Fund

PROSPECTUS

JULY 31, 1999

Advised by Smith Breeden Associates, Inc.

These securities have not been approved or disapproved by the
Securities and Exchange commission nor has the securities and
exchange commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
1

SUMMARY INFORMATION

This Prospectus describes seven no load mutual funds offering
you a choice of investments to help fulfill your asset allocation
needs:

Smith Breeden Short Duration U.S. Government Fund
Smith Breeden Intermediate Duration U.S. Government Fund
Smith Breeden High Yield Bond Fund
Smith Breeden U.S. Equity Market Plus Fund
Smith Breeden Asian/Pacific Equity Market Fund
Smith Breeden European Equity Market Fund
Smith Breeden Financial Services Fund

Each Fund is a series of the Smith Breeden Series Fund or the
Smith Breeden Trust, each an open-end management investment
company. The investment adviser for the Funds is Smith Breeden
Associates, Inc. (the "Adviser"). The Adviser is a money
management and consulting firm founded in 1982 whose clients
include pension funds, financial institutions, corporations,
governmental entities and charitable foundations.

TABLE OF CONTENTS

Smith Breeden Bond Funds 3
Smith Breeden Equity Funds 8
Summary of Principal Risks and Investment Strategies 13
Characteristics and Risks of the Securities in which
the Funds May Invest 19
Management of Funds 24
Pricing of Fund Shares 29
How to Purchase Shares 30
How to Exchange Shares 32
How to Redeem Shares 33
Dividends and Distributions 36
Shareholder Reports and Information 37
Retirement Plans 38
Service and Distribution Plans 38
Taxes 38
Capital Structure 39
Transfer and Dividend Disbursing Agent, Custodian
and Independent Auditors 40
Fund Performance 40
Financial Highlights 42
2
SMITH BREEDEN BOND FUNDS

Smith Breeden Short Duration U.S. Government Fund
Smith Breeden Intermediate Duration U.S. Government Fund

Investment Objectives

The Short Duration U.S. Government Fund (the "Short Fund")
seeks to provide investors with a high level of current income,
consistent with a low volatility of net asset value.

The Intermediate Duration U.S. Government Fund (the
"Intermediate Fund") seeks to provide investors with a total
return in excess of the total return of the major market indices
for mortgage-backed securities.

Principal Investment Strategies

The Short Fund seeks to achieve its objective by matching
the duration, or interest-rate risk, of a portfolio that invests
exclusively in six month U.S. Treasury securities on a constant
maturity basis.

The Intermediate Fund seeks to achieve its objective by
matching the duration, or interest-rate risk, of a portfolio that
invests exclusively in mortgage-backed securities, as weighted in
the major market indices for mortgage-backed securities. These
indices currently include, but are not limited to, the Salomon
Brothers Mortgage Index and the Lehman Brothers Mortgage Index,
each of which includes all outstanding government sponsored fixed-
rate mortgage-backed securities, weighted in proportion to their
current market capitalization. The duration of these indices is
generally similar to that of intermediate-term U.S. Treasury
Notes, and typically will range between three and five years.

Duration is a measure of the price sensitivity of a portfolio
to changes in interest rates. The maturity of a security, another
commonly used measure of price sensitivity, measures only the
time until final payment is due, whereas duration takes into
account the pattern of all payments of interest and principal on
a security over time, including how these payments are affected
by prepayments and by changes in interest rates. Each year of
duration represents an approximate 1% change in price for a 1%
change in interest rates. For example, if a bond fund has an
average duration of three years, its price will fall
approximately 3% when interest rates rise by one percentage
point. Conversely, the bond fund's price will rise approximately
3% when interest rates fall by one percentage point.

Under normal circumstances, each Fund will invest at least 70%
of its total assets in U.S. Government Securities, primarily in
mortgage-backed securities issued by the U.S. Government, its
agencies and instrumentalities. The Funds will also invest in
fixed-rate and adjustable-rate mortgage-backed securities issued
by non-governmental issuers and may hold a portion of their
assets in money market instruments and in time and savings
deposits in commercial banks or institutions whose accounts are
insured by the Federal Deposit Insurance Corporation.
3
The investment objectives of the Short and Intermediate Funds
are fundamental, meaning they may not be changed without a vote
of the shareholders of the relevant Fund. In addition, as a
matter of fundamental policy the Funds will limit purchases to
securities from the following classes of assets:

Securities issued directly or guaranteed by the U.S. Government
or its agencies or instrumentalities.
Mortgage-Backed Securities rated AAA by Standard & Poor's
Corporation ("S&P") or Aaa by Moody's Investors Service, Inc.
("Moody's") or unrated but deemed of equivalent quality by the
Adviser.
Securities fully collateralized by assets in either of the
above classes.
Assets which would qualify as liquidity items under federal
regulations (which may change from time to time) if held by a
commercial bank or savings institution.
Hedge instruments, which may only be used for risk management
purposes. Any securities described in [the "Hedging" section] and
any stripped Mortgage-Backed Securities may only be used for risk
management purposes.

Principal Investment Risks

Among the primary risks of investing in the Funds are:

Market Risk
Interest Rate Risk
Prepayment Risk
Derivatives Risk
Management Risk
Year 2000 Risk

Please see "Summary of Principal Risks and Investment
Strategies" for a discussion of these and other risks of
investing in the Funds.

Annual Performance

The bar charts below show how the Funds' performance has
varied from year to year by illustrating the Fund's total
calendar-year returns. The table following the bar charts
compares each Fund's average annual returns for the periods
indicated to those of a broad-based securities market index. The
charts and table are intended to illustrate some of the risks of
investing in the Funds by showing how the Funds' performance can
vary from year to year. Past performance does not guarantee
future results.

Calendar-Year Total Returns
Short Fund
Best quarter: First quarter 1995, + 2.40%
Worst quarter: First quarter 1994, + 0.06%
More recent return information:
(January 1, 1999 - June 30,1999) to be provided
4
U.S. T-Bill 3.39% 3.88% 6.54% 5.31% 5.57% 5.58%
Short Fund 4.30% 4.14% 6.13% 6.28% 6.32% 4.77%
1993 1994 1995 1996 1997 1998

Calendar-Year Total Returns
Intermediate Fund
Best quarter: First quarter 1995, + 5.45%
Worst quarter: First quarter 1994, - 2.25%
More recent return information:
(January 1, 1999 - June 30, 1999) to be provided

5 Year/SBMI (1) 9.63% (1.42)% 16.77% 5.37% 9.26% 6.98%
Intermediate Fund 11.09% (1.67)% 16.40% 5.05% 9.00% 6.56%
1993 1994 1995 1996 1997 1998

Average Annual Total Returns
(for periods ended December 31, 1998)

Short Fund Fund
1 Year 5 Inception
Years (March 31,
1992)
The Fund 4.77 5.52 5.46
Merrill Lynch 6 Month US T-Bill 5.58 5.36 4.96
T-Bill

Intermediate Fund Fund
1 Year 5 Inception
Years (March 31,
1992)
The Fund 6.56 6.90 8.26
5 Year/SBMI (1) 6.98 7.23 8.09

(1) 5 -Year Treasury Note to 12/31/93 and Salomon Smith Barney
Mortgage Index ("SBMI") to 3/31/99. The fund changed its
investment objective 1/1/94.

Your Expenses

The information below describes the fees and expenses you may pay if you
buy and hold shares of the Funds and do not reflect any expense
reimbursements by the Adviser.
5
Short Fund Intermediate Fund

Shareholder Fees (1)
(fees paid directly from your None None
investment)

Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets) 0.70% 0.70%
Management Fees (2)(3)
Other Expenses (3) 0.30% 0.36%
Total Fund Operating 1.00% 1.06%
Expenses (3)

(2)Pursuant to a distribution and services plan in respect of each Fund,
the Adviser may pay annual distribution and servicing fees of up to 0.25%
of each Fund's net assets out of its management fee.

Examples

The examples below are intended to help you compare the cost of
investing in the Funds with the cost of investing in other mutual funds.
The examples assume that you invest $10,000 in each Fund for the time
periods indicated, that you investment earns a 5% return each year and that
the Fund's operating expenses remain the same and that the Adviser does not
reimburse the Fund any expenses. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years

Short Fund $105 $328 $568 $1,258
Intermediate Fund $111 $347 $601 $1,329

Smith Breeden High Yield Bond Fund

Investment Objective

The Fund seeks high current income and capital appreciation.

Principal Investment Strategies

The Fund invests primarily in lower and unrated rated debt securities
commonly referred to as "junk bonds." At least 65% of the Fund's total
assets will be invested in these high yield debt securities rated below
investment grade by national rating agencies such as S&P and Moody's.
There is no limit on the acceptable rating of securities bought by the
Fund.
6
The Fund may also invest 35% of its total assets in equity securities,
namely common or preferred stock and warrants, of U.S. and foreign
companies. To the extent the Fund invests in stocks, the value of these
equity investments will fluctuate day to day with movements in the stock
market, as well as in response to the activities of individual companies.
The Fund may also use options, future contracts, options on futures
contracts and swaps to increase or decrease its exposure to changing
security prices, interest or currency exchange rates, or other factors that
affect security values.

Principal Investment Risks

Among the primary risks of investing in the Funds are:

Market Risk
Interest Rate Risk
Credit Risk
Prepayment Risk
Derivatives Risk
Leveraging Risk
Liquidity Risk
Foreign Investment Risk
Management Risk
Year 2000 Risk

Please see "Summary of Principal Risks and Investment Strategies" for a
discussion of these and other risks of investing in the Funds. .

Annual Performance

The Fund began operations on October 15, 1998 and therefore does not
have a full calendar year of performance to report. Since the Fund's
performance can be expected to vary from year to year there are risks of
investing in the Fund.

Your Expenses

The information below describes the fees and expenses you may pay if you
buy and hold shares of the Funds and do not reflect any expense
reimbursements by the Adviser.

Shareholder Fees (1) None
(fees paid directly from your
investment)

Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets) 0.70%
Management Fees (2)(3)
Other Expenses (3) 6.16%
Total Fund Operating
Expenses (3) 6.86%

(1)For accounts of less than $2,000, the Fund assesses an annual account
maintenance fee of $16. In addition, a transaction charge of $9 may be
imposed on redemptions by wire transfer and an account closing fee of $8
may be imposed.
7
(2)Pursuant to a distribution and services plan in respect of the Fund,
the Adviser may pay annual distribution and servicing fees of up to 0.25%
of the Fund's net assets out of its management fee.

(3)Expenses shown are before giving effect to expense limitations and are
estimated had the Fund been operational for a full fiscal year. The Adviser
voluntarily reimburses the Fund's expenses so that had the Fund been
operational during the full fiscal year ended March 31, 1999 total fund
operating expenses would have been 0.98%

Examples

The examples below are intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The examples assume that you invest $10,000 in the Fund for the time
periods indicated, that you investment earns a 5% return each year and that
the Fund's operating expenses remain the same and that the Adviser does not
reimburse any expenses. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years

$720 $2,114 $3,446 $6,529

SMITH BREEDEN EQUITY FUNDS
Smith Breeden U.S. Equity Market Plus Fund
Smith Breeden Asian/Pacific Equity Market Fund
Smith Breeden European Equity Market Fund

Investment Objectives

The U.S. Equity Market Plus Fund seeks to provide a total return
exceeding the Standard & Poor's 500 Composite Stock Index (the "S&P 500
Index") without additional equity market risk.

The Asian/Pacific Equity Market Fund seeks capital appreciation through
investments in financial instruments related to the major equity markets of
Asia and the Pacific region.

The European Equity Market Fund seeks capital appreciation through
investments in securities related to the major equity markets of Europe.

Principal Investment Strategies

None of the Funds invests principally in the common stocks of the regions
or indices whose returns they are targeting. Instead, each Fund uses
futures, options and swaps to maintain its equity exposure in its
respective market. The Asian/Pacific Equity Market and European Equity
Market Funds may also employ futures and forwards on the currency markets
of their respective regions to maintain the relevant market exposure. When
futures contracts and/or swaps are, in the judgment of the Adviser,
relatively overpriced, a Fund may invest directly in the common stocks
represented by the index or in the region being tracked. In these
circumstances, the Fund will not own all issues, but will attempt to
purchase a basket of common stocks which the Adviser expects will, on
average, match the movements in the index or market being tracked.

Since futures contracts and swaps can be purchased on little or no margin,
8
under normal circumstances each Fund commits only a small percentage of its
net assets to purchasing the instruments which it uses to capture its
equity market risk. With its remaining cash, each Fund invests in a low
duration fixed income strategy substantially similar to that of the Short
Fund. The Funds' fixed income securities consist primarily of U.S.
Government Securities, including U.S. agency mortgage-backed securities,
but may also include corporate debt securities, and mortgage-backed and
other asset-backed securities of non-governmental issuers.

With these fixed-income related investments, each Fund seeks to generate
income and gains exceeding the total operating costs of the Fund. The
operating costs of the Funds include the transaction and financing costs of
entering into the futures, options and swap contracts used to replicate the
respective stock market returns. Thus, whether a Fund's total return equals
or exceeds the performance of the index or market it targets (the S&P 500
index in the case of the U.S. Equity Market Plus Fund, the Asia/Pacific
region in the case of the Asian/Pacific Equity Market Fund, the European
region in the case of the European Equity Market Fund) depends largely on
whether the total return on the Fund's fixed-income portfolio equals or
exceeds the Fund's total operating expenses. Other factors which will
impact the success of the Funds' strategies relate to how well the returns
of the futures, swaps and options chosen by the Adviser as the Fund's
investments correlate to the markets tracked. Each Fund has also applied
for an exemptive order with the Securities and Exchange Commission which
would permit the Fund to invest in the Short Fund for purposes of pursuing
its short duration fixed income strategy. There is no assurance that such
an order will be granted.

Principal Investment Risks

Among the primary risks of investing in the Funds are:
Market Risk
Interest Rate Risk
Prepayment Risk
Derivatives Risk
Foreign Investment Risk
Leveraging Risk
Liquidity Risk
Management Risk
Year 2000 Risk

Please see "Summary of Principal Risks and Investment Strategies" for a
discussion of these and other risks of investing in the Funds.

Annual Performance

The bar chart below shows how the U.S. Equity Market Plus Fund's
performance has varied from year to year by illustrating the Fund's total
calendar-year returns. The table following the bar chart compares the
Fund's average annual returns for the periods indicated to those of a broad-
based securities market index. The chart and table are intended to
illustrate some of the risks of investing in the Fund by showing how the
Fund's performance can vary from year to year. There are no charts and
tables for the Asian/Pacific Equity Market and European Equity Market Fund
because the Funds have no performance history. However, since these Funds'
performance can be expected to vary from year to year there are risks of
investing in these Fund as well. Past performance does not guarantee
future results.

9
Calendar-Year Total Returns
U.S. Equity Market Plus Fund

[Plot points for bar chart]

S&P 500 10.06% 1.32% 37.58% 22.96% 33.36% 28.58%
U.S. Equity 13.22% 1.84% 36.76% 24.36% 32.29% 26.43%
Market Plus Fund 1993 1994 1995 1996 1997 1998

Best quarter: Fourth quarter 1998, 21.07%
Worst quarter: Third quarter 1998, (10.82)%
More recent return information (January 1, 1999-June 30, 1999):
to be provided%

Average Annual Total Returns
(for periods ended December 31, 1998)

Fund
1 Year 5 Inception
Years (June 30,
1992)
U.S. Equity Market 26.43% 23.69% 21.89%
Plus Fund
S&P 500 Index* 28.58% 24.03% 21.24%

* The S&P 500 Index is a widely recognized, unmanaged index of common
stocks of the 500 largest capitalized U.S. companies. The index does
not incur expenses and cannot be purchased directly by investors.

Your Expenses

The information below describes the fees and expenses you may pay if you
buy and hold shares of the Funds.

U.S. Asian/Pa European
Equity cific Equity
Market Equity Market
Plus Market

Shareholder Fees (1) None None None
(fees paid directly from your
investment)
Annual Fund Operating
Expenses
(expenses that are deducted
from Fund assets)
Management Fees (2)(3) 0.70% 0.70% 0.70%
Other Expenses (3)(4) 0.34% 5.30% 5.30%
Total Fund Operating 1.34% 6.00% 6.00%
Expenses (3)(4)

(1)For accounts of less than $2,000, each Fund assesses an annual account
maintenance fee of $16. In addition, a transaction charge of $9 may be
imposed on redemptions by wire transfer and an account closing fee of $8
may be imposed.
10
(2)Pursuant to a distribution and services plan in respect of each Fund,
the Adviser may pay annual distribution and servicing fees of up to 0.25%
of each Fund's net assets out of its management fee.

(3)Expenses shown are before giving effect to expense limitations. The
Adviser voluntarily reimburses the Funds' expenses so that during the
fiscal year ended March 31, 1999 total fund operating expenses were 0.88%
for the U.S. Equity Market Plus Fund and would be expected to be 0.98% for
each of the European Equity Index and Asian/Pacific Equity Index Funds had
they been operational.

(4)Other expenses and Total Fund Operating expenses for the Asian/Pacific
Equity Market and European Equity Market Funds are based on estimated
amounts for the first fiscal year of the Funds.

Examples

The examples below are intended to help you compare the cost of
investing in the Funds with the cost of investing in other mutual funds.
The examples assume that you invest $10,000 in each Fund for the time
periods indicated, that you investment earns a 5% return each year and that
the Fund's operating expenses remain the same and that the Adviser does not
reimburse any expenses. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years

U.S. Equity Market Plus $ 109 $ 341 $ 590 $1,305
Asian/Pacific Equity Market $ 630 $1,866 $3,069 $5,944
European Equity Market $ 630 $1,866 $3,069 $5,944

Smith Breeden Financial Services Fund

Investment Objective

The Fund seeks capital appreciation.

Principal Investment Strategies

To pursue its investment objective, the Fund invests at least 65% of its
total assets in U.S. and foreign financial services companies. These
include banks, thrifts, finance and leasing companies, brokerage,
investment banking and advisory firms, real estate related firms and
insurance companies. The Fund will generally invest in common stock and in
other equity securities such as preferred stock and warrants, although it
may also engage in other investment practices.

Under regulations imposed by the Investment Company Act of 1940 and its
rules (the "1940 Act"), the Fund may not purchase more than 10% of the
securities of any domestic or foreign insurance company. The Fund may also
not invest more than 5% of its total assets in the equity securities of any
company that derives more than 15% of its revenues from brokerage or
investment management activities, unless such investment is limited to not
more than 5% of the equity securities or 10% of the debt securities of such
company, and such investment represents not more than 5% of the net assets
of the Fund.
11
The Fund intends to be a diversified fund, as defined under the 1940 Act,
and as such, with respect to 75% of its assets, will not invest more than
5% of its assets in any single issuer, and such 5% holding cannot represent
more than a 10% voting interest in the acquired company.

Principal Investment Risks

Among the primary risks of investing in the Funds are:

Market Risk
Concentration and Related Risk
Derivatives Risk
Foreign Investment Risk
Leveraging Risk
Liquidity Risk
Management Risk
Year 2000 Risk

Please see "Summary of Principal Risks and Investment Strategies" for a
discussion of these and other risks of investing in the Funds.

Annual Performance

The bar chart below shows the Fund's performance by illustrating the Fund's
total calendar-year returns. The table following the bar chart compares
the Fund's average annual returns for the periods indicated to those of a
broad-based securities market index. Because the Fund's performance can be
expected to vary from year to year there are risks of investing in the
Fund. Past performance does not guarantee future results.

Calendar-Year Total Returns

[Plot points for bar chart]
S&P 500 28.58%
Financial Services Fund (4.81%)
1998

Best quarter: Fourth quarter 1998, 18.18%
Worst quarter: Third quarter 1998, (27.04)%
More recent return information (January 1, 1999-June 30, 1999):
to be provided%

Average Annual Total Returns
(for periods ended December 31, 1998)

Fund
1 Year Inception
(December
22, 1997)
Fund (3.77) (4.81)
S&P 500 Index * 28.58 30.08
* The S&P 500 Index is a widely recognized, unmanaged index of common
stocks of the 500 largest capitalized U.S. companies. The index does
not incur expenses and cannot be purchased directly by investors.

12
Your Expenses

The information below describes the fees and expenses you may pay if you
buy and hold shares of the Fund.

Shareholder Fees (1) None
(fees paid directly from your
investment)

Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets) 0.70%
Management Fees (2)(3)
Other Expenses (3) 2.42%
Total Fund Operating 3.12%
Expenses (3)

(2)Pursuant to a distribution and services plan in respect of the Fund,
the Adviser may pay annual distribution and servicing fees of up to 0.25%
of the Fund's net assets out of its management fee.

(3)Expenses shown are before giving effect to expense limitations. The
Adviser voluntarily reimburses the Fund's expenses so that during the
fiscal year ended March 31, 1999 total fund operating expenses were 1.48%

Examples

1 Year 3 Years 5 Years 10 Years
$328 $1,000 $1,695 $3,452

SUMMARY OF PRINCIPAL RISKS AND INVESTMENT STRATEGIES

Principal Risks

The value of your investment in a Fund changes with the values of that
Fund's holdings. Many factors can affect those values. The "principal
risks" identified in the fund descriptions part of this Prospectus
represent the factors that are most likely to have a material effect on a
particular Fund's portfolio as a whole. Each Fund may be subject to
additional principal risks and other risks in addition to the risks
described here. The risks of a Fund may change over time because the types
of investments made by a Fund can change over time. The following
subsection on "Characteristics and Risks of the Securities in Which the
Funds May Invest" and the Statements of Additional Information include more
important information about the Funds, their investment strategies and the
13
related risks.

Market Risk. The market price of securities held by a Fund may fall,
sometimes rapidly or unpredictably, due to changing economic, political or
market conditions, or due to the financial condition of the issuer. The
value of a security may decline due to general market conditions which are
not specifically related to a company or industry, such a real or perceived
adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates or adverse investor
sentiment generally.

Interest Rate Risk. The market prices of a Fund's fixed-income
investments may decline due to an increase in market interest rates.
Generally, the longer the maturity or duration of a fixed-income security,
the more sensitive it is to changes in interest rates. The Short Fund (and
the fixed-income segments of the U.S. Equity Market Plus, Asian/Pacific
Equity Market and European Equity Market Funds) seek to match the duration
of a portfolio that invests exclusively in six month U.S. Treasury
securities on a constant maturity basis, and the Intermediate Fund seeks to
match the duration of a portfolio that invests in mortgage-backed
securities as weighted in the major market indices (typically ranging from
three to five years). However, each Fund expects that, under normal
circumstances, the dollar-weighted average life (or period until the next
reset date) of its portfolio securities will be longer six months or five
years, as the case may be, sometimes significantly longer.

Credit Risk. An issuer of securities held by the Fund may be unable to
pay principal and interest when due, or the value of the security may
suffer because investors believe the issuer is less able to pay. Lower
rated securities, while usually offering higher yields, generally have more
risk and volatility because of reduced creditworthiness and greater chance
of default.

While certain U.S. Government securities such as U.S. Treasury
obligations and GNMAs (discussed in the next section) are backed by the
full faith and credit of the U.S. Government, other fixed-income securities
in which the Funds may invest are subject to varying degrees of risk of
default. These risk factors include the creditworthiness of the issuer and,
in the case of mortgage-backed and asset-backed securities, the ability of
the mortgagor or other borrower to meet its obligations. The Short and
Intermediate Funds will seek to minimize this credit risk by investing in
securities of the highest credit quality, while the U.S. Equity Market
Plus, European Equity Market and Asian/Pacific Equity Market Funds will
seek to minimize this risk of default by investing in securities of at
least investment grade, except that its investment in mortgage-backed
securities will be rated at least A. The High Yield Bond Fund will invest
in securities of below investment grade.

Debt obligations that are deemed investment grade carry a rating of at
least Baa from Moody's or BBB from Standard and Poor's, or a comparable
rating agency from another rating agency. Bonds rated BBB or Baa or below
(and unrated bonds of comparable quality) have speculative characteristics
and changes in economic circumstances are more likely to lead to a weakened
capacity of the issuer to make interest and principal payments. In
addition, the market for high yield bonds can be thinner and less active
than that for higher-quality debt securities. As a result, lower rated
securities held by a Fund can be less liquid, meaning that they are
difficult to purchase or sell, possibly preventing the Fund from selling
the investment at an advantageous price or time. Moreover, because these
14
less active market quotations may not always be available, the securities
will be valued in accordance with procedures established by the Board of
Trustees. Judgment plays a greater role in valuing high-yield corporate
debt securities than is the case for securities for which more external
sources for quotations and last-sale information is available. Adverse
publicity and changing investor perceptions may affect the ability of
outside pricing services to value lower-quality debt securities and a
Fund's ability to dispose of these securities.

Prepayment risk. Prepayment risk is the risk that principal will be
repaid at a different rate than anticipated, causing the return on a
security purchased to be less than expected. Mortgage-backed securities,
which represent an interest in a pool of mortgages, present this risk, as
do many asset-backed securities and high yield bonds. In general, when
market interest rates decline, many mortgages are refinanced, and mortgage-
backed securities are paid off earlier than expected, forcing a Fund to
reinvest the proceeds at current yields, which are lower than those paid by
the security that was paid off. When market interest rates increase, the
market values of mortgage-backed securities declines. At the same time,
however, mortgage refinancing slows, which lengthens the effective
maturities on these securities. As a result, the negative effect of the
rate increase on the market value of mortgage securities is usually more
pronounced than it is for other types of fixed-income securities. Asset-
backed securities can present similar risks.

Similarly, investments in high yield bonds can present the risk of
prepayment since these securities often contain redemption and call
provisions. If an issuer exercises these provisions in a declining
interest rate market, the Fund would have to replace the security with a
lower yielding security, resulting in a decreased return for investors. The
Adviser may use options to try to mitigate the prepayment risk but such a
strategy may not be successful.

Derivatives Risk. The Funds may use derivatives, which are financial
contracts whose value depends on, or is derived from, the value of an
underlying asset, interest rate or index. Using derivatives, a Fund can
increase or decrease its exposure to changing security prices and indices,
currency exchange rates, interest rates or other factors that affect
security value, or to employ temporary substitutes for anticipated future
transactions. Techniques involving derivatives include buying or selling
financial futures contracts, purchasing call or put options, or selling
covered call options on such futures or entering into currency exchange
contracts or swap agreements. Any or all of these techniques may be used at
one time, except that only the Asian/Pacific Equity Market, European Equity
Market, and Financial Services Funds may enter into currency exchange
futures, forward or swap contracts. Use of any particular transaction is a
function of market conditions. There is no overall limitation on the
percentage of a Fund's assets which may be subject to a hedge position.

The Funds will sometimes use derivatives as part of a strategy designed
to reduce other risks and sometimes will use derivatives for leverage,
which increases opportunities for gain but also involves greater risk. In
addition to other risks such as the credit risk of the counterparty, market
risk and liquidity risk, derivatives involve the risk of mispricing or
improper valuation and the risk that changes in the value of the derivative
may not correlate perfectly with relevant assets, rates and indices. In
addition, the Funds' use of derivatives may have the effect of accelerating
a Fund's recognition of gain.

15
The use of derivatives involves costs and may result in losses. For
example, the losses from investing in futures transactions are potentially
unlimited. In addition, the use of options and futures strategies also
involves the risk of imperfect correlation between movements in the values
of the securities underlying the futures and options purchased and sold by
a Fund, of the option and futures contract itself, and of the securities
which are the subject of a hedge. For example, a Fund bears the risk that
prices of hedged securities will not move to the same degree as the hedging
instrument, or that price movements in the hedging instrument will not
accurately reflect price movements in the security underlying the hedging
instrument. It is also possible for a Fund to incur a loss on both the
hedged securities and the hedging instrument. This means that a Fund may
not achieve, and may at times exceed, its targeted duration or the return
of the market it tracks.

The U.S. Equity Market Plus, Asian/Pacific Equity Market and European
Equity Market Funds' use of derivative instruments such as futures, swaps
and options to track the relevant index or region raises additional risks.
Each of these Fund's opportunity for gain or loss may be greater than if
the Fund invested directly in the stocks represented by the relevant market
or index because the notional value of the financial instruments utilized
may not match exactly a Fund's net assets. For example, in the U.S. Equity
Market Plus Fund, the total net notional amount of the Fund's equity swap
contracts, S&P 500 Index futures contracts, plus the market value of any
common stocks owned may be more or less than the Fund's total net assets.
(Under normal market conditions, each Fund expects that such variations in
its exposure to the relevant index or regions will be up to 5% more or less
than the Fund's net assets.) For the Asian/Pacific Equity Market and
European Equity Market Funds, there are no futures traded which match
exactly the stock market capitalization of the Asian/Pacific or European
regions. As a result, the Asian/Pacific Equity Market and European Equity
Market Funds will utilize a composite of the futures traded in these
regions. Futures contracts may not be available to trade in all countries
making up a region, or a Fund may not be able to match exactly the
weighting of a country's market capitalization in a region due to size
limitations on the notional amount of the futures being purchased. Due to
the lower correlation of the selected country or region futures with the
return of the region in total, this circumstance may magnify the "tracking
error" of a Fund's performance.

At times, a Fund may sell interest rate futures in a different dollar
amount than the dollar amount of securities being hedged, depending on the
expected relationship between the volatility of the prices of such
securities and the volatility of the futures contracts, based on duration
calculations by the Adviser. If the actual price movements of the
securities and futures are inconsistent with the Adviser's estimates of
their durations, the hedge may not be effective.

A Fund will not maintain open short positions in interest rate futures
contracts if, in the aggregate, the value of the open positions (marked to
market) exceeds the current market value of its fixed income securities
portfolio plus or minus the unrealized gain or loss on these open
positions, adjusted for the expected volatility relationship between the
portfolio and the futures contracts based on duration calculations. If this
limitation should be exceeded at any time, a Fund will take prompt action
to close out the appropriate number of open contracts to bring its open
futures position into compliance with this limitation.

The Short and Intermediate Funds will not purchase a put or call option
16
n U.S. Government Securities or mortgage-backed securities if, as a result
of such purchase, more than 10% of its total assets would be invested in
such options. The Short and Intermediate Funds will engage in OTC option
transactions only with primary U.S. Government Securities dealers
recognized by the Federal Reserve Bank of New York. The Short and
Intermediate Funds will also not sell options which are not covered.

In accordance with regulations established by the Commodity Futures
Trading Commission, each Funds' aggregate initial margin and premiums on
all futures and options contract positions not held for bona fide hedging
purposes, will not exceed 5% of a Fund's net assets, after taking into
account unrealized profits and losses on such contracts. In addition to
margin deposits, when the Fund purchases a futures contract, it is required
to maintain at all times liquid securities in a segregated account with its
Custodian, in an amount which, together with the initial margin deposit on
the futures contract, is equal to the current delivery or cash settlement
value of the futures contract. The Funds' ability to engage in options and
futures transactions and to sell related securities might also be limited
by tax considerations and by certain regulatory requirements. See "Taxes"
in the relevant Statement of Additional Information.

Foreign Investment Risk. Funds investing in foreign markets and
securities may experience more rapid and extreme changes in value than
Funds investing solely in U.S. companies and markets. This is because the
securities markets of many foreign countries are relatively small, with a
limited number of companies representing a small number of industries. In
addition, foreign companies are usually not subject to the same degree of
regulation as U.S. companies. These investments are also influenced by
currency risk, the risk that changes in foreign exchange rates will affect,
favorably or unfavorably, the value of a Fund's foreign securities.
Although these Funds will enter into currency futures and forwards to
maintain the same currency exposure as the markets in which they invest,
there is no guarantee that the use of such techniques will be successful.
Other risks and considerations relate to the higher transaction costs of
trading in foreign securities; lower liquidity which may result in greater
price volatility; the possibility of expropriation or confiscatory
taxation; adverse change in investment or exchange control regulation;
difficulty in obtaining a judgement from a foreign court; political
instability; and potential restrictions on the flow of international
capital.

Concentration and Related Risk. Because the Financial Services Fund
invests in a single sector, its performance is largely dependent on the
sector's performance, which may differ from that of the overall stock
market. Changing interest rates or deteriorating economic conditions can
adversely affect the performance of financial services companies' stocks.
Although the Fund may buy or sell interest rate futures and options to
attempt to mitigate the effect of changing interest rates on the portfolio,
the use of these instruments in such a strategy involves the risk that the
price movements of the hedging instrument will not accurately reflect price
movements in the securities, so that the hedge will not be fully effective
or may result in losses.

In addition, the financial services companies in which the Fund invests
are subject to extensive government regulation which may limit both the
amounts and types of loans and other financial commitments they can make,
and the interest rates and fees they charge. Profitability is largely
dependent upon the availability and cost of capital funds, and can
fluctuate significantly when interest rates change. Credit losses resulting
17
from the financial difficulties of borrowers can negatively affect the
industry. Insurance companies may be subject to severe price competition.
Legislation is currently being considered which would reduce the separation
between commercial and investment banking businesses. If enacted this could
significantly harm the financial services sector and the Fund.

Liquidity Risk. Liquidity risk exists when particular investments are
difficult to sell. A Fund may not be able to sell these illiquid
investments at the best prices. Investments in derivatives, foreign
investments and securities having small market capitalization, substantial
market and/or credit risk tend to involve greater liquidity risk.

A Fund may invest up to 15% of its net assets in illiquid securities.
The term illiquid securities for this purpose means securities that cannot
be disposed of within seven days in the ordinary course of business. The
SEC staff takes the position that this includes non-terminable repurchase
agreements having maturities of more than seven days.

The High Yield Bond, U.S. Equity Market Plus, Asian/Pacific Equity
Market, European Equity Market, and Financial Services Funds may invest in
restricted securities, which represent securities that can be sold in
privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, or in registered public
offering. Restricted securities deemed to be liquid under procedures
established by the Board are not subject to the limitations on illiquid
securities.

The determination of whether certain IO/PO Strips issued by the U.S.
Government and backed by fixed-rate mortgages or any other securities in
which a Fund desires to invest are liquid shall be made by the Adviser
under guidelines established by the Trustees in accordance with applicable
pronouncements of the SEC. At present, all other IO/PO Strips, other
residual interests of CMOs and OTC options are treated as illiquid
securities. The SEC staff also currently takes the position that the
interest rate swaps, caps and floors discussed in the Statements of
Additional Information, as well as equity swap contracts and reverse equity
swap contracts, are illiquid.

Year 2000 Risk Like other mutual funds (and most organizations around
the world), the Funds could be adversely affected by computer problems
related to the year 2000. These could interfere with operations of the
Funds, the Adviser and the Distributor or could impact the issuers of the
securities in which the Funds invest.

While no one knows if these problems will have any impact on the Funds or
on financial markets in general, the Adviser is taking steps to protect
fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.

Whether these steps will be effective can only be known for certain in the
year 2000.

Leveraging Risk. When a Fund is borrowing money or otherwise leveraging
its portfolio, the value of an investment in that Fund will be more
volatile and all other risks will tend to be compounded. This is because
leverage tends to exaggerate the effect of any increase or decrease in the
value of a Fund's portfolio holdings. Each Fund may take on leveraging
risk by using reverse repurchase agreements, dollar rolls and other
18
borrowings, by investing collateral from loans of portfolio securities,
through the use of when-issued, delayed-delivery or forward commitment
transactions or by using other derivatives. The use of leverage may also
cause a Fund to liquidate portfolio positions when it may not be
advantageous to do so to satisfy its obligations or meet segregation
requirements.

Management Risk. Each Fund is subject to management risk because it is
an actively managed investment portfolio. Management risk is the chance
that poor security selection will cause the Fund to underperform other
funds with similar objectives. The Adviser will apply its investment
techniques and risk analyses in making investment decisions for the Funds,
but there can be no guarantee that these will produce the desired
result.

Characteristics of Certain of the Securities in which the Funds May Invest

Subject to the percentage limitations on investment to which each Fund
is subject based on their investment objective, and unless stated
otherwise, each of the Funds may invest in the following types of
securities. The Statements of Additional Information also include
information on these and other securities and financial instruments in
which the Funds may invest.

U.S. Government Securities. The U.S. Government Securities in which the
Funds may invest include U.S. Treasury Bills, Notes, Bonds, discount notes
and other debt securities issued by the U.S. Treasury, and obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities including, but not limited to, the Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). (Other U.S.
Government agencies or instrumentalities include Federal Home Loan Banks,
Bank for Cooperatives, Farm Credit Banks, Tennessee Valley Authority,
Federal Financing Bank, Small Business Administration, and Federal
Agricultural Mortgage Corporation.) Mortgage-backed securities are
explained more fully below.

Corporate Debt Securities. All of the Funds, with the exception of the
Short and Intermediate Funds, may invest in corporate debt securities.
Corporate Debt Securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligation (credit risk) and
may also be subject to price volatility due to such factors as interest
rate sensitivity, market perception of the credit-worthiness of the issuer
and general market liquidity. Debt securities issued by smaller and
medium sized issuers may be less actively traded than those of larger
issuers and may experience greater fluctuations in price. Smaller and
medium sized issuers may be less seasoned, have more limited product lines,
markets, financial resources and management depth, and therefore be more
susceptible to adverse market conditions than larger issuers.

Convertible Securities. All of the Funds, with the exception of the Short
and Intermediate Funds, may invest in convertible securities. A convertible
security is a fixed income equity security that may be converted into a
prescribed amount of common stock at a specified formula. A convertible
security entitles the owner to receive interest until the security matures
or is converted. Convertibles have several unique investment
characteristics such as: (a) higher yields than common stocks but lower
yields than straight debt securities; (b) lesser degree of fluctuation in
value than the underlying stock since they have fixed income
19
characteristics; and (c) potential for capital appreciation if the market
price of the underlying securities increases.

Mortgage-Backed and Other Asset-Backed Securities. Mortgage-backed
securities are securities that directly or indirectly represent a
participation in, or are collateralized by and payable from, mortgage loans
secured by real property. The term "mortgage-backed securities," as used
herein, includes adjustable-rate mortgage securities, fixed-rate mortgage
securities, and derivative mortgage products such as collateralized
mortgage obligations, including residuals, stripped mortgage-backed
securities and other instruments. Asset-backed securities are structured
like mortgage-backed securities, but instead of mortgage loans or interests
in mortgage loans, the underlying assets may include, but are not limited
to, pools of automobile loans, educational loans and credit card
receivables. These securities are described in detail below and in the
Statement of Additional Information.

There are currently three basic types of mortgage-backed securities: (i)
those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, such as GNMA, FNMA and FHLMC; (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or
one of its agencies or instrumentalities; and (iii) those issued by private
issuers that represent an interest in or are collateralized by whole
mortgage loans or mortgage-backed securities without a government guarantee
but usually having some form of private credit enhancement. Not all
securities issued by the U.S. Government or its agencies are backed by the
full faith and credit of the United States; some may be backed only by the
assets of the particular instrumentality or the ability of the agency to
borrow.

The Short and Intermediate Funds may only invest in mortgage-backed
securities issued by private originators of, or investors in, mortgage
loans issued by private entities that are rated AAA by S&P or Aaa by
Moody's, or, if unrated, determined by the Adviser to be of comparable
quality. The Short and Intermediate Funds will not pay any additional fees
for credit support and will not invest in private mortgage pass-through
securities unless they are rated AAA by S&P or Aaa by Moody's. In
addition, the Short and Intermediate Funds will only purchase mortgage-
backed securities which constitute "Mortgage Related Securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.

The Funds will not purchase privately-issued mortgage-backed securities or
Collateralized Mortgage Backed Obligations ("CMOs") collateralized by
interests in whole mortgage loans (not guaranteed by GNMA, FNMA or FHLMC)
if the securities of any one issuer would exceed 10% of any Fund's assets
at the time of purchase. The Funds will not purchase privately-issued
mortgage-backed securities or CMOs collateralized by U.S. Government agency
mortgage-backed securities if the securities of any one issuer would exceed
20% of any Fund's assets at the time or purchase.

The U.S. Equity Market Plus, European Equity Market and Asian/Pacific
Equity Market Funds' investments in mortgage-backed and other asset-backed
securities will be rated at least A by Moody's or S&P.

Mortgage-backed and asset-backed securities have yield and maturity
characteristics corresponding to their underlying assets. Unlike
traditional debt securities, which may pay a fixed rate of interest until
maturity when the entire principal amount comes due, payments on certain
10
mortgage-backed and asset-backed securities include both interest and a
partial payment of principal. This partial payment of principal may be
comprised of a scheduled principal payment as well as an unscheduled
payment from the voluntary prepayment, refinancing, or foreclosure of the
underlying loans. As a result of these unscheduled payments of principal,
or prepayments on the underlying securities, the price and yield of
mortgage-backed securities can be adversely affected. For example, during
periods of declining interest rates, prepayments can be expected to
accelerate, and the Funds would be required to reinvest the proceeds at the
lower interest rates then available. Prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses
because the premium may not have been fully amortized at the time the
obligation is prepaid. In addition, like other interest-bearing securities,
the values of mortgage-backed securities generally fall when interest rates
rise, but when interest rates fall, their potential for capital
appreciation is limited due to the existence of the prepayment feature. In
order to hedge against possible prepayment, the Funds may purchase certain
options and options on futures contracts as described more fully in "Other
Investment Practices and Risk Considerations" and the Statements of
Additional Information.

Adjustable-Rate Securities. Adjustable-rate securities have interest rates
that are reset at periodic intervals, usually by reference to some interest
rate index or market interest rate. Some adjustable-rate securities are
backed by pools of mortgage loans. The Short and Intermediate Funds will
only invest in adjustable-rate securities backed by pools of mortgage loans
("ARMs"). The Fixed Income Segments of the U.S. Equity Market Plus,
Asian/Pacific Equity Market, and European Equity Market Funds may also
invest in adjustable-rate securities backed by assets other than mortgage
pools.

Although the rate adjustment feature may act as a buffer to reduce large
changes in the value of adjustable-rate securities, these securities are
still subject to changes in value based on changes in market interest rates
or changes in the issuer's creditworthiness. Because the interest rate is
reset only periodically, changes in the interest rate on adjustable-rate
securities may lag changes in prevailing market interest rates. Also, some
adjustable-rate securities (or the underlying mortgages or other underlying
loans or receivables) are subject to caps or floors that limit the maximum
change in interest rate during a specified period or over the life of the
security. Because of the resetting of interest rates, adjustable-rate
securities are less likely than non-adjustable-rate securities of
comparable quality and maturity to increase significantly in value when
market interest rates fall. Adjustable-rate securities are also subject to
the prepayment risks associated generally with mortgage-backed securities.

Other Mortgage Backed Securities and Fixed Income Investments. The Funds
may also invest in other types of mortgage-backed and fixed income
securities including Collateralized Mortgage Obligations, Stripped
Securities, and zero coupon bonds. These types of securities, including
their risks, are described in detail in the Statements of Additional
Information. New financial instruments and securities continue to be
developed. The Funds may invest in any such instruments or variations to
the extent consistent with their investment objectives and policies and
applicable regulatory requirements.

Securities Lending, Repurchase Agreements and Forward Commitments. The
Funds may lend portfolio securities to broker-dealers and may enter into
repurchase agreements. These transactions must be fully collateralized at
21
all times but involve some risk to the Funds if the other party should
default on its obligations and a Fund is delayed in or prevented from
recovering the collateral. None of the Funds will lend portfolio securities
if, as a result, the aggregate of such loans exceeds 33 1/3% of the total
asset value (including such loans). The Funds will only enter into
repurchase agreements with or lend securities to (i) member banks of the
Federal Reserve System having total assets in excess of $500 million and
(ii) securities dealers, provided such banks or dealers meet the
creditworthiness standards established by the Board of Trustees ("Qualified
Institutions"). The Adviser will monitor the continued creditworthiness of
Qualified Institutions, subject to the oversight of the Board of Trustees.

The Funds may also purchase securities for future delivery, which may
increase overall investment exposure and involves a risk of loss if the
value of the securities declines prior to the settlement date. At the time
a Fund enters into a transaction on a when-issued or forward commitment
basis, a segregated account consisting of liquid securities equal to at
least 100% of the value of the when-issued or forward commitment securities
will be established and maintained with the Funds' custodian. Subject to
this requirement, the Funds may purchase securities on such basis without
limit. Settlements in the ordinary course, which may be substantially more
than three business days for mortgage-backed securities, are not treated as
when-issued or forward commitment transactions, and are not subject to the
foregoing limitations, although some of the risks described above may
exist.

Reverse Repurchase Agreements, Dollar Roll Agreements and Borrowing. The
Funds may enter into reverse repurchase agreements or dollar roll
agreements with commercial banks and registered broker-dealers in amounts
up to 33 1/3% of their assets. The Short and Intermediate Funds may only
enter into these transactions with commercial banks and registered broker-
dealers which are also Qualified Institutions. The Statement of Additional
Information for each Trust contains a more detailed explanation of these
practices. Reverse repurchase agreements and dollar rolls are considered
borrowings by a Fund and require segregation of assets with a Fund's
custodian in an amount equal to the Fund's obligations pending completion
of such transactions. Each Fund may also borrow money from banks in an
amount up to 33 1/3% of a Fund's total assets to realize investment
opportunities, for extraordinary or emergency purposes, or for the
clearance of transactions. Borrowing from banks usually involves certain
transaction and ongoing costs and may require a Fund to maintain minimum
bank account balances. Use of these borrowing techniques to purchase
securities is a speculative practice known as "leverage." Depending on
whether the performance of the investments purchased with borrowed funds is
sufficient to meet the costs of borrowing, a Fund's net asset value per
share will increase or decrease, as the case may be, more rapidly than if
the Fund did not employ leverage.

Short Sales. The Funds may make short sales of securities. A short sale is
a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. All of
the Funds, except the Financial Services and High Yield Bond Funds, expect
to engage in short sales as a form of hedging in order to shorten the
overall duration of the portfolio and maintain portfolio flexibility. The
Financial Services and High Yield Bond Funds may make short sales of
securities to reduce the risk of the portfolio to the market or to increase
return. While a short sale may act as effective hedge to reduce the market
or interest rate risk of a portfolio, it may also result in losses which
can reduce the portfolio's total return.
22
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon completion of
the transaction. A Fund may have to pay a fee to borrow particular
securities, and is often obligated to relinquish any payments received on
such borrowed securities.

Until a Fund replaces a borrowed security, it will maintain daily a
segregated account with its custodian into which it will deposit liquid
securities such that the amount deposited in the account plus any amount
deposited with the broker as collateral will equal the current value of the
security sold short. Depending on arrangements made with the broker, a Fund
may not receive any payments (including interest) on collateral deposited
with the broker. If the price of the security sold short increases between
the time of the short sale and the time a Fund replaces the borrowed
security, the Fund will incur a loss; conversely, if the price declines,
the Fund will realize a gain. Although a Fund's gain is limited to the
amount at which it sold the security short, its potential loss is limited
only by the maximum attainable price of the security less the price at
which the security was sold.

A Fund will not make a short sale if, after giving effect to such sale, the
market value of all securities sold exceeds 25% of the value of the Fund's
total net assets. A Fund may also effect short sales where the Fund owns,
or has the right to acquire at no additional cost, the identical security
(a technique known as a short sale "against the box"). Such transactions
might accelerate the recognition of gain. See "Taxes" in the relevant
Statement of Additional Information.

Portfolio Turnover

The Adviser buys and sells securities for a Fund whenever it believes it is
appropriate to do so. The portfolio turnover rate for each Fund's previous
fiscal periods is shown in the table under the heading "Financial
Highlights".

The portfolio turnover rates reported in the "Financial Highlights" for the
Short, Intermediate, High Yield Bond and U.S. Equity Market Plus Funds for
the fiscal year ended March 31, 1999 were relatively high. In addition, the
Adviser anticipates that the portfolio turnover rate for the Asian/Pacific
Equity Market, and European Equity Market Funds will also be relatively
high. Because of their relatively frequent trading, the funds will realize
taxable capital gains frequently which must be distributed yearly to
shareholders. To the extent these gains are short-term capital gains, such
gains are generally taxed at ordinary income tax rates. If a shareholder
holds an investment in a fund in something other than a tax-deferred
account (e.g. a retirement account), the payment of any taxes will impact a
shareholder's net return from holding an investment in a Fund. Portfolio
turnover also generally involves some expense to a Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestment in other securities. However, the
mortgage securities in which some of the Funds may invest are generally
traded on a "net" basis with dealers acting as principals for their own
account without a stated commission. The Funds will pay commissions in
connection with options and future transactions and, for the High Yield
Bond, U.S. Equity Market Plus, Asian/Pacific Equity Market, European Equity
Market and Financial Services Funds, in relation to any purchase of common
stocks or other equity securities.

23
MANAGEMENT OF THE FUNDS

Its Board of Trustees manages the business affairs of the Funds. Each of
the Funds has entered into an investment advisory agreement with Smith
Breeden Associates, Inc., 100 Europa Drive, Chapel Hill, North Carolina,
27514 (the "Investment Advisory Agreements"). Pursuant to such investment
advisory agreements, the Adviser furnishes continuous investment advisory
services to each of the Funds.

Trustees and Officers

The following is a listing of the Trustees and officers of the Series Fund
and Trust, the legal entities that have issued shares in the Funds. Unless
otherwise indicated, all of the named individuals serve in their capacities
for both the Series Fund and Trust.

Douglas T. Breeden* Trustee and Chairman
Portfolio Manager, Financial Services Fund
Portfolio Manager, High Yield Bond Fund

Dr. Breeden, the Chairman of the Board of Smith Breeden Associates, co-
founded the firm in 1982. In conjunction with Michael J. Giarla and Robert
B. Perry, he is responsible for the day-to-day operations of the Financial
Services Fund, and in conjunction with David A. Tiberii, he is responsible
for the day-to-day operations of the High Yield Bond Fund. Dr. Breeden has
served on business school faculties at Duke University, Stanford University
and the University of Chicago, and as a visiting professor at Yale
University and at the Massachusetts Institute of Technology. He is the
Editor of The Journal of Fixed Income. Dr. Breeden served as Associate
Editor for five journals in financial economics, and was elected to the
Board of Directors of the American Finance Association. He has published
several well-cited articles in finance and economics journals. He holds a
Ph.D. in Finance from the Stanford University Graduate School of Business,
and a B.S. in Management Science from the Massachusetts Institute of
Technology. He serves as Chairman of Harrington Financial Group, the
holding company for Harrington Bank, F.S.B., of Richmond, Indiana.

*Interested Person

Michael J. Giarla* Trustee and President
Portfolio Manager, Financial Services Fund

Mr. Giarla is Chief Operating Officer, President and Director of Smith
Breeden Associates. In conjunction with Douglas T. Breeden and Robert B.
Perry, he is responsible for the day-to-day operations of the Financial
Services Fund. He also serves as a Director of Harrington Financial Group,
the holding company for Harrington Bank, F.S.B., of Richmond, Indiana.
Formerly Smith Breeden's Director of Research, he was involved in research
and programming, particularly in the development and implementation of
models to evaluate and hedge mortgage securities. He also consults with
institutional clients and conducts special projects. Before joining Smith
Breeden Associates, Mr. Giarla was a Summer Associate in Goldman Sachs &
Company's Equity Strategy Group in New York. Mr. Giarla has published a
number of articles and book chapters regarding MBS investment, risk
management and hedging. He served as an Associate Editor of The Journal of
Fixed Income from 1991-1993. Mr. Giarla holds a Master of Business
Administration with Concentration in Finance from the Stanford University
Graduate School of Business, where he was an Arjay Miller Scholar. He
earned a Bachelor of Arts in Statistics, summa cum laude, from Harvard
24
University, where he was elected to Phi Beta Kappa and was a Harvard Club
of Boston Scholar. Mr. Giarla is a Trustee of the Roxbury Latin School,
West Roxbury, Massachusetts.

*Interested Person

Stephen M. Schaefer Trustee

Stephen M. Schaefer is the Tokai Bank Professor of Finance at the London
Business School. Previously on the Faculty of the Graduate School of
Business of Stanford University, he has also taught at the Universities of
California (Berkeley), Chicago, British Columbia and Venice. His research
interests focus on capital markets and financial regulation. He served on
the editorial board of a number of professional journals including,
currently, The Journal of Fixed Income, The Review of Derivative Research,
and Ricerche Economiche. He consults for a number of leading financial
institutions, including the Adviser, and is a former Independent Board
Member of the Securities and Futures Authority of Great Britain.

Myron S. Scholes Trustee

Myron S. Scholes is the Frank E. Buck Professor of Finance Emeritus at
the Graduate School of Business at Stanford University (since 1983). He is
a member of the Econometric Society. Professor Scholes was also a Managing
Director and co-head of the fixed income derivatives group at Salomon
Brothers between 1991-1993. Prior to coming to Stanford University in 1983,
Professor Scholes was the Edward Eagle Brown Professor of Finance at the
Graduate School of Business, University of Chicago (1974-1983). He served
as the Director of the University of Chicago's Center for Research in
Security Prices from 1974-1980. Prior to coming to the University of
Chicago, Professor Scholes was first an Assistant Professor then an
Associate Professor at the Sloan School of Management at M.I.T. from 1968
to 1973. He received his Ph.D. in 1969 from the Graduate School of
Business, University of Chicago. He has honorary Doctor of Law degrees from
the University of Paris and McMaster University. He is a past president of
the American Finance Association (1990).

Dr. Scholes has published numerous articles in academic journals and in
professional volumes. He is most noted as the co-originator of the Black-
Scholes Options Pricing Model as described in the paper, "The Pricing of
Options and Corporate Liabilities," published in the Journal of Political
Economy (with Fischer Black, May 1973), for which he was awarded the Nobel
Prize in Economic Sciences in 1997. His other papers include such topics as
risk-return relationships, the effects of dividend policy on stock prices,
and the effects of taxes and tax policy on corporate decision making. His
book with Mark Wolfson (Stanford University) Taxes and Business Strategy: A
Planning Approach was published by Prentice Hall in 1991.

William F. Sharpe Trustee

William F. Sharpe is the STANCO 25 Professor of Finance at Stanford
University's Graduate School of Business. He is best known as one of the
developers of the Capital Asset Pricing Model, including the beta and alpha
concepts used in risk analysis and performance measurement. He developed
the widely used binomial method for the valuation of options and other
contingent claims. He also developed the computer algorithm used in many
asset allocation procedures, a procedure for estimating the style of an
investment manager from its historic returns, and the Sharpe ratio for
measuring investment performance. Dr. Sharpe has published articles in a
25
number of professional journals. He has also written six books, including
Portfolio Theory and Capital Markets, (McGraw-Hill, 1970), Asset Allocation
Tools, (Scientific Press, 1987), Fundamentals of Investments (with Gordon
J. Alexander and Jeffery Bailey, Prentice-Hall, 1993) and Investments (with
Gordon J. Alexander and Jeffrey Bailey, Prentice-Hall, 1990). Dr. Sharpe is
a past President of the American Finance Association. He also served as
consultant to a number of corporations and investment organizations. He is
Trustee of the Barr Rosenberg mutual funds, a director of Stanford
Management Company and the Chairman of the Board of Financial Engines, a
company providing electronic portfolio advice. He received the Nobel Prize
in Economic Sciences in 1990.

Daniel C. Dektar Vice President, Smith Breeden Series Fund
Portfolio Manager, Short and Intermediate Funds

Daniel C. Dektar is a Principal, Executive Vice President, Director of
Portfolio Management, and Director of Smith Breeden Associates. Mr. Dektar
has been primarily responsible for the day-to-day management of the Short
and Intermediate Funds since their commencement of operations in 1992. In
December 1997, Timothy D. Rowe joined Mr. Dektar as Co-portfolio Manager of
the Intermediate Fund, and shares responsibility for the day-to-day
management of that Fund. As head of Smith Breeden Associates' portfolio
management group, Mr. Dektar is constantly in touch with developments on
Wall Street. He serves as a liaison among the portfolio management, client
service, and research groups to ensure accurate analysis and timely
execution of portfolio management opportunities. Mr. Dektar consults with
institutional clients in the areas of investments and risk management. He
made several presentations on mortgage investments and risk management at
seminars for institutional investors. Mr. Dektar was an Associate in the
Mergers and Acquisitions Group of Montgomery Securities in San Francisco,
California and a Financial Analyst in the Investment Banking Division of
Morgan Stanley & Co., Incorporated, New York before joining Smith Breeden
Associates. He holds a Master of Business Administration with Concentration
in Finance from Stanford University Graduate School of Business, where he
was an Arjay Miller Scholar. Mr. Dektar received a Bachelor of Science in
Business Administration, summa cum laude, from the University of California
at Berkeley, where he was University of California Regent's Scholar, was
elected to Phi Beta Kappa and Phi Eta Sigma, and won the White Award as the
top student in finance.

Timothy D. Rowe Vice President, Smith Breeden Series Fund
Portfolio Manager, Intermediate Fund

Timothy D. Rowe is a Principal, Director, and Vice President of Smith
Breeden Associates. Mr. Rowe, in conjunction with Daniel C. Dektar, is
responsible for the day-to-day management of the Intermediate Fund. Mr.
Rowe is a senior portfolio manager working primarily with discretionary
separate account clients. He implements investment strategies designed to
generate portfolio returns superior to the broad investment grade and
mortgage market indices. Mr. Rowe joined Smith Breeden in 1988. His prior
experience includes three years as Assistant Economist at the Federal
Reserve Bank of Richmond, Virginia. While at the Bank, he co-edited the
sixth edition of Instruments of the Money Market, and produced research
papers for publication in the Bank's Economic Review magazine. He holds a
Master of Business Administration with specialization in Finance from the
University of Chicago Graduate School of Business, and a Bachelor of Arts
in Economics and History from Duke University. He graduated from Duke magna
cum laude, earned Class Honors and was a National Merit Scholar.

26
John B. Sprow Vice President, Smith Breeden Trust
Portfolio Manager, U.S. Equity Market Plus Fund

John B. Sprow is a Principal, Director and Executive Vice President of
Smith Breeden Associates. Mr. Sprow has been primarily responsible for the
day-to-day management of the U.S. Equity Market Plus Fund from the
commencement of its operations in 1992. Mr. Sprow is a senior portfolio
manager who works primarily with discretionary pension accounts. In
addition to traditional mortgage accounts, he also manages S&P 500 indexed
accounts. Prior to directly managing discretionary accounts, Mr. Sprow
assisted in the development of the Adviser's models for pricing and hedging
mortgage-related securities, risky commercial debt, and forecasting
mortgage prepayment behavior. Mr. Sprow came to Smith Breeden Associates
from the Fuqua School of Business, Duke University, where he was Research
Assistant. Previously, Mr. Sprow was a Research Assistant to the Department
Head of the Materials Science Department, Cornell University. He received a
Master of Business Administration with Emphasis in Finance from the Fuqua
School of Business, Duke University. Mr. Sprow holds a Bachelor of Science
in Materials Science and Engineering from Cornell University, where he was
awarded the Carpenter Technology Scholarship three successive years.

Robert B. Perry Vice President, Smith Breeden Trust
Portfolio Manager, Financial Services Fund

Robert B. Perry is a Principal at Smith Breeden Associates, providing
hedging and investment advice to Smith Breeden's financial services
clients. He is also responsible for calculating marked-to-market values and
projected income of institutions, and assesses the effects of interest rate
and economic changes. In conjunction with Douglas T. Breeden and Michael J.
Giarla, Mr. Perry is responsible for the day-to-day operations of the
Financial Services Fund. Prior to joining Smith Breeden, Mr. Perry served
as an interest rate risk analyst for Centura Bank, and secretary to the
Asset/Liability Management Committee. He has also served as a Director for
Community First Financial Group, a multi-bank holding company located in
Indianapolis, Indiana. Mr. Perry earned his Bachelor of Arts in Business
Administration from North Carolina State University.

David A. Tiberii Vice President, Smith Breeden Trust
Portfolio Manager, High Yield Bond Fund

David A. Tiberii is an Associate at Smith Breeden Associates. In
conjunction with Douglas T. Breeden, Mr. Tiberii is responsible for the day-
to-day operations of the High Yield Bond Fund. Before joining Smith
Breeden Associates, he was an engineering consultant specializing in
operational and maintenance issues at nuclear power plants and a submarine
officer in the US Navy. He received his Masters of Business Administration
with a concentration in Finance from the Fuqua School of Business, Duke
University, where he was a Fuqua Scholar. Mr. Tiberii holds a Bachelor of
Arts degree in Physics from Holy Cross College and a Chief Nuclear Engineer
certification from the US Navy.

William F. Quinn Vice President, Smith Breeden Trust
Portfolio Manager, Asian/Pacific Equity Market
and European Equity Market Funds

William F. Quinn is an Executive Vice President and a Director of Smith
Breeden Associates. He is a Senior Portfolio Manager, a member of Smith
Breeden's Portfolio Management Group (PMG), and the portfolio manager for
several discretionary accounts. Mr. Quinn is also involved in the
27
formulation and implementation of investment and risk management policies
and procedures as well as clients' strategic plans and business plans. He
has completed a number of special projects for both institutional clients
and government regulators regarding complex mortgage securities. Mr. Quinn
is primarily responsible for the day-to-day operations of the Asian/Pacific
Equity Market and European Equity Market Funds. Mr. Quinn joined Smith
Breeden after completing his Masters of Science in Management with
Concentrations in Finance, MIS and System Dynamics from the Sloan School of
Management, Massachusetts Institute of Technology. He earned a Bachelor of
Science in Management Science from the Massachusetts Institute of
Technology.

Marianthe S. Mewkill Vice President, Secretary, Treasurer, and
Chief Accounting Officer

Marianthe S. Mewkill is a Principal, Vice President and Chief Financial
Officer of Smith Breeden Associates. Ms. Mewkill handles financial
reporting, budgeting, tax research and planning for the Smith Breeden
Mutual Funds and for Smith Breeden Associates, Inc. She ensures compliance
with agency regulations and administers the Adviser's internal trading and
other policies. She was previously employed as a Controller for the Hunt
Alternatives Fund, as an Associate at Goldman Sachs & Co., and as a Senior
Auditor at Arthur Andersen & Co. She earned a Master of Business
Administration with Concentrations in Finance and Accounting from New York
University and graduated from Wellesley College, magna cum laude with a
Bachelor of Arts degree in History and French and a Minor in Economics.

St. John M. Kelliher Assistant Treasurer

St. John M. Kelliher assists in financial administration and portfolio
analysis for Smith Breeden Associates and Smith Breeden Mutual Funds. He
holds a Bachelor of Arts degree from Trinity College, Dublin, Ireland, and
a Master of Arts degree in Philosophy from the University of Illinois at
Chicago. He passed the Uniform C.P.A. examination in 1993, and currently
is a candidate for the Chartered Financial Analyst (C.F.A.) designation.

Investment Adviser

Smith Breeden Associates, Inc., a registered investment adviser, acts as
investment adviser to the Funds. Approximately 62% of the Adviser's voting
stock on a fully diluted basis is owned by Douglas T. Breeden, its
Chairman. Under its Investment Advisory Agreement with each Fund, the
Adviser, subject to the general supervision of the Board of Trustees,
manages the Funds' portfolios and provides for the administration of all of
the Funds' other affairs. For the fiscal year ended March 31, 1999, the
Adviser was paid an advisory fee, computed daily and payable monthly, based
on a percentage of average net assets as follows: 0.70% of each of the
Short, Intermediate, High Yield Bond, U.S. Equity Market Plus,
Asian/Pacific Equity Market, and European Equity Market Funds' and 1.50%
for the Financial Services Fund.

The Adviser places all orders for purchases and sales of the Funds'
securities. Subject to seeking the most favorable price and execution
available, the Adviser may consider sales of shares of the Funds as a
factor in the selection of broker-dealers.

Distribution

First Data Distributors, Inc. (the "Principal Underwriter") acts as
28
distributor for the Funds. Shares may also be sold by authorized dealers
who have entered into dealer agreements with the Principal Underwriter or
the Adviser.

Expenses

Subject to any expense waivers or reimbursements, the Funds pay all of
their own expenses, including, without limitation, the cost of preparing
and printing their registration statements required under the Securities
Act of 1933 and the 1940 Act and any amendments thereto, the expense of
registering their shares with the Securities and Exchange Commission and
the various states, the printing and distribution costs of prospectuses
mailed to existing investors, reports to investors, reports to government
authorities and proxy statements, fees paid to directors who are not
interested persons of the Adviser, interest charges, taxes, legal expenses,
association membership dues, auditing services, insurance premiums,
brokerage commissions and expenses in connection with portfolio
transactions, fees and expenses of the custodian of their assets, printing
and mailing expenses and charges and expenses of dividend disbursing
agents, accounting services agents, registrars and stock transfer agents.

PRICING OF FUND SHARES

The price you pay when buying a Fund's shares, and the price you receive
when selling (redeeming) a Fund's shares, is the net asset value of the
shares next determined after receipt of a purchase or redemption request in
proper form. No front-end sales charge or commission of any kind is added
by the Fund upon a purchase, and no charge is deducted upon redemption.
These charges may apply if you purchase or sell shares through certain
broker-dealers. The Funds currently charge a $9 fee for each redemption
made by wire, and a fee of $8 may be charged when an account is closed. See
"How to Redeem Shares."

The per share net asset value of a Fund is determined by dividing the total
value of its assets, less its liabilities, by the total number of its
shares outstanding at that time. The net asset value is determined as of
the close of regular trading (usually at 4:00 p.m. Eastern time) each day
that the Adviser and Transfer Agent are open for business and on which
there is a sufficient degree of trading in a Fund's securities such that
the net asset value of a Fund's shares might be affected. Accordingly,
Purchase Applications accepted or redemption requests received in proper
form by the Transfer Agent, or other agent designated by the Funds, prior
to the close of regular trading each day that the Adviser and Transfer
Agent are open for business, will be confirmed at that day's net asset
value. Purchase Applications accepted or redemption requests received in
proper form after the close of regular trading by the Transfer Agent, or
other agent designated by the Funds, will be confirmed at the net asset
value of the following business day.

Foreign securities, futures and options are valued at the last quoted sales
price, according to the broadest and most representative market, available
at the time a Fund is valued. If events which materially affect the value
of an investment occur after the close of the securities and futures
markets on which such securities are primarily traded, those investments
may be valued by such methods as the Board of Trustees deems in good faith
to reflect fair value.

Current holiday schedules indicate that the Funds' net asset values will
not be calculated on New Year's Day, Martin Luther King Day, President's
29
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, the day following Thanksgiving, Christmas Eve and Christmas Day. The
Short, Intermediate, and High Yield Bond Funds will also not be priced on
Columbus Day and Veterans' Day.

Under procedures approved by the Board of Trustees, a Fund's securities for
which market quotations are readily available are valued at current market
value provided by a pricing service, bank or broker-dealer experienced in
such matters. Short-term investments that will mature in 60 days or less
are generally valued at amortized cost, which approximates market value.
All other securities and assets are valued at fair market value as
determined by following procedures approved by the Board of Trustees.

HOW TO PURCHASE SHARES

All of the Funds are no-load, so you may purchase, redeem or exchange
shares directly at net asset value without paying a sales charge. Because
the Funds' net asset value changes daily, your purchase price will be the
next net asset value determined after the Funds' Transfer Agent, or other
agent designated by the Funds, receives and accepts your purchase order.
See "Pricing of Fund Shares."

Initial Minimum Additional
Type of Account Investment Minimum
Investment
Regular $ 1,000 $ 50
Automatic Investment Plan None $ 50
Individual Retirement Account $ 250 $ 50
Gift to Minors $ 250 $ 50

The Funds reserve the right to deduct an annual maintenance fee of $16
from accounts with a value of less than $2,000. The fee applies to each
account in each fund that is of a value of less than $2,000 and is funded
by redeeming shares. It is expected that accounts will be valued on the
second Friday in September of each year. The fee, which is payable to the
transfer agent, is designed to offset in part the relatively higher costs
of servicing smaller accounts.

Each Fund reserves the right to reject any orders for the purchase of its
shares or to limit or suspend, without prior notice, the offering of its
shares. The required minimum investments may be waived in the case of
qualified retirement plans.

How to Open Your Account by Mail. Please complete the Purchase Application.
You can obtain additional copies of the Purchase Application and a copy of
the IRA Purchase Application from the Funds by calling 1-800-221-3138.

Your completed Purchase Application should be mailed directly to:

Smith Breeden Mutual Funds
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903

All applications must be accompanied by payment in the form of a check or
money order made payable to "Smith Breeden Mutual Funds." All purchases
must be made in U.S. dollars, and checks must be drawn on U.S. banks. No
cash, credit cards or third party checks will be accepted. When a purchase
30
is made by check and a redemption is made shortly thereafter, the Funds
will delay the mailing of a redemption check until the purchase check has
cleared your bank, which may take up to 15 calendar days from the purchase
date. If you contemplate needing access to your investment shortly after
purchase, you should purchase the shares by wire as discussed below.

How to Open Your Account by Wire. You may make purchases by direct wire
transfers. To ensure proper credit to your account, please call the Funds
at 1-800-221-3137 for instructions prior to wiring funds. Funds should be
wired through the Federal Reserve System as follows:

United Missouri Bank
A.B.A. Number 10-10-00695
For the account of First Data Investor Services Group, Inc.
Account Number 98-7037-071-9
For credit to (identify which Fund to purchase)
For further credit to: (investor account number)
(name or account registration)
(Social Security or Tax Identification Number)

Following such wire transfer, you must promptly complete a Purchase
Application and mail it to the Funds at the following address: Smith
Breeden Mutual Funds, 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
PA 19406-0903. Shares will be redeemed with Federal tax withheld if the
Funds do not receive a properly completed and executed Purchase
Application.

Telephone Transactions. The privilege to initiate redemption or exchange
transactions by telephone is made automatically available to shareholders
when opening an account, unless they indicate otherwise by checking the
appropriate boxes on the Purchase Application. Each Fund will employ
reasonable procedures to ensure that instructions communicated by telephone
are genuine. If reasonable procedures are not implemented, the Funds may be
liable for any loss due to unauthorized or fraudulent transactions. In all
other cases, you are liable for any loss due to unauthorized transactions.
The Funds reserve the right to refuse a telephone transaction if they
believe it is advisable to do so.

If you have any questions, please call the Funds at 1-800-221-3138.

How to Add to Your Account. You may make additional investments by mail or
by wire in an amount equal to or greater than $50. When adding to an
account by mail, you should send the Funds your check, together with the
additional investment form from a recent statement. If this form is
unavailable, you should send a signed note giving the full name of the
account and the account number. For additional investments made by wire
transfer, you should use the wiring instructions listed above. Be sure to
include your account number.

Automatic Investment Plan. You may make purchases of shares of each Fund
automatically on a regular basis ($50 minimum per transaction). You have
two options under the Plan to make investments. One is by automatic payroll
deduction. Under this method, you authorize your employer to direct a
portion of each paycheck to be invested in the Fund of your choice. Your
employer must be using direct deposit to process its payroll in order for
you to elect this method. Under the other method, your bank debits a pre-
authorized amount from your checking or savings account each month and
applies the amount to your investment in Fund shares. In order to have your
bank account debited automatically for investment into the Funds, your
31
financial institution must be a member of the Automated Clearing House. No
service fee is currently charged by the Funds for participation in either
method under the Plan. A $20 fee will be imposed by the Funds if sufficient
funds are not available in your bank account, or if your bank account has
been closed at the time of the automatic transaction. You may adopt either
method under the Plan at the time an account is opened by completing the
appropriate section of the Purchase Application. Enclosed with the
application are the necessary forms to deliver to your employer to set up
the payroll deduction. You may obtain an application to establish the
Automatic Investment Plan after an account is opened by calling the Funds
at 1-800-221-3138. In the event you discontinue participation in the Plan,
the Funds reserve the right to redeem your Fund account involuntarily, upon
sixty days' written notice, if the account's net asset value is $1,000 or
less.

Purchasing Shares Through Other Institutions. The Funds have authorized
dealers besides the Principal Underwriter to accept on its behalf purchase
and redemption orders. If you purchase shares through a program of services
offered or administered by one of these broker-dealers, financial
institutions, or other service provider, you should read the program
materials, including information relating to fees, in addition to this
Prospectus. Certain services of a Fund may not be available or may be
modified in connection with the program of services provided, and service
providers may establish higher minimum investment amounts. The Funds may
only accept requests to purchase additional shares into a broker-dealer
street name account from the broker- dealer.

Certain broker-dealers, financial institutions, or other service providers
that have entered into an agreement with the Adviser or Principal
Underwriter may enter purchase and redemption orders on behalf of their
customers by phone, with payment to follow within several days as specified
in the agreement. These broker-dealers and service providers may designate
other intermediaries to accept purchase and redemption orders on the Funds'
behalf. The Funds will be deemed to have effected such purchase or
redemption orders at the net asset value next determined after acceptance
of the telephone purchase order by the authorized broker or the authorized
broker's designee. It is the responsibility of the broker-dealer, financial
institution, or other service provider to place the order with the Funds on
a timely basis. If payment is not received within the time specified in the
agreement, the broker-dealer, financial institution, or other service
provider could be held liable for any resulting fees or losses.

Miscellaneous. The Funds will charge a $20 service fee against your account
for any check or electronic funds transfer that is returned unpaid. You
will also be responsible for any losses suffered by the Funds as a result.
In order to relieve you of responsibility for the safekeeping and delivery
of stock certificates, the Funds do not currently issue certificates.

HOW TO EXCHANGE SHARES

Shares of any Fund may be exchanged for shares of another Fund at any time.
This exchange offer is available only in states where shares of such other
Fund may be legally sold. You may open a new account, or purchase
additional shares in an existing account, by making an exchange from an
identically registered Smith Breeden Fund account. A new account will have
the same registration as the existing account from which the exchange was
made, and is subject to the same initial investment minimums.

32
Exchanges may be made either in writing or by telephone. Written
instructions should be mailed to 3200 Horizon Drive, P.O. Box 61503, King
of Prussia, PA 19406 and must be signed by all account owners, and
accompanied by any properly endorsed outstanding share certificates, if
applicable. The telephone exchange is automatically accepted unless checked
otherwise. The telephone exchange privilege is available only for
uncertificated shares. During periods of drastic economic or market
changes, it is possible that exchanges by telephone may be difficult to
implement. In this event, shareholders should follow the written exchange
procedures. The telephone exchange privilege may be modified or
discontinued by the Funds at any time upon a 60-day notice to the
shareholders. To exchange by telephone, you must follow the instructions
below under "How to Redeem by Telephone."

The Funds will accept exchange orders by telephone or other means of
electronic transmission from broker- dealers, financial institutions or
other service providers who execute an agreement with the Adviser or
Principal Underwriter. It is the responsibility of the broker-dealer,
financial institution or other service provider to place the exchange order
on a timely basis.

Exchanges are made on the basis of the Funds' relative net asset values.
Because the exchange is considered a redemption and purchase of shares, the
shareholder may recognize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Additional
information regarding the possible tax consequences of such an exchange is
included under the caption "Taxes" in the Funds' Statements of Additional
Information.

There are differences among the Funds. When exchanging shares, shareholders
should be aware that the Funds might have different dividend payment dates.
The dividend payment schedules should be checked before exchanging shares.
The amount of any accumulated, but unpaid, dividend is included in the net
asset value per share.

If you buy shares by check, you may not exchange those shares for up to 15
calendar days to ensure your check has cleared. If you intend to exchange
shares soon after their purchase, you should purchase the shares by wire or
contact the Funds at 1-800-221-3137 for further information.

The Funds reserve the right to temporarily or permanently terminate, with
or without advance notice, the exchange privilege of any investor who makes
excessive use of the exchange privilege (e.g., more than four exchanges per
calendar year).

Additional documentation may be required for exchange requests if shares
are registered in the name of a corporation, partnership or fiduciary.
Please contact the Funds for additional information concerning the exchange
privilege.

HOW TO REDEEM SHARES

You may redeem shares of the Funds at any time. The price at which the
shares will be redeemed is the net asset value per share next determined
after proper redemption instructions are received by the Transfer Agent or
other agent designated by the Funds. See "Pricing of Fund Shares." There
are no charges for the redemption of shares, except that a fee of $9 is
charged for each wire redemption, and a fee of $8 may be charged when an
33
account is closed. Depending upon the redemption price you receive, you may
realize a capital gain or loss for federal income tax purposes.

How to Redeem by Mail to Receive Proceeds by Check. To redeem shares by
mail, simply send an unconditional written request to the Funds specifying
the number of shares or dollar amount to be redeemed, the name of the Fund,
the name(s) on the account registration and the account number. A request
for redemption must be signed exactly as the shares are registered. If the
amount requested is greater than $25,000, or the proceeds are to be sent to
a person other than the recordholder or to a location other than the
address of record, each signature must be guaranteed by a commercial bank
or trust company in the United States, a member firm of the National
Association of Securities Dealers, Inc. or other eligible guarantor
institution. A notary public is not an acceptable guarantor. Guarantees
must be signed by an authorized signatory of the bank, trust company, or
member firm, and "Signature Guaranteed" must appear with the signature.
Additional documentation may be required for the redemption of shares held
in corporate, partnership or fiduciary accounts. In case of any questions,
please contact the Funds in advance.

A Fund will mail payment for redemption within seven days after receiving
proper instructions for redemption. However, the Funds will delay payment
for 15 calendar days on redemptions of recent purchases made by check. This
allows the Funds to verify that the check used to purchase Fund shares will
not be returned due to insufficient funds and is intended to protect the
remaining investors from loss.

How to Redeem by Telephone. The redemption of shares by telephone is
available automatically unless you elected to refuse this redemption
privilege on your Purchase Application. Shares may be redeemed by calling
the Funds at 1-800-221-3137. Proceeds redeemed by telephone will be mailed
to your address, or wired or credited to your pre-authorized bank account.
To establish wire redemption privileges, you must select the appropriate
box on the Purchase Application and enclose a voided check.

In order to arrange for telephone redemptions after your account has been
opened, or to change the bank account or address designated to receive
redemption proceeds, you must send a written request to your Fund. The
request must be signed by each registered holder of the account with the
signatures guaranteed by a commercial bank or trust company in the United
States, a member firm of the National Association of Securities Dealers,
Inc. or other eligible guarantor institution. A notary public is not an
acceptable guarantor. Further documentation as provided above may be
requested from corporations, executors, administrators, trustees and
guardians.

Payment of the redemption proceeds for Fund shares redeemed by telephone
where you request wire payment will normally be made in federal funds on
the next business day. The Funds reserve the right to delay payment for a
period of up to seven days after receipt of the redemption request. There
is currently a $9 fee for each wire redemption, which will be deducted from
your account.

The Funds reserve the right to charge an $8 fee when an account is closed.

The Funds reserve the right to refuse a telephone redemption or exchange
transaction if they believe it is advisable to do so. Procedures for
redeeming or exchanging shares of the Funds by telephone may be modified or
terminated by the Funds at any time. In an effort to prevent unauthorized
34
or fraudulent redemption or exchange requests by telephone, the Funds have
implemented procedures designed to reasonably assure that telephone
instructions are genuine. These procedures include: requesting verification
of certain personal information; recording telephone transactions;
confirming transactions in writing; and restricting transmittal of
redemption proceeds only to pre-authorized designations. Other procedures
may be implemented from time to time. If reasonable procedures are not
implemented, the Funds may be liable for any loss due to unauthorized or
fraudulent transactions. In all other cases, you are liable for any loss
for unauthorized transactions.

You should be aware that during periods of substantial economic or market
change, telephone or wire redemptions may be difficult to implement. If you
are unable to contact the Funds by telephone, you may also redeem shares by
delivering or mailing the redemption request to: Smith Breeden Mutual
Funds, 3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903.

The Funds reserve the right to suspend or postpone redemptions during any
period when trading on the New York Stock Exchange ("Exchange") is
restricted as determined by the Securities and Exchange Commission ("SEC"),
or the Exchange is closed for other than customary weekend and holiday
closing; the SEC has by order permitted such suspension; or an emergency,
as determined by the SEC, exists, making disposal of portfolio securities
or valuation of net assets of a Fund not reasonably practicable.

Due to the relatively high cost of maintaining small accounts, if your
account balance falls below $1000 as a result of a redemption or exchange,
or if you discontinue the Automatic Investment Plan before your account
balance reaches $1000, you may be given a 60-day notice to bring your
balance to $1000 or reactivate an Automatic Investment Plan. If this
requirement is not met, your account may be closed and the proceeds sent to
you.

Check Writing. In addition to telephone and written redemption requests,
the Short Fund offers redemption through check writing. Shareholders
electing this option will receive checks that may be used like personal or
business checks. Checks are not ordered to be mailed to the shareholder
until 15 days after the account is opened, if the account is opened by
check by the shareholder. This allows the Fund to verify that the check
used to open the account will not be returned due to insufficient funds.
There is no limit on the number of checks you may write. Checks must be
written for at least $100. There is a $30 fee for returned checks. Because
dividends declared on shares held in a shareholder's account, prior
redemptions, and possible changes in net asset value may cause the value of
the account to change, shareholders should not write a check for the entire
value of the account or close the account by writing a check.

In using the check writing privilege, shareholders bear the responsibility
of ensuring that the check amount does not exceed the value of their
account on the day the check is presented to the Transfer Agent for
payment. The day the check is presented for payment is the day the
redemption of Fund shares takes place. If insufficient shares are in the
account, the check will be returned and no shares will be redeemed. The
clearing agent for the check writing facility is United Missouri Bank.
Shareholders utilizing check writing are subject to United Missouri Bank's
rules governing checking accounts. However, this check writing facility is
purely a means to redeem Fund shares. No facilities characteristic of bank
accounts, such as deposit insurance, are provided along with the check
writing option. Cancelled checks will not be returned to the shareholder.
35
If you need to request a copy of a cancelled check, please contact
Shareholder Services for procedures and applicable fees.

If you would like to initiate check writing, please call Shareholder
Services at 1-800-221-3137 or check the appropriate box on the Purchase
Application.

Systematic Withdrawal Plan. A shareholder may establish a Systematic
Withdrawal Plan to receive regular periodic payments from the account. An
initial balance of $10,000 is required to establish a Systematic Withdrawal
Plan. There are no service charges for establishing or maintaining a
Systematic Withdrawal Plan. The minimum amount which the shareholder may
withdraw periodically is $100. Capital gain distributions and income
dividends to the shareholder's account are received in additional shares at
net asset value. Payments are then made from the liquidation of shares at
net asset value to meet the specified withdrawals. Liquidation of shares
may reduce or possibly exhaust the shares in the shareholder's account, to
the extent withdrawals exceed shares earned through dividends and
distributions, particularly in the event of a market decline. No payment
pursuant to a Systematic Withdrawal Plan will be made if there are
insufficient shares on deposit on the date of the scheduled distribution. A
subsequent deposit of shares will not result in a payment under the plan
retroactive to the distribution date. As with other redemptions, a
liquidation to make a withdrawal payment is a sale for federal income tax
purposes. The entire Systematic Withdrawal Plan payment cannot be
considered as actual yield or income since part of the Plan's payment may
be a return of capital.

A Systematic Withdrawal Plan may be terminated upon written notice by the
shareholder, or by a Fund on a 30 day written notice, and it will terminate
automatically if all shares are liquidated or withdrawn from the account or
upon the Fund's receipt of notification of the death or incapacity of the
shareholder. Shareholders may change the amount (but not below the
specified minimums) and schedule of withdrawal payments, or suspend such
payments, by giving written notice to the Transfer Agent at least five
business days prior to the next scheduled payment.

DIVIDENDS AND DISTRIBUTIONS

The Short, Intermediate and High Yield Bond Funds intend to pay monthly
distributions to their shareholders of net investment income. The U.S.
Equity Market Plus, Asian/Pacific Equity Market, and European Equity Market
Funds each intend to make quarterly distributions of net investment income.
All Funds will distribute net realized gains at least annually. The
Financial Services Fund will most likely make only this annual distribution
of net realized gains, and at this time, will also distribute any net
investment income. Each Fund may make additional distributions if necessary
to avoid imposition of a 4% excise tax or other tax on undistributed income
and gains.

The monthly distributions for the Short Fund's shares are quoted ex-
dividend on the business day after record date (the "ex-date"). Record date
is usually the first or second business day of the month. If a shareholder
elects to reinvest dividends, the date the dividends are reinvested is also
the ex-date. Dividends are paid in cash by the Short Fund generally one
week after the ex-date.

The Intermediate and High Yield Bond Funds will declare daily dividends for
36
shareholders of record. The Intermediate and High Yield Bond Funds'
dividend payable date, and the day that dividends are reinvested for
shareholders who have made this election, is the last business day of the
month. Shares begin accruing dividends on the business day after federal
funds (funds credited to a member bank's account at the Federal Reserve
Bank) are available from the purchase payment for such shares, and continue
to accrue dividends through and including the day the redemption order for
the shares is executed. If an investor closes his account, any accrued
dividends through and including the day of redemption will be paid as part
of the redemption proceeds.

Dividends and capital gains distributions may be declared more or less
frequently at the direction of the Trustees. In order to be entitled to a
dividend or a distribution, an investor must acquire a Fund's shares on or
before the record date. Caution should be exercised, however, before
purchasing shares immediately prior to a distribution record date. Since
the value of a Fund's shares is based directly on the amount of its net
assets, rather than on the principle of supply and demand, any distribution
of income or capital gain will result in a decrease in the value of its
shares equal to the amount of the distribution. While a dividend or capital
gain distribution received shortly after purchasing shares represents, in
effect, a return of the shareholder's investment, it may be taxable as
dividend income or capital gain. You may separately elect to reinvest
income dividends and capital gains distributions in shares of a Fund or
receive cash as designated on the Purchase Application. You may change your
election at any time by sending written notification to your Fund. The
election is effective for distributions with a dividend record date on or
after the date that the Funds receive notice of the election. If you do not
specify an election, all income dividends and capital gains distributions
will automatically be reinvested in full and fractional shares of the Fund
from which they were paid. Shareholders may also elect to have dividends
automatically reinvested in a fund different than the one from which the
dividends were paid. A shareholder may write the transfer agent, or
complete the appropriate section of the Purchase Application, to designate
such an election, but must have already established an account in the other
fund. The transfer agent's address is on the back of the Prospectus.
Reinvested dividends and distributions receive the same tax treatment as
those paid in cash.

SHAREHOLDER REPORTS AND INFORMATION

The Funds will provide the following statements and reports:

Confirmation and Account Statements. Quarterly statements will be sent to
each shareholder. Additional statements will only be sent if there is a
direct purchase or sale or if there is a cash dividend payment. Direct
purchases and sales do not include automatic investment plan purchases or
systematic withdrawal plan redemptions.

Form 1099. By January 31 of each year, all shareholders will receive Form
1099, which will report the amount and tax status of distributions paid to
you by the Funds for the preceding calendar year.

Financial Reports. Financial reports are provided to shareholders
semiannually. Annual reports will include audited financial statements. To
reduce the Funds' expenses, one copy of each report will be mailed to each
Taxpayer Identification Number even though the investor may have more than
one account in a Fund.
37
Reports to Depository Institutions. Shareholders of the Short or
Intermediate Funds who are financial institutions may request receipt of
monthly or quarterly reports which provide information about the Short or
Intermediate Fund's investments considering regulatory risk-based asset
categories.

If you need additional copies of previous statements, you may order
statements for the current and preceding year at no charge. Call 1-800-221-
3137 to order past statements. If you need information on your account with
the Funds or if you wish to submit any applications, redemption requests,
inquiries or notifications, please contact: Smith Breeden Mutual Funds,
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903 or call
1-800-221-3137.

RETIREMENT PLANS

The Funds have a program under which you may establish an Individual
Retirement Account ("IRA") with the Funds and purchase shares through such
account. Shareholders wishing to establish an IRA should consult their tax
adviser regarding (1) their individual qualifying status and (2) the tax
regulations governing these accounts. The minimum initial investment in
each Fund for an IRA is $250. There is a $12 annual maintenance fee charged
to process an account. This fee is waived for accounts greater than
$10,000. You may obtain additional information regarding establishing such
an account by calling the Funds at 1-800-221-3138.

The Funds may be used as investment vehicles for established defined
contribution plans, including simplified employee, 401(k), 403(b), profit-
sharing, money purchase, and simple pension plans ("Retirement Plans"). For
details concerning Retirement Plans, please call 1-800-221-3138.

SERVICE AND DISTRIBUTION PLANS

Each Fund has adopted a Distribution and Services Plan (the "Plans"). The
purpose of the Plans is to permit the Adviser to compensate investment
dealers and other persons involved in servicing shareholder accounts for
services provided and expenses incurred in promoting the sale of shares of
the Funds, reducing redemptions, or otherwise maintaining or improving
services provided to shareholders by such dealers or other persons. The
Plans provide for payments by the Adviser out of its advisory fee to
dealers and other persons at an annual rate of up to 0.25% of a Fund's
average net assets, subject to the authority of the Trustees to reduce the
amount of payments permitted under the Plan or to suspend the Plan for such
periods as they may determine. Subject to these limitations, the Adviser
shall determine the amount of such payments and the purposes for which they
are made.

Any distribution and service related payments made by the Adviser to
investment dealers or other persons are subject to the continuation of the
Plans, the terms of any related service agreements, and any applicable
limits imposed by the National Association of Securities Dealers, Inc.

TAXES

Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code. In each taxable year that a Fund so qualifies, such
38
Fund (but not its shareholders) will be relieved of federal income tax on
the part of its net investment income and net capital gain that is
distributed to shareholders. Each Fund will distribute at least annually
substantially all of the sum of its taxable net investment income, its net
tax-exempt income and the excess, if any, of net short-term capital gains
over the net long-term capital losses for such year.

All Fund distributions from net investment income (whether paid in cash or
reinvested in additional shares) will be taxable to its shareholders as
ordinary income, except that any distributions of a Fund's net long-term
capital gain will be taxable to its shareholders as long-term capital gain
(generally taxed at a 20% rate in the hands of non-corporate shareholders),
regardless of how long they have held their Fund shares. Each fund provides
federal tax information to its shareholders annually about distributions
paid during the preceding year.

The use of certain synthetic instruments (including certain futures
contracts, foreign currency contracts and options) by the U.S. Equity
Market Plus, Asian/Pacific Equity Market, and European Equity Market Funds
as a means of achieving equity exposure in each Fund's respective market
will require such Funds to mark such instruments to the market annually, a
practice which will accelerate the Funds' recognition of gain or loss.
With respect to such instruments, 60% of any gain or loss recognized will
be treated as long-term capital gain or loss and 40% will be treated as
short-term capital gain or loss.

It is not anticipated that any of the Funds' distributions will qualify for
either the corporate dividends-received deduction or tax-exempt interest
income. Distributions will also probably be subject to state and local
taxes, depending on each shareholder's tax situation. While many states
grant tax-free status to mutual fund distributions paid from interest
income earned from direct obligations of the U.S. Government, none of the
Short or Intermediate Fund's distributions are expected to qualify for such
tax-free treatment, and only an insignificant amount of the U.S. Equity
Market Plus Fund's distributions are expected to so qualify.

The Funds will be required to withhold federal income tax at a rate of 31%
("backup withholding") from distribution payments and redemption and
exchange proceeds if you fail to properly complete the Purchase
Application, or in certain other situations.

The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders. See
"Taxes" in the relevant Statement of Additional Information for further
discussion. There may be other foreign, federal, state or local tax
considerations applicable to you as an investor. You therefore are urged to
consult your tax adviser regarding any tax-related issues.

CAPITAL STRUCTURE

The Smith Breeden Trust and the Smith Breeden Series Fund are both
Massachusetts business trusts. The Trust was organized under an Agreement
and Declaration of Trust, dated December 18, 1991. The Series Fund was
organized under an Agreement and Declaration of Trust dated October 3,
1991. Copies of both Agreements, which are governed by Massachusetts law,
are on file with the Secretary of State of The Commonwealth of
Massachusetts. The Trust and the Series Fund have the same Trustees.

39
The Trustees have the authority to issue shares in an unlimited number of
funds of either the Series Fund or Trust. Each such fund's shares may be
further divided into classes. The assets and liabilities of each such fund
will be separate and distinct. All shares when issued are fully paid, non-
assessable and redeemable, and have equal voting, dividend and liquidation
rights.

Shareholders of the separate funds of each of the Series Fund or Trust, as
the case may be, will vote together in electing the relevant trustees and
in certain other matters. Shareholders should be aware that the outcome of
the election of trustees and of certain other matters for their trust could
be controlled by the shareholders of another fund. The shares have non-
cumulative voting rights, which means that holders of more than 50% of the
shares voting for the election of the trustees can elect 100% of the
trustees if they choose to do so.

Neither the Series Fund nor the Trust is required to hold annual meetings
of its shareholders. However, shareholders of the Series Fund have the
right to call a meeting to take certain actions as provided in the
Declaration of Trust. Upon written request by the holders of at least 1% of
the outstanding shares stating that such shareholders wish to communicate
with the other shareholders for the purpose of obtaining the signatures
necessary to demand a meeting to consider such actions, the Series Fund has
undertaken to provide a list of shareholders or to disseminate appropriate
materials (at the expense of the requesting shareholders).

Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
(i) any liability was greater than a Fund's insurance coverage and (ii) a
Fund itself was unable to meet its obligations.

TRANSFER AND DIVIDEND DISBURSING AGENT, CUSTODIAN AND INDEPENDENT
ACCOUNTANTS

First Data Investor Services Group, Inc. (the "Transfer Agent"), 3200
Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406, a wholly owned
subsidiary of First Data Corporation, which has its principal place of
business at 4400 Computer Drive, Westboro, MA, 01581, acts as each Fund's
Transfer and Dividend Disbursing Agent. See "Management of the Funds." The
Bank of New York acts as the custodian of each Fund's assets. The Bank of
New York's address is 48 Wall Street, New York, New York 10286. Neither the
Transfer and Dividend Disbursing Agent nor the Custodian has any part in
deciding the Funds' investment policies or which securities are to be
purchased or sold for the Funds' portfolios. Deloitte & Touche LLP has been
selected to serve as independent auditors of the Company.

FUND PERFORMANCE

Each Fund may quote the Fund's average annual total and/or aggregate total
return for various time periods in advertisements or communications to
shareholders. An average annual total return refers to the rate of return
which, if applied to an initial investment at the beginning of a stated
period and compounded over that period, would result in the redeemable
value of the investment at the end of the period assuming reinvestment of
all dividends and distributions and reflecting the effect of all recurring
40
fees. An investor's principal in each Fund and the Fund's return are not
guaranteed and will fluctuate according to market conditions. When
considering "average" total return figures for periods longer than one
year, you should note that a Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period. Each Fund also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in
the Fund for a specific period (again reflecting changes in the Fund's
share price and assuming reinvestment of dividends and distributions).

The Short, Intermediate, and High Yield Bond Funds may also advertise
current yield and distribution rate information. Current yield reflects
the income per share earned by a Fund's portfolio investments, and is
calculated by dividing a Fund's net investment income per share during a
recent 30-day period by a Fund's net asset value on the last day of that
period and annualizing the result. The current yield (or "SEC Yield"),
which is calculated according to a formula prescribed by the SEC (see the
relevant Statement of Additional Information), is not indicative of the
dividends or distributions which were or will be paid to a Fund's
shareholders. SEC regulations require that net investment income be
calculated on a "yield-to-maturity" basis, which has the effect of
amortizing any premiums or discounts in the current market value of fixed
income securities. Dividends or distributions paid to shareholders are
reflected in the current distribution rate which may be quoted to
shareholders, and may not reflect amortization in the same manner.

A Fund may also compare its performance to that of other mutual funds and
to stock and other relevant indices, or to rankings prepared by independent
services or industry publications. For example, a Fund's total return may
be compared to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc., Value Line Mutual Fund Survey and CDA Investment
Technologies, Inc. Total return data as reported in such national financial
publications as The Wall Street Journal, The New York Times, Investor's
Business Daily, USA Today, Barron's, Money and Forbes, as well as in
publications of a local or regional nature, may be used in comparing Fund
performance. The Short Fund's total return may also be compared to that of
taxable money funds as quoted in Donaghue's Money Fund Report and other
suppliers, and to total returns for the six month U.S. Treasury as
published by Merrill Lynch or others. The Intermediate Fund's return may be
compared to the total return of the Salomon Brothers Mortgage Index, or the
total return of intermediate U.S. Treasury Notes as published by various
brokerage firms and others. The High Yield Bond Fund's return may be
compared to the Merrill Lynch High Yield Master Index or some other high
yield bond index as published by a brokerage firm or others. The High
Yield Bond Fund's performance may also be compared to the competitive funds
average as published by Lipper Analytical Services, Inc.
The U.S. Equity Market Plus Fund's total return may also be compared to the
return of the Standard & Poor's 500 Composite Stock Price Index. For
purposes of showing the returns of large company stocks versus small
company stocks, or to compare returns versus inflation, the U.S. Equity
Market Plus Fund's total return may also be compared to the total return of
the Nasdaq Composite OTC Index, Nasdaq Industrials Index, Russell 2000
Index, or the Consumer Price Index. The Asian/Pacific Equity Market Fund's
total return may be compared to the return of the Morgan Stanley Capital
International (MSCI) - Pacific (Free) Index, which consists of common
stocks of companies located in Australia, Hong Kong, Japan, Malaysia, New
Zealand, and Singapore. The European Equity Market Fund's total return may
be compared to the return of the Morgan Stanley Capital International
(MSCI) - Europe Index, which is comprised of common stocks of companies
42
located in 15 European countries (Austria, Belgium, Denmark, Finland,,
France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, and the United Kingdom). The Financial Services
Fund's return may be compared to the S&P 500 Index return, an investment of
80% in the S&P Financial Composite Index and 20% in money market funds, the
Keefe, Bruyette & Woods Index, or the average of the mutual funds in the
Morningstar Specialty Financial Category. Further information on
performance measurement may be found in the relevant Statement of
Additional Information.

Performance quotations of a Fund represent the Fund's past performance and
should not be considered representative of future results. The investment
return and principal value of an investment in a Fund will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. The methods used to compute a Fund's total return and
yield are described in more detail in the relevant Statement of Additional
Information.

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand each
Fund's financial performance for the past 5 years or, if shorter, since the
period of the Fund's operations. Certain information reflects financial
results for a single Fund share. The total returns in the table represent
the rate that an investor would have earned or lost on an investment in the
Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along
with each Fund's financial statements, are included in the annual report to
shareholders, which is available upon request.
42
SHORT DURATION FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD

The following selected per share data and ratios cover the fiscal periods
from April 1, 1994 through March 31, 1999, and are part of the Short Fund's
financial statements which have been audited by Deloitte & Touche LLP,
independent auditors. This data should be read in conjunction with the Short
Fund's most recent annual audited financial statements and the report of
Deloitte & Touche LLP thereon, which appear in the Statement of Additional
Information for the Smith Breeden Series Fund.
<TABLE>

Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
1999 1998 1997 1996 1995
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Asset Value, $9.92 $9.83 $9.74 $9.90 $9.90
Beginning of Period....
Income From Investment
Operations
Net investment income.. 0.442 0.484 0.476 0.621 0.628
Net realized and
unrealized gain (loss) 0.020 0.114 0.146 (0.148) --
on investments.........
Total from investment 0.462 0.598 0.622 0.473 0.628
operations.............
Less Distributions
Dividends from net (0.447) (0.508) (0.476) (0.621) (0.628)
investment income......
Dividends in excess of
net investment income.. -- -- (0.056) (0.012) --
Total Distributions.... (0.447) (0.508) (0.532) (0.633) (0.628)
Net Asset Value, End of $9.94 $9.92 $9.83 $9.74 $9.90
Period.................
Total Return........... 4.83% 6.24% 6.57% 4.95% 6.58%

Ratios/Supplemental Data

Net assets, end of $60,807,449 $78,427,855 $118,988,609 $221,825,136 $218,431,665
period.................
Ratio of expenses to
average net assets
Before expense 1.00% 1.00% 0.93% 0.93% 0.92%
limitation.............
After expense 0.78% 0.78% 0.78% 0.78% 0.78%
limitation.............
Ratio of net income to
average net assets
Before expense 4.56% 5.06% 4.90% 6.13% 6.18%
limitation.............
After expense 4.78% 5.28% 5.04% 6.29% 6.33%
limitation.............
Portfolio turnover 298% 626% 556% 225% 47%
rate...................
</TABLE>

Additional performance information is presented in the Short Fund's Annual
Report, which is available without charge upon request.
43
INTERMEDIATE DURATION FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
The following selected per share data and ratios cover the fiscal periods
from April 1, 1994 through March 31, 1999, and are part of the Intermediate
Fund's financial statements which have been audited by Deloitte & Touche LLP,
independent auditors. This data should be read in conjunction with the
Intermediate Fund's most recent annual audited financial statements and the
report of Deloitte & Touche LLP thereon, which appear in the Statement of
Additional Information for the Smith Breeden Series Fund.
<TABLE>

Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
1999 1998 1997 1996 1995
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Asset Value, $10.00 $9.73 $10.01 $9.83 $10.01
Beginning of Period....
Income From Investment
Operations
Net investment income.. 0.525 0.590 0.599 0.660 0.664
Net realized and
unrealized gain (loss) 0.030 0.419 (0.024) 0.277 (0.049)
on investments.........
Total from investment 0.555 1.009 0.575 0.937 0.615
operations..........
Less Distributions
Dividends from net (0.515) (0.561) (0.604) (0.656) (0.664)
investment income.....
Dividends in excess of
net investment income.. ---- ---- ---- ---- (0.108)
Distributions from net
realized gains on (0.130) (0.178) (0.251) (0.101) --
investments............
Distributions in excess
of net realized gains -- -- -- -- (0.022)
on investments.........
Total Distributions.... (0.645) (0.739) (0.855) (0.757) (0.794)
Net Asset Value, End of $9.91 $10.00 $9.73 $10.01 $9.83
Period...............
Total 5.73% 10.65% 5.92% 9.69% 6.10%
Return.................
Ratios/Supplemental
Data
Net assets, end of $55,125,797 $38,641,879 $37,735,525 $36,446,940 $34,797,496
period.................
Ratio of expenses to
average net assets
Before expense 1.06% 1.13% 1.16% 1.14% 2.33%
limitation.............
After expense 0.88% 0.88% 0.88% 0.90% 0.90%
limitation.............
Ratio of net income to
average net assets
Before expense 5.08% 5.36% 5.92% 6.26% 4.77%
limitation.............
After expense 5.25% 5.61% 6.19% 6.49% 6.20%
limitation.............
44
Portfolio turnover rate 423% 583% 409% 193% 557%
rate...................
</TABLE>
Additional performance information is presented in the Intermediate Fund's
Annual Report, which is available without charge upon request.

U.S. EQUITY MARKET PLUS FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD

The following selected per share data and ratios cover the fiscal periods
from April 1, 1994 through March 31, 1999, and are part of the Fund's
financial statements, which have been audited by Deloitte & Touche LLP,
independent auditors. This data should be read in conjunction with the Fund's
most recent annual audited financial statements and the report of Deloitte &
Touche LLP thereon, which appear in the Statement of Additional Information
for the Smith Breeden Trust.
<TABLE>

Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
1999 1998 1997 1996 1995
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Asset Value, $16.86 $12.56 $12.27 $10.84 $9.88
Beginning of Period....
Income From Investment
Operations
Net investment 0.686 0.591 0.592 0.615 0.568
income.................
Net realized and
unrealized gain (loss) (1.765) 4.940 1.813 2.768 1.081
on
investments............
Total from investment 2.451 5.531 2.405 3.383 1.649
operations..........
Less Distributions
Dividends from net (0.624) (0.586) (0.590) (0.583) (0.568)
investment income.....
Dividends in excess of
net investment -- -- -- -- (0.001)
income.................
Distributions from net
realized gains on (1.905) (0.645) (1.525) (1.370) (0.047)
investments............
Distributions in excess
of net realized gains -- -- -- -- (0.073)
on
investments............
Total (2.529) (1.231) (2.115) (1.953) (0.689)
Distributions..........
Net Asset Value, End of $16.78 $16.86 $12.56 $12.27 $10.84
Period...............
Total 17.17% 45.71% 21.41% 32.30% 17.18%
Return.................
Ratios/Supplemental
Data
Net assets, end of $185,584,121 $136,667,439 $13,507,377 $4,766,534 $2,107,346
period..................
45
Ratio of expenses to
average net assets
Before expense 1.04% 1.23% 2.60% 4.58% 7.75%
limitation............
After expense 0.88% 0.88% 0.88% 0.90% 0.90%
limitation.............
Ratio of net income to
average net assets
Before expense 4.45% 4.44% 3.58% 1.85% 0.59%
limitation.............
After expense 4.62% 4.79% 5.30% 5.53% 7.44%
limitation.............
Portfolio turnover 527% 424% 182% 107% 120%
rate...................
</TABLE>
Additional performance information is presented in the Fund's Annual Report,
which is available without charge upon request.

FINANCIAL SERVICES FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD

The following selected per share data and ratios cover the period from
December 22, 1997, the date the Fund commenced operations, through March 31,
1999, and are part of the Fund's financial statements, which have been audited
by Deloitte & Touche LLP, independent auditors. This data should be read in
conjunction with the Fund's most recent audited financial statements and the
report of Deloitte & Touche LLP thereon, which appear in the Statement of
Additional Information for the Smith Breeden Trust.
<TABLE>

Year Ended Period Ended
March 31, 1999 March 31, 1998
<CAPTION>
<S> <C> <C>
Net Asset Value, Beginning of $10.06 $9.00
Period.....................................................
Income From Investment Operations
Net investment 0.006 0.017
income.....................................................
Net realized and unrealized gain (loss) on (1.082) 1.043
investments................................................
Total from investment (1.076) 1.060
operations.................................................
Less Distributions
Dividends from net investment (0.020) --
income.....................................................
Dividends in excess of net investment -- --
income.....................................................
Distributions from net realized gains on (0.063) --
investments................................................
Distributions in excess of net realized gains on -- --
investments................................................
Total -- --
Distributions..............................................
Net Asset Value, End of $8.90 $10.06
Period......................................................
46
Total (10.79%) 11.78%
Return.....................................................
Ratios/Supplemental Data
Net assets, end of $7,316,716
period..................................................... $6,842,414
Ratio of expenses to average net assets
Before expense 3.12% 3.20%*
limitation.................................................
After expense 1.48% 1.48%*
limitation.................................................
Ratio of net income to average net assets
Before expense (1.56%) (0.92%)*
limitation.................................................
After expense 0.08% 0.79%*
limitation.................................................
Portfolio turnover 105% 85%
rate.......................................................
* Annualized
</TABLE>
Additional performance information is presented in the Fund's Annual Report,
which is available without charge upon request.

HIGH YIELD BOND FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD

The following selected per share data and ratios cover the period from
October 15, 1998, the date the Fund commenced operations, through March 31,
1999, and are part of the Fund's financial statements, which have been audited
by Deloitte & Touche LLP, independent auditors. This data should be read in
conjunction with the Fund's most recent audited financial statements and the
report of Deloitte & Touche LLP thereon, which appear in the Statement of
Additional Information for the Smith Breeden Trust.
<TABLE>

Period Ended
March 31, 1999
<CAPTION>
<S> <C>
Net Asset Value, Beginning of Period................................. $9.00
Income From Investment Operations
Net investment income................................................ 0.318
Net realized and unrealized gain (loss) on investments............... (0.280)
Total from investment operations..................................... 0.038
Less Distributions
Dividends from net investment income................................. (0.318)
Dividends in excess of net investment income......................... --
Distributions from net realized gains on investments................. --
Distributions in excess of net realized gains on --
investments..........................................................
Total Distributions.................................................. (0.318)
Net Asset Value, End of $8.72
Period...............................................................
Total 0.39%
Return...............................................................
Ratios/Supplemental Data
Net assets, end of
period............................................................... $2,121,386
47
Ratio of expenses to average net assets
Before expense 6.86%*
limitation...........................................................
After expense 0.98%*
limitation...........................................................
Ratio of net income to average net assets
Before expense 2.43%*
limitation...........................................................
After expense 8.30%*
limitation...........................................................
Portfolio turnover 12%
rate.................................................................
* Annualized
</TABLE>
Additional performance information is presented in the Fund's Annual Report,
which is available without charge upon request.

[Back Cover]

SMITH BREEDEN MUTUAL FUNDS

The Statement of Additional Information ("SAI") and annual and
semi-annual reports to shareholders for each of the Smith Breeden
Series Fund and the Smith Breeden Trust include additional
information about the Funds. The SAIs and the financial
statements included in the Funds' most recent annual report to
shareholders are incorporated by reference into (legally a part
of) this Prospectus. You may get free copies of any of these
materials, request other information about the Funds and make
shareholder inquires by calling 1-800-221-3138 of by visiting the
Funds' website (www.smithbreeden.com).

You can review, for a fee, the reports of the Funds and the SAIs
by writing to the Public Reference Section of the Securities and
Exchange Commission, Washington, D.C. 20459-60091, or by calling
the SEC at 1-800-SEC-0330. You can get copies of thus
information for free on the SEC's Internet site (www.sec.gov).
48

Part B: Information Required in
Statement of Additional Information

N-1A
Item No. Item Location in the
Registration
Statement

10. Cover Page and Cover Page and
Table of Contents Table of Contents

11. Fund History See Part A, Item 6

12. Description of the Fund Miscellaneous
and Its Investments Investment Practices
and Risks and Risk Considerations

13. Management of the Fund Trustees and Officers

14. Control Persons and Principal Holders of
Principal Holders of Securities and
Securities Controlling Persons

15. Investment Advisory Investment Advisory
and Other Services and Other Services

16. Brokerage Allocation Investment Advisory
and Other Practices and Other Services

17. Capital Stock and Additional Information
Other Securities Regarding Purchases and
Redemptions of Fund
Shares

18. Purchase, Redemption Additional Information
and Pricing of Regarding Purchases and
Securities Being Redemptions of Fund
Offered Shares

19. Taxation of the Fund Taxes

20. Underwriters Additional Information
Regarding Purchases and
Redemptions of Fund
Shares

21. Calculation of Standard Performance
Performance Data Measures

22. Financial Statements Experts; Financial
Statements

SMITH BREEDEN TRUST
SMITH BREEDEN HIGH YIELD BOND FUND
SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
SMITH BREEDEN ASIAN/PACIFIC EQUITY MARKET FUND
SMITH BREEDEN EUROPEAN EQUITY MARKET FUND
SMITH BREEDEN FINANCIAL SERVICES FUND
(the "Funds")
STATEMENT OF ADDITIONAL INFORMATION

JULY 31, 1999

100 Europa Drive, Suite 200
Chapel Hill, North Carolina 27514-2310
(919) 967-7221

This Statement of Additional Information contains information
pertaining to the Funds, which may be useful to investors and is
not included in the Prospectus of the Smith Breeden Mutual Funds.
This Statement is not a Prospectus and is only authorized for
distribution when accompanied or preceded by the Prospectus of
the Smith Breeden Mutual Funds dated July 31, 1999 as may be
amended from time to time. The Statement should be read together
with the Prospectus.

Contents Page

DEFINITIONS 2
INVESTMENT RESTRICTIONS OF THE FUNDS 2
MISCELLANEOUS INVESTMENT PRACTICES AND RISK CONSIDERATIONS 4
HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS 11
TAXES 17
FUND CHARGES AND EXPENSES 20
MANAGEMENT OF THE FUNDS 22
THE INVESTMENT ADVISORY AGREEMENT AND OTHER SERVICES 23
PRINCIPAL HOLDERS OF SECURITIES AND CONTROLLING PERSONS 27
DETERMINATION OF NET ASSET VALUE 28
ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES 29
SHAREHOLDER INFORMATION 30
SUSPENSION OF REDEMPTIONS 31
SHAREHOLDER LIABILITY 31
STANDARD PERFORMANCE MEASURES 31
EXPERTS 34
FINANCIAL STATEMENTS 35
1
SMITH BREEDEN TRUST

SMITH BREEDEN HIGH YIELD BOND FUND
SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
SMITH BREEDEN ASIAN/PACIFIC EQUITY MARKET FUND
SMITH BREEDEN EUROPEAN EQUITY MARKET FUND
SMITH BREEDEN FINANCIAL SERVICES FUND
(the "Funds")

Statement of Additional Information

DEFINITIONS

The "Trust": Smith Breeden Trust
The "Adviser": Smith Breeden Associates, Inc., the
Funds' investment adviser.
The "Custodian": The Bank of New York, the
Funds' custodian.
"First Data Investor Services": First Data Investor Services,
Inc., the Funds' investor servicing agent
The "Principal Underwriter": First Data Distributors, Inc.

INVESTMENT RESTRICTIONS OF THE FUNDS

As fundamental investment restrictions, which may not be changed
without a vote of a majority of the outstanding voting
securities, a Fund may not and will not engage in the following
activities, except that only the U.S. Equity Market Plus Fund has
adopted item 7 as a fundamental policy. The Investment Company
Act of 1940 (the "Investment Company Act") provides that a "vote
of a majority of the outstanding voting securities" of a Fund
means the affirmative of the lesser of (1) more than 50% of the
outstanding shares of the Fund, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy.)

1. Issue senior securities, borrow money or pledge its assets,
except that the Fund may borrow from banks or through reverse
repurchase agreements or dollar rolls up to 33 1/3% of the value
of its respective total assets (calculated when the loan is made)
for temporary, extraordinary or emergency purposes and to take
advantage of investment opportunities and may pledge up to 33
1/3% of the value of its total assets to secure such borrowings.
For purposes of this restriction, the purchase or sale of
securities on a "when-issued" or delayed delivery basis, the
purchase and sale of futures contracts, the entry into forward
contracts, reverse repurchase agreements and dollar roll
transactions, short sales, interest rate caps, floors and swaps,
mortgage swaps, and collateral arrangements with respect thereto
and such other practices as may be determined by counsel to the
Fund (consistent with pronouncements of the Securities and
Exchange Commission (the "SEC")) are not deemed to be a pledge of
assets and none of such transactions or arrangements nor
obligations of the Fund to Trustees pursuant to deferred
compensation arrangements are deemed to be the issuance of a
senior security.

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

3. Acquire, sell, lease or hold real estate or real estate
limited partnerships, except that it may invest in
2
securities of companies which deal in real estate and in
securities collateralized by real estate or interests
therein and it may acquire, sell, lease or hold real estate
in connection with protecting its rights as a creditor.

4. Purchase or sell commodities or commodity contracts, except
that the Fund may purchase and sell financial futures
contracts and options thereon. (For purposes of this
restriction, "commodity contracts" do not include caps,
floors, collars or swaps.)

5. Invest in interests in oil, gas, mineral leases or other
mineral exploration or development program.

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

7. Purchase securities of other investment companies.

8. Make loans of money or property to any person, except
through loans of portfolio securities to qualified
institutions, the purchase of debt obligations in which the
Fund may invest consistently with its investment objectives
and policies and investment limitations or the investment in
repurchase agreements with qualified institutions. The Fund
will not lend portfolio securities if, as a result, the
aggregate of such loans exceeds 33 1/3% of the value of the
Fund's total assets (including such loans).

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

10. Make short sales of securities or maintain a short
position if, when added together, more than 25% of the value
of the Fund's net assets would be (i) deposited as
collateral for the obligation to replace securities borrowed
to effect short sales, and (ii) allocated to segregated
accounts in connection with short sales. Short sales
"against the box" are not subject to this limitation.

In addition to the items listed above, the U.S. Equity Market
Plus Fund will not, as a matter of fundamental policy:

1. Purchase any security, other than mortgage-backed
securities, obligations of the U.S. Government, its agencies
or instrumentalities, collateralized mortgage obligations,
and shares of other investment companies as permitted
pursuant to exemptive relief granted by the SEC, if as a
result the Fund would have invested more than 5% of its
respective total assets in securities of issuers (including
predecessors) having a record of less than three years of
continuous operation.

In addition to the items listed above, the U.S. Equity Market
Plus Fund, the European Equity Market Fund and the Asian/Pacific
3
Equity Market Fund will not, as a matter of fundamental policy:

1. Purchase any security (other than obligations of the U.S.
Government, its agencies and instrumentalities and shares of
other investment companies as permitted pursuant to
exemptive relief granted by the SEC) if as a result 25% or
more of the Fund's total assets (determined at the time of
investment) would be invested in one or more issuers having
their principal business activities in the same industry.

The Financial Services Fund and High Yield Bond Fund may purchase
securities such that 25% or more of their total assets
(determined at the time of investment) would be invested in one
or more issuers having their principal business activities in the
same industry.

It is contrary to each Fund's present policy, which may be
changed without shareholder approval, to:

(a) sell over-the-counter options which it does not own; or
(b) sell options on futures contracts which options it does not
own.

All percentage limitations on investments will apply at the time
of the making of an investment and shall not be considered
violated unless an excess or deficiency exist immediately after
and as a result of such investment.

MISCELLANEOUS INVESTMENT PRACTICES AND RISK CONSIDERATIONS

Unless so indicated, each Fund may engage in each of the
following investment practices or make the following investments.
However, the fact that a Fund may engage in a particular practice
does not necessarily mean that it will actually do so.

Repurchase Agreements. A repurchase agreement is a contract
under which the Fund acquires a security for a relatively short
period (usually not more than one week) subject to the obligation
of the seller to repurchase and the Fund to resell such security
at a fixed time and price (representing the Fund's cost plus
interest). It is the Funds' present intention to enter into
repurchase agreements only with commercial banks and registered
broker-dealers. Repurchase agreements may also be viewed as loans
made by a Fund which are collateralized by the securities subject
to repurchase. The Adviser will monitor such transactions to
determine that the value of the underlying securities is at least
equal at all times to the total amount of the repurchase
obligation, including the interest factor. If the seller
defaults, a Fund could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale
including accrued interest are less than the resale price
provided in the agreement including interest. In addition, if
the seller should be involved in bankruptcy or insolvency
proceedings, a Fund may incur delay and costs in selling the
underlying security or may suffer a loss of principal and
interest if a Fund is treated as an unsecured creditor and
required to return the underlying collateral to the seller's
estate.
4
Forward Commitments. A forward commitment represents a contract
to purchase securities for a fixed price at a future date beyond
customary settlement time (referred to as "forward commitments"
or "when issued" or "delayed delivery" securities) if, when
entering into a forward commitment, a Fund will hold until the
settlement date, in a segregated account, liquid securities in an
amount sufficient to meet the purchase price, or the Fund will
enter into offsetting contracts for the forward sale of other
securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value
of the security to be purchased declines prior to the settlement
date. Where such purchases are made through dealers, a Fund
relies on the dealer to consummate the sale. The dealer's
failure to do so may result in the loss to the Fund of an
advantageous return or price. Although a Fund will generally
enter into forward commitments with the intention of acquiring
securities for its portfolio or for delivery pursuant to options
contracts it has entered into, a Fund may dispose of a commitment
prior to settlement if the Adviser deems it appropriate to do so.
A Fund may realize short-term profits or losses upon the sale of
forward commitments.

Securities Loans. The Fund may make secured loans of securities
amounting to not more than 33 1/3% of the Fund's total assets
thereby realizing additional income. The risks in lending
portfolio securities, as with other extensions of credit, consist
of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially.
As a matter of the Funds' policy, securities loans are made to
broker-dealers pursuant to an agreement requiring that loans be
continuously secured by collateral in cash or short-term debt
obligations at least equal at all times to the value of the
securities on loan. The borrower pays to the Fund an amount
equal to any dividends or interest received on securities lent.
The Fund retains all or a portion of the interest received on
investment of the cash collateral or receives a fee from the
borrower. Although voting rights, or rights to consent, with
respect to the loaned securities pass to the borrower, the Fund
retains the right to call the loans at any time on reasonable
notice, and it will do so in order that the securities may be
voted by the Fund if the holders of such securities are asked to
vote upon or consent to matters materially affecting the
investment. A Fund may also call such loans in order to sell the
securities involved.

Borrowing. The Funds may borrow from banks and enter into
reverse repurchase agreements or dollar rolls up to 33 1/3% of
the value of the Fund's total assets (computed at the time the
loan is made) to take advantage of investment opportunities and
for extraordinary or emergency purposes, or for the clearance of
transactions. The Funds may pledge up to 33 1/3% of its total
assets to secure these borrowings. If a Fund's asset coverage
for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings even though it may be disadvantageous at
that time from an investment point of view. A Fund will incur
borrowing costs when it leverages, including payment of interest
and any fee necessary to maintain a line of credit, and may be
required to maintain a minimum average balance. If the income and
appreciation on assets acquired with borrowed funds exceed their
5
borrowing cost, the Fund's investment performance will increase,
whereas if the income and appreciation on assets acquired with
borrowed funds are less than their borrowing costs, investment
performance will decrease. In addition, if a Fund borrows to
invest in securities, any investment gains made on the securities
in excess of the costs of the borrowing, and any gain or loss on
hedging, will cause the net asset value of the shares to rise
faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased
fails to cover their cost (including any interest paid on the
money borrowed) to a Fund, the net asset value of the Fund's
shares will decrease faster than would otherwise be the case.
This speculative characteristic is known as "leverage."

Reverse Repurchase Agreements and Dollar Roll Agreements. The
Funds may enter into reverse repurchase agreements and dollar
roll agreements with commercial banks and registered broker-
dealers to seek to enhance returns. Reverse repurchase
agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same
assets at a later date at a fixed price. During the reverse
repurchase agreement period, the Fund continues to receive
principal and interest payments on these securities and also has
the opportunity to earn a return on the collateral furnished by
the counterparty to secure its obligation to redeliver the
securities.

Dollar rolls are transactions in which the Fund sells securities
for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type and coupon)
securities on a specified future date. During the roll period,
the Fund forgoes principal and interest paid on the securities.
The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on
the cash proceeds of the initial sale.

The Fund will establish a segregated account with its custodian
in which it will maintain cash, U.S. Government securities or
other liquid high-grade debt obligations equal in value to its
obligations in respect of reverse repurchase agreements and
dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities retained
by a Fund may decline below the price of the securities the Fund
has sold but is obligated to repurchase under the agreement. In
the event the buyer of securities under a reverse repurchase
agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party or its
trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements and
dollar rolls are considered borrowings by the Fund and result in
leverage.

Foreign Securities. All of the Funds, with the exception of the
U.S. Equity Market Plus Fund, may hold securities of foreign
issuers that are not registered with the SEC, and foreign issuers
may not be subject to SEC reporting requirements. Accordingly,
there may be less publicly available information concerning
6
foreign issuers of securities held by these Funds than is
available concerning U.S. companies. Foreign companies are not
generally subject to uniform accounting, auditing and financial
reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies. The securities
of some foreign companies are less liquid and at times more
volatile than securities of comparable U.S. companies.

A fund may invest in foreign securities by purchasing American
Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs") or other securities
convertible into securities of issuers based in foreign countries
or a fund may also purchase the securities directly in the
foreign markets. ADRs are generally in registered form and are
denominated in U.S. dollars and are designed for use in U.S.
securities markets. EDRs are similar to ADRs but generally are
in bearer form, may be denominated in other currencies, and are
designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international
markets. ADRs are typically receipts issued by a U.S. Bank or
trust company evidencing ownership of the underlying securities.
For purposes of the Fund's investment policies, ADRs, EDRs and
GDRs are deemed to have the same classification as the underlying
securities they represent. Thus, an ADR, EDR, or GDR
representing ownership of common stock will be treated as common
stock. The European Equity, Asian/Pacific Equity Market and High
Yield Bond Funds may also invest in fixed income securities of
foreign issuers.

The Funds investing in foreign securities anticipate that
brokerage transactions involving foreign securities of companies
headquartered outside of the United States will be conducted
primarily on the principal exchanges of such countries.
Transactions on foreign exchanges are subject to fixed
commissions that are generally higher than negotiated commissions
on U.S. transactions, although the Fund will endeavor to achieve
the best net results in effecting its portfolio transactions.
There is generally less government supervision and regulation of
exchanges and brokers in foreign countries than in the United
States and as a result trade and settlement procedures in foreign
securities may involve certain risks or expenses not present in
the settlement of domestic transactions (such as delay in payment
or delivery of securities or in the recovery of the Fund's assets
held abroad).

Investment income on certain foreign securities may be subject to
foreign withholding or other taxes that could reduce the return
on these securities. In addition, with respect to certain
foreign countries, there is a possibility of nationalization or
expropriation of assets, imposition of currency exchange
controls, confiscatory taxation, political or financial
instability, and domestic developments which could affect the
value of investments in those countries. In certain countries,
legal remedies available to investors may be more limited than
those available with respect to investments in the United States
or other countries. The laws of some foreign countries may limit
a Fund's ability to invest in securities of certain issuers
located in those countries.
7
Foreign Currency Transactions. All of the Funds, with the
exception of the U.S. Equity Market Plus Fund, may conduct
foreign currency transactions on a spot (i.e. cash) or forward
basis (i.e. by entering into forward contracts to purchase or
sell foreign currencies). Although foreign exchange dealers
generally do not charge a fee for such conversions, they do
realize a profit based on the difference between the prices at
which they are buying and selling various currencies. Thus a
dealer may offer to sell a foreign currency at one rate, while
offering a lesser rate of exchange should the counterparty desire
to resell that currency to the dealer. Forward contracts are
customized transactions that require a specified amount of a
currency to be delivered at a specific exchange rate on a
specific date or range of dates in the future. Forward contracts
are generally traded in an interbank market directly between
currency traders (usually large commercial banks) and their
customers. The parties to a forward contract may agree to offset
or terminate the contract before its maturity, or may hold the
contract to maturity and complete the contemplated currency
exchange.

A Fund may use currency forward contracts to hedge against a
decline in the value of its investments denominated in foreign
currency. For example, if a Fund owned securities, or a futures
contract, denominated in British pound sterling, it could enter
into a forward contract to sell pound sterling in return for U.S.
dollars to hedge against possible declines in the pound's value.
Such a hedge, called a "position hedge" would tend to offset both
positive and negative currency fluctuations, but would not offset
changes in the value of its investment caused by other factors.

Under certain conditions, SEC guidelines require mutual funds to
set aside liquid assets in a segregated custodial account to
cover currency forward contracts, if done for speculative
purposes. Currently, the Funds do not expect to use currency
forward contracts for speculative purposes. A Fund will not
segregate assets to cover its forward contracts entered into for
hedging, such as the position hedge described above.

Convertible Securities. Convertible securities may be converted
at either a stated price or stated rate into underlying shares of
common stock of the same issuer. Convertible securities have
general characteristics similar to both fixed income and equity
securities. The market value of convertible securities declines
as interest rates increase, and increases as interest rates
decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stocks
and therefore will also react to variations in the general market
for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly
on a yield basis, and consequently may not experience market
value declines to the same extent as the underlying common stock.
When the market price of the underlying common stock increases,
the prices of convertible securities tend to rise as a reflection
of the value of the underlying common stock. Issuers of
convertible securities may default on their obligations.
8
Collateralized Mortgage Obligations ("CMOs"). Each of the Funds
may invest in CMOs. A CMO is a security backed by a portfolio of
mortgages or mortgage-backed securities held under an indenture.
The issuer's obligation to make interest and principal payments
is secured by the underlying portfolio of mortgages or mortgage-
backed securities. CMOs are issued with a number of classes or
series, which have different maturities representing interests in
some or all of the interest or principal on the underlying
collateral or a combination thereof. Payments of interest or
principal on some classes or series of CMOs may be subject to
contingencies, or some classes or series may bear some or all of
the risk of default on the underlying mortgages. CMOs of
different classes are generally retired in sequence as the
underlying mortgage loans in the mortgage pools are repaid. In
the event of sufficient early prepayments on such mortgages, the
class or series of CMO first to mature generally will be retired
prior to its stated maturity. Thus, the early retirement of a
particular class or series of a CMO held by a Fund would have the
same effect as the prepayment of mortgages underlying a mortgage-
backed pass-through security. Another type of CMO is a real
estate mortgage investment conduit ("REMIC") which qualifies for
special tax treatment under the Internal Revenue Code and invests
in certain mortgages principally secured by interests in real
property and other permitted investments.

CMOs also include securities representing the interest in any
excess cash flow and/or the value of any collateral remaining
after the issuer has applied cash flow from the underlying
mortgages or mortgage-backed securities to the payment of
principal of and interest on all other CMOs and the
administrative expenses of the issuer ("Residuals"). Residuals
have value only to the extent that income from such underlying
mortgages or mortgage-backed securities exceeds the amounts
necessary to satisfy the issuer's debt obligations represented by
all other outstanding classes or series of the CMOs. In
addition, if a CMO bears interest at an adjustable-rate, the cash
flows on the related Residual will also be extremely sensitive to
the level of the index upon which the rate adjustments are based.

In reliance on an interpretation by the SEC, the Funds'
investments in certain qualifying CMOs and REMICs are not subject
to the Investment Company Act's limitations on acquiring
interests in other investment companies. CMOs and REMICs issued
by an agency or instrumentality of the U.S. Government are
considered U.S. Government securities for the purposes of this
Prospectus.

Stripped Securities ("STRIPS"). Each of the Funds may invest in
STRIPS. STRIPS are usually structured with two classes that
receive different proportions of the interest and principal
distributions from a pool of underlying assets. A common type of
STRIP will have one class receiving all of the interest from the
underlying assets ("interest-only" or "IO" class), while the
other class will receive all of the principal ("principal-only"
or "PO" class). However, in some instances, one class will
receive some of the interest and most of the principal while the
other class will receive most of the interest and the remainder
of the principal. STRIPS are unusually volatile in response to
changes in interest rates. The yield to maturity on an IO class
9
of STRIPS is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal
payments (including prepayments) on the underlying assets. A
rapid rate of principal prepayments may have a measurably adverse
effect on the Fund's yield to maturity to the extent it invests
in IOs. Conversely, POs tend to increase in value if prepayments
are greater than anticipated and decline if prepayments are
slower than anticipated. Thus, if the underlying assets
experience greater than anticipated prepayments of principal, the
Fund may fail to fully recover its initial investment in these
securities, even if the STRIPS were rated of the highest credit
quality by S&P or Moody's, respectively. The Adviser will seek to
manage these risks (and potential benefits) by investing in a
variety of such securities and by using certain hedging
techniques, as described in "Other Investment Practices and Risk
Considerations" in the Prospectus. In addition, the secondary
market for STRIPS may be less liquid than that for other mortgage-
backed or asset-backed securities, potentially limiting the
Fund's ability to buy or sell those securities at any particular
time.

The Adviser expects that interest-only STRIPS will be purchased
for their hedging characteristics. Because of their structure,
interest-only STRIPS will most likely move differently than
typical fixed income securities in relation to changes in
interest rates. For example, with increases in interest rates,
these securities will typically increase rather than decrease in
value. As a result, since they move differently to changes in
interest rates than the typical investments held by a Fund,
interest-only STRIPS can be used as hedging instruments to reduce
the variance of a Fund's net asset value from its targeted option-
adjusted duration. There can be no assurance that the use of
interest-only STRIPS will be effective as a hedging technique, in
which event, a Fund's overall performance may be less than if the
Fund had not purchased the STRIPS. It is not anticipated that
STRIPS will constitute more than 5% of a Fund's net assets.

The determination of whether certain IO and PO STRIPS issued by
the U.S. Government and backed by fixed-rate mortgages are liquid
shall be made by the Trustees in accordance with applicable
pronouncements of the SEC. At present all other IO and PO STRIPS
are treated as illiquid securities for the purposes of the 15%
limitation on illiquid securities as a percentage of a Fund's net
assets.

Pay-in-kind, Delayed and Zero Coupon Securities. Each of the
Funds may invest in pay-in-kind, delayed and zero coupon bonds.
These are securities issued at a discount from their face value
because interest payments are typically postponed until maturity.
The amount of the discount varies depending on factors including
the time remaining until maturity, prevailing interest rates, the
security's liquidity and the issuer's credit quality. These
securities also may take the form of debt securities that have
been stripped of their interest payments. The market prices of
pay-in-kind, delayed and zero coupon bonds generally are more
volatile than the market prices of interest-bearing securities
and are likely to respond to a greater degree to changes in
interest rates than interest bearing securities having similar
maturities and credit quality. A Fund's investment in pay-in-
10
kind, delayed and zero coupon bonds may require the Fund to sell
certain of its portfolio securities to generate sufficient cash
to satisfy certain income distribution requirements, which may
reduce the Fund's assets and may thereby decrease its rate of
return.

Indexed Securities. Each of the Funds, with the exception of the
Short and Intermediate, may invest in "index-linked" notes, which
are debt securities of companies that call for interest payments
and/or payment at maturity in different terms than they typical
note where the borrower agrees to make fixed interest payments
and to pay a fixed sum at maturity. Principal and/or interest
payments on an index-linked note depend on the performance of one
or more market indices, such as the S&P 500 Index. A Fund may
also invest in "equity-linked" and "currency-linked" debt
securities. At maturity, the principal amount of an equity-
linked debt security is exchanged for common stock of the issuer
or is payable in an amount based on the issuer's common stock
price at the time of maturity. Currency-linked debt securities
are short-term or intermediate-term instruments having a value at
maturity, and/or an interest rate, determined by reference to one
or more foreign currencies. Payment of principal or periodic
interest may be calculated as a multiple of the movement of one
currency against another currency, or against an index. The U.S.
Equity Market Plus Fund will not invest in currency-linked debt
securities.

Index and currency-linked securities are derivative instruments
which may entail substantial risks. The company may fail to pay
the amount due on maturity. The underlying investment or
security may not perform as expected. Indexed securities are
also subject to the credit risk of the issuer.

Variable and Floating Rate Obligations. These obligations bear
variable or floating interest rates and carry rights that permit
holders to demand payment of the unpaid principal balance plus
accrued interest from the issuers or certain financial
intermediaries. Floating rate instruments have interest rates
that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic
adjustment in the interest rate. These formulas are designed to
result in a market value for the instrument that approximates its
par value.

An active secondary market may not exist with respect to a
particular variable or floating rate instrument purchased by the
Fund. The absence of such an active secondary market could make
it difficult for a Fund to sell a variable or floating rate
instrument when desired.

HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS

Futures Contracts. When a Fund purchases a futures contract it
agrees to purchase a specified underlying instrument at a
specified future date. When a Fund sells a futures contract, it
agrees to sell the underlying instrument at a specified future
date. The price at which the purchase and sale take place is
fixed when the fund enters the contract. Some currently
11
available futures contracts are based on specific securities,
such as U.S. Treasury bonds or notes, and some are based on
indices of securities prices, such as the Standard and Poor's 500
Composite Stock Index (S&P 500). Futures can be held until their
delivery dates, or can be closed out before then if a liquid
secondary market is available.

The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore,
purchasing futures contracts will tend to increase a Fund's
exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying
instrument directly. When a fund sells a futures contract, by
contrast, the value of its futures position will tend to move in
a direction contrary to the market. Selling futures contracts,
therefore, will tend to offset both positive and negative market
price changes, much as if the underlying instrument had been
sold.

The Funds will not use futures contracts for leverage.

Futures Margin Payments. The purchaser or seller of a futures
contract is not required to deliver or pay for the underlying
instrument unless the contract is held until delivery date, and
it is not cash settled. However, when the contract is entered
into, a purchaser or seller is required to deposit "initial
margin" with a futures broker, known as a futures commission
merchant ("FCM"). Initial margin deposits are typically a
percentage of the contract's value. If the value of either
party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in
value on a daily basis. The party that has a gain may be
entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities
on margin for purposes of a Fund's investment limitations. In
the event of the bankruptcy of an FCM that holds margin on behalf
of a Fund, the Fund may be entitled to return of the margin owed
to it only in proportion to the amount received by the FCM's
other customers, potentially resulting in losses to a Fund.

Asset Coverage and Limitations on Futures and Options
Transactions. The Funds will comply with guidelines established
by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require,
will set aside liquid assets in a segregated custodial account in
the amount prescribed. Securities held in a segregated account
cannot be sold while the futures and options strategy is
outstanding, unless they are replaced with other suitable assets.
As a result there is a possibility that segregation of a large
percentage of a Fund's assets could impede portfolio management
or a Fund's ability to meet redemption requests.

In accordance with regulations established by the Commodity
Futures Trading Commission, each Fund's aggregate initial margin
and premiums on all futures and options contract positions not
held for bona fide hedging purposes, will not exceed 5% of a
Fund's net assets, after taking into account unrealized profits
and losses on such contracts.
12
Risks Associated with Correlation of Price Changes. Because
there are a limited number of types of exchange-traded option and
future contracts, it is likely that the standardized contracts
available will not match a Fund's current or anticipated market
exposure directly. The Funds may invest in options and futures
contracts based on securities with different maturities or other
characteristics from the securities or market in which they
typically invest, which involves a risk that the options or
futures position will not track the performance of the Funds'
targeted market, index or investments. The potential losses from
investment in futures contracts is unlimited.

Options and futures prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments
match a Fund's investments well. Options and futures prices are
affected by such factors as current and anticipated short-term
interest rates, changes in volatility of the underlying
instrument, and the time remaining until expiration of the
contract, which may not affect security prices the same way.
Imperfect correlation may also result from differing levels of
demand in the options and futures markets versus the securities
markets, from structural differences in how options and futures
and securities are traded, or from the imposition of daily price
fluctuation limits or trading halts. A fund may purchase or sell
options or futures contracts with a greater or lesser value than
the securities it wishes to hedge or intends to purchase in order
to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be
successful in all cases. If price changes in a Fund's options or
futures positions are poorly correlated with its other
investments, the positions may fail to produce anticipated gains
or result in losses that are not offset by gains in other
investments.

Liquidity of Options and Futures Contracts. There is no
assurance a liquid secondary market will exist for any particular
options or futures contract at any particular time. Options may
have relatively low trading volume and liquidity if their strike
prices are not close to the underlying instrument's current
price. In addition, exchanges may establish daily price
fluctuation limits for options and futures contracts, and may
halt trading if a contract's price moves upward or downward more
than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached or a trading halt is imposed,
it may be impossible for a Fund to enter into new positions or
close out existing positions. If the secondary market for a
contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable
positions, and potentially could require a Fund to continue to
hold a position until delivery or expiration regardless of
changes in its value. As a result, a Fund's access to other
assets held to cover its option or futures positions could also
be impaired.

OTC Options. Unlike exchange traded options, which are
standardized with respect to the underlying instrument,
expiration date, contract size and strike price, the terms of
over-the-counter (OTC) options (options not traded on exchanges)
generally are established through negotiation with the other
13
party to the option contract. While this type of arrangement
allows the Funds greater flexibility to tailor an option to its
needs, OTC options generally involve greater credit risk than
exchange traded options, which are guaranteed by the clearing
organization of the exchanges where they are traded.

The staff of the SEC currently considers OTC options to be
illiquid for purposes of the 15% limitation on illiquid
securities as a percentage of a Fund's net assets unless certain
arrangements have been made with the other party to the option
contract that permit the prompt liquidation of the option
position.

Purchasing Put and Call Options. By purchasing a put option, a
Fund obtains the right (but not the obligation) to sell the
option's underlying instrument at a fixed strike price. In
return for this right, a Fund pays the current market price for
the option (known as the option premium). Options have various
types of underlying instruments, including specified securities,
indices of securities prices, and futures contracts. A Fund may
terminate its position in a put option it has purchased by
allowing it to expire or by exercising the option. If the option
is allowed to expire, a Fund will lose the entire premium it
paid. If a Fund exercises the option, it completes the sale of
the underlying instrument at the strike price. A Fund may also
terminate a put option position by closing it out in the
secondary market at its current price, if a liquid secondary
market exists.

The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying
instrument's price does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss
(limited to the amount of the premium paid, plus related
transaction costs).

The features of call options are essentially the same as those of
put options, except that the purchaser of a call option obtains
the right to purchase, rather than sell, the underlying
instrument at the option's strike price. A call buyer typically
attempts to participate in potential price increases of the
underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can
expect to suffer a loss if security prices do not rise
sufficiently to offset the cost of the option.

Writing Put and Call Options. When a Fund writes a put option,
it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Fund
assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to
exercise it. When writing an option on a futures contract, a
Fund will be required to make margin payments to an FCM as
described above for futures contracts. A Fund may seek to
terminate its position in a put option it writes before exercise
by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for a put option
the Fund has written, however, the Fund must continue to be
prepared to pay the strike price while the option is outstanding,
14
regardless of price changes, and must continue to set aside
assets to cover its position.

If security prices rise, a put writer would generally expect to
profit although its gain would be limited to the amount of the
premium it received. If security prices remain the same over
time, it is likely that the writer will also profit, because it
should be able to close out the option at a lower price. If
security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the
underlying instrument directly, however, because of the premium
received for writing the option.

Writing a call option obligates a Fund to sell or deliver the
option's underlying instrument, in return for the strike price,
upon exercise of the option. The characteristics of writing call
options are similar to those of writing put options, except that
writing calls generally is a profitable strategy if prices remain
the same or fall. Through receipt of the option premium, a call
writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the
underlying instrument in return for the strike price, even if its
current value is greater, a call writer gives up its ability to
participate in security price increases and will suffer a loss in
the event of an increase.

Combined Positions. A Fund may purchase and write options in
combination with each other, or in combination with futures or
forward contracts, to adjust the risk and return characteristics
of the overall position. For example, a Fund may purchase a put
option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call
option at one strike price and buying a call option at a lower
price, in order to reduce the risk of the written call option in
the event of a substantial price increase. Because combined
positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close
out.

Options and Futures Relating to Foreign Currencies. All of the
Funds, with the exception of the U.S. Equity Market Plus Fund,
may utilize currency futures contracts. Currency futures
contracts are similar to forward currency exchange contracts,
except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and
delivery date. Most currency futures contracts call for payment
or delivery in U.S. dollars. The underlying instrument of a
currency option may be a foreign currency, which generally is
purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the
right to purchase the underlying currency, and the purchaser of a
currency put obtains the right to sell they underlying currency.

A Fund may purchase and sell currency futures and purchase and
write currency options to increase or decrease its exposure to
different foreign currencies in order to hedge against the
currency risk implicit in the investments which it owns that are
15
denominated in other than U.S. dollars. Currency futures and
options values can be expected to correlate with exchange rates,
but may not reflect other factors that affect the Fund's
investments, such as a decline in an issuer's creditworthiness.
Because the value of a Fund's foreign denominated investments
changes in response to many factors other than exchange rates,
it may not be possible to march the amount of currency options
and futures to the value of the Fund's investments exactly over
time.

Swaps, Caps, Floors and Collars. Swap agreements can be
individually negotiated and structured to include exposure to a
variety of different types of investments or market factors.
Depending on their nature, swap agreements may increase or
decrease exposure to interest rates (in the United States or
abroad), foreign currency values, mortgage securities, or other
factors such as stock or bond indices.

In a typical cap or floor agreement, one party agrees to make
payments only under specified circumstances, usually in return
for payment of a fee by the other party. For example, the
purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a notional principal
amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
An interest rate collar combines the elements of purchasing a cap
and selling a floor. The collar protects against an interest
rate rise above the maximum amount, but gives up the benefits of
an interest rate decline below the minimum amount.

There can be no assurance that the Funds will be able to enter
into swaps, caps, floors or collars on favorable terms.
Furthermore, there can be no assurance that any of the Funds will
be able to terminate a swap or sell or offset caps, floors or
collars notwithstanding any terms in the agreements providing for
such termination. The Funds will enter into swap contracts only
on a net basis, i.e., where the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may
be, only the net amount of any payments. Payments under a swap
contract may be made at the conclusion of the contract or
periodically during its term.

Inasmuch as these transactions are entered into for hedging
purposes, the Adviser and the Funds believe swaps, caps, floors
and collars do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of a Fund's
obligations over its entitlement with respect to each swap will
be accrued on a daily basis, and an amount of cash or liquid
securities having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by
a custodian that satisfies the requirements of the Investment
Company Act.
16
The Funds will not enter into any swap, cap, collar or floor
contract unless, at the time of entering into such transaction,
the unsecured senior debt of the counterparty is rated at least A
by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's ("S&P").

If there is default by the other party to such a transaction, the
Funds will have contractual remedies pursuant to the agreements
related to the transaction. There is no assurance that swap, cap,
floor or collar counterparties will be able to meet their
obligations pursuant to their contracts, or that, in the event of
default, a Fund will succeed in pursuing contractual remedies.
The Funds thus assume the risk that one of them may be delayed in
or prevented from obtaining payments owed to it pursuant to
swaps, caps, floors or collars.

The swap, cap, floor and collar market has grown substantially in
recent years with a large number of banks and investment banking
firms acting both as principals and as agents utilizing
standardized documentation. As a result, this market has become
relatively liquid, although the Funds will still treat these
instruments as illiquid investments subject to the limitation on
such investments described under "Illiquid Securities" in the
Prospectus.

TAXES

Taxation of the Funds. Each Fund intends to qualify each year as
a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). In order so to
qualify and to qualify for the special tax treatment accorded
regulated investment companies and their shareholders, the Fund
must, among other things:

(a) derive at least 90% of its gross income
from dividends, interest, payments with respect to
certain securities loans, and gains from the sale of
stock, securities and foreign currencies, or other
income (including but not limited to gains from
options, futures, or forward contracts) derived with
respect to its business of investing in such stock,
securities, or currencies;

(b) distribute with respect to each taxable
year at least 90% of the sum of its taxable net
investment income, its net tax-exempt income, and the
excess, if any, of net short-term capital gains over
net long-term capital losses for such year; and

(c) diversify its holdings so that, at the
end of each fiscal quarter (i) at least 50% of the
market value of the Fund's assets is represented by
cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and
other securities limited in respect of any one issuer
to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25%
17
of the value of its assets is invested in the
securities (other than those of the U.S. Government or
other regulated investment companies) of any one issuer
or of two or more issuers which the Fund controls and
which are engaged in the same, similar, or related
trades or businesses.

Qualification as a regulated investment company exempts a Fund
from federal income tax on income paid to its shareholders in the
form of dividends (including capital gain dividends). A dividend
paid to shareholders by the Fund in January of a year generally
is deemed to have been paid by the Fund on December 31 of the
preceding year, if the dividend was declared and payable to
shareholders of record on a date in October, November or December
of that preceding year.

If a Fund failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Fund
would be subject to tax on its taxable income at corporate rates,
and could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is
accorded special tax treatment.

If a Fund fails to distribute in a calendar year substantially
all of its ordinary income for such year and substantially all of
its net capital gain for the year ending October 31, plus any
retained amount from the prior year, the Fund will be subject to
a 4% excise tax on the undistributed amounts. Each Fund intends
generally to make distributions sufficient to avoid imposition of
the 4% excise tax. In calculating its income, each Fund must
include dividends in income not when received but on the date
when the stock in question is acquired or becomes ex-dividend,
whichever is later. Also, a portion of the yield on certain high
yield securities (including certain payment-in-kind bonds) issued
after July 10, 1989 may be treated as dividends.

Sale or redemption of shares. The sale, exchange, or redemption
of Fund Shares may give rise to a gain or loss. In general, any
gain or loss realized upon a taxable disposition of shares will
be treated as long-term capital gain or loss if the shares have
been held for more than a year. Otherwise the gain or loss on
the sale, exchange, or redemption of Fund shares generally will
be treated as short-term capital gain or loss. In addition, any
loss (not already disallowed as provided in the next sentence)
realized upon a taxable disposition of shares held for six months
or less will be treated as long-term, rather than short-term, to
the extent of any long-term capital gain distributions received
by the shareholder with respect to the shares. All or a portion
of any loss realized upon a taxable disposition of Fund shares
will be disallowed if other Fund shares are purchased within 30
days before or after the disposition. In such a case, the basis
of the newly purchased shares will be adjusted to reflect the
disallowed loss.

Return of capital distributions. If a Fund makes a distribution
to you in excess of its current and accumulated "earnings and
profits" in any taxable year, the excess distribution will be
treated as a return of capital to the extent of your tax basis in
18
your shares, and thereafter as capital gain. A return of capital
is not taxable, but it reduces your tax basis in your shares.

Hedging Transactions. If a Fund engages in hedging transactions,
including hedging transactions in option, futures contracts, and
straddles, or similar transactions, it will be subject to special
tax rules (including constructive sale, market-to-market,
straddle, wash sales, and short sale rules), the effect of which
may be to accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's
securities, convert long-term capital gains into short-term
capital gains, or convert short-term capital losses into long-
term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders.

Tax Implications of Certain Investments. Certain of a Fund's
investments, including investments in stripped securities, will
create taxable income in excess of the cash they generate. In
such cases, a Fund may be required to sell assets (including when
it is not advantageous to do so) to generate the cash necessary
to distribute as dividends to its shareholders all of its income
and gains and therefore to eliminate any tax liability at the
Fund level.

"Constructive sale" provisions apply to activities by a Fund
which lock-in gain on an "appreciated financial position."
Generally, a "position" is defined to include stock, a debt
instrument, or partnership interest, or an interest in any of the
foregoing, including through a short sale, a swap contract, or a
future or forward contract. The entry into a short sale, a swap
contract or a future or forward contract relating to an
appreciated direct position in any stock or debt instrument, or
the acquisition of stock or debt instrument at a time when the
Fund occupies an offsetting (short) appreciated position in the
stock or debt instrument, is treated as a "constructive sale"
that gives rise to the immediate recognition of gain (but not
loss). The application of these new provisions may cause a Fund
to recognize taxable income from these offsetting transactions in
excess of the cash generated by such activities.

In addition, a Fund's use of derivative instruments (such as
futures and options) may cause the Fund to realize greater
amounts of short-term capital gains (generally taxed at ordinary
income tax rates) than it would realize if it did not use such
instruments.

THE TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR
GENERAL INFORMATION PURPOSES ONLY. EACH SHAREHOLDER IS ADVISED TO
CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES TO IT OF AN INVESTMENT IN A FUND, INCLUDING THE
EFFECT AND APPLICABILITY OF STATE, LOCAL, FOREIGN, AND OTHER TAX
LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX
LAWS. THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL
TAX PLANNING.

19
FUND CHARGES AND EXPENSES

Management Fees. Each Fund pays a monthly fee to the Adviser
based on the average net assets of the Fund, as determined at the
close of each business day during the month. The fee is computed
at an annual rate of 0.70% for each of the High Yield Bond, U.S.
Equity Market Plus, Asian/Pacific Equity Market, and European
Equity Market Funds, and 1.50% for the Financial Services Fund.
Advisory fees paid by the Funds for the past three fiscal years
are as follows.

Advisory Fees Paid by Funds

U.S. Asian/Pac European
Fiscal High Equity ific Equity Financial
Year Yield Market Equity Market Services
Ended Bond Fund Plus Fund Market Fund Fund
Fund

March 31, $ $1,090,37 N/A* N/A* $ 107,863
1999 6,058 2
March 31, N/A* $ 423,706 N/A* N/A* $ 23,152
1998
March 31, N/A* $ N/A* N/A* N/A*
1997 53,341

The following chart details the reimbursements the Adviser made
to the Funds for each of the last three fiscal years, under
20
voluntary expense limitation provisions:

Amounts Reimbursed by Adviser to the Funds

U.S. Asian/Pac European
Fiscal High Equity ific Equity Financial
Year Yield Market Equity Market Services
Ended Bond Fund Plus Fund Market Fund Fund
Fund

March 31, $ $ 251,051 N/A* N/A* $ 117,431
1999 50,547
March 31, N/A* $ 215,049 N/A* N/A* $ 26,865
1998
March 31, N/A* $ 131,965 N/A* N/A* N/A*
1997

*The Financial Services Fund commenced operations December
22, 1997 and the amounts both paid and reimbursed for the fiscal
year ended March 31, 1998 are for the period beginning December
22, 1997 and ending March 31, 1998. The High Yield Bond,
Asian/Pacific Equity Market, and European Equity Market Funds
each commenced operations October 15, 1998 and to date, only the
High Yield Bond Fund has either paid advisory fees or been
reimbursed by the Adviser. Both the amounts paid by and
reimbursed to the High Yield Bond Fund for the fiscal year ended
March 31, 1999 are for the period beginning October 15, 1998 and
ending March 31, 1999.
21
Other Expenses. Subject to any voluntary expense limitation
provisions, each Fund pays its own expenses, including, but not
limited to auditing, legal, tax preparation and consulting,
insurance, custodial, accounting, shareholder servicing and
shareholder report expenses. Fees paid to First Data Investor
Services which serves as the Funds' shareholder servicing and
accounting agent are determined by contract as approved by the
Board of Trustees.

MANAGEMENT OF THE FUNDS

The Board of Trustees has the responsibility for the overall
management of the Funds, including general supervision and review
of its investment activities. The Trustees, in turn, elect the
officers of the Funds who are responsible for administering the
day-to-day operations of the Funds. Trustees and officers of the
Funds are identified in the Prospectus.

All of the Trustees are Trustees of all the other funds
managed by the Adviser and each independent Trustee receives fees
for his or her services. The Trustees do not receive pension or
retirement benefits from the Funds. The table below shows the
fees paid by the each of the Funds separately to each independent
Trustee for the fiscal year ended March 31, 1999 and total fees
paid by the entire Fund complex for the fiscal year ended March
31, 1999. There are two other funds in the complex besides the
Funds of the Smith Breeden Trust.

Total Compensation Paid to Independent Trustees by the Funds

U.S. Asian/ Europea Financi Entire
Trustee High Equity Pacific n al Smith
Yield Market Market Equity Service Breeden
Bond Plus Fund Market s Fund Fund
Fund Fund Fund Complex

Stephen M. $ 0.00* $ $ 0.00* $ 0.00* $ 0.00* $
Schaefer 35,000. 70,000.0
00 0
Myron S. $ 0.00* $ $ 0.00* $ 0.00* $ 0.00* $
Scholes 0.00 70,000.0
0
William F. $ 0.00* $ $ 0.00* $ 0.00* $ 0.00* $
Sharpe 70,000. 70,000.0
00 0

*The Asian/Pacific Equity Market and European Equity Market
Funds each commenced operations October 15, 1998 and, as such,
have not yet made any compensation to the Independent Trustees.
Both of these Funds expects to pay approximately $300 to each
Trustee listed above prior to March 31, 2000. The High Yield
Bond Fund commenced operations October 15, 1998, and has not yet
made any compensation to the Independent Trustees. This Fund
expects to pay $400 to each Trustee listed above prior to March
31, 2000. The Financial Services Fund commenced operations
December 22, 1997 and has not yet paid any fees to the Trustees.
This Fund expects to pay approximately $1000 to each Trustee
listed above prior to March 31, 2000.
22
The Agreement and Declaration of Trust provides that the Funds
will indemnify the Trustees and officers against liabilities and
expenses incurred in connection with litigation in which they may
be involved because of their offices with the Trust, except if it
is determined in the manner specified in the Agreement and
Declaration of Trust that such indemnification would relieve any
officer or Trustee of any liability to the Funds or its
shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties.

Trustees and officers of the Funds who are also officers or
shareholders of the Adviser will benefit from the advisory fees
paid by the Fund.

Potential Conflicts of Interest. Principals of the Adviser as
individuals own approximately 70% of the common stock of
Harrington Financial Group ("HFGI"), the holding company for
Harrington Bank, FSB of Richmond, Indiana (the "Bank"). HFGI and
the Bank may invest in assets of the same types as those to be
held by the Funds.

Douglas T. Breeden, in combination with immediate family members,
controls over 75% of the common stock of Community First
Financial Group, Inc. ("CFFG"), the holding company for certain
banks and thrifts, to which the Adviser renders Investment
Advisory services. CFFG and its subsidiaries invest in assets of
the same types as those to be held by the Funds.

The Adviser may also manage advisory accounts with investment
objectives similar to or the same as those of the Funds, or
different from the Funds but trading in the same type of
securities and instruments as the Funds. Portfolio decisions and
results of the Funds' investments may differ from those of such
accounts managed by the Adviser. When two or more accounts
managed by the Adviser seek to purchase or sell the same assets,
the assets actually purchased or sold may be allocated among the
accounts on a basis determined by the Adviser in its good faith
discretion to be equitable. In some cases, this system may
adversely affect the size or the price of the position obtainable
for the Funds.

THE INVESTMENT ADVISORY AGREEMENT AND OTHER SERVICES

The investment manager of the Funds is Smith Breeden Associates,
Inc. (the "Adviser"). The table in the Prospectus indicates
which officers and trustees are affiliated persons of the
Adviser.

Under the Investment Advisory Agreements between the Funds and
the Adviser, subject to such policies as the Trustees may
determine, the Adviser, at its expense, furnishes continuously an
investment program for the Funds and makes investment decisions
on behalf of the Funds. Subject to the control of the Trustees,
the Adviser also manages, supervises and conducts the other
affairs and business of the Funds, furnishes office space and
equipment, provides bookkeeping and clerical services and places
all orders for the purchase and sale of the Funds' portfolio
securities.
23
For details of the Adviser's compensation under the Investment
Advisory Agreements, see "Fund Charges and Expenses" in this
Statement. Under the Investment Advisory Agreements, the Adviser
may reduce its compensation to the extent that the Funds'
expenses exceed such lower expense limitation as the Adviser may,
by notice to the Funds, voluntarily declare to be effective. The
expenses subject to this limitation are exclusive of brokerage
commissions, other investment related expenses such as securities
lending fees, interest, taxes, and extraordinary expenses. The
terms of the expense limitations currently in effect are
described in the Prospectus and on the following page. The Funds
pay all expenses not assumed by the Adviser including, without
limitation, auditing, legal, tax preparation and consulting,
custodial, investor servicing and shareholder reporting expenses.

The Investment Advisory Agreements provide that the Adviser shall
not be subject to any liability to the Funds or to any
shareholder of the Funds for any act or omission in the course of
or connected with rendering services to the Funds in the absence
of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties on the part of the Adviser.

The Investment Advisory Agreements may be terminated without
penalty by vote of the Trustees or the shareholders of the
relevant Fund, or by the Adviser, on 60 days written notice.
They may be amended only by a vote of the shareholders of the
relevant Fund. The Investment Advisory Agreements also terminate
without payment of any penalty in the event of its assignment as
defined in the Investment Company Act. The Investment Advisory
Agreements provide that they will continue in effect after their
initial term of two years only so long as such continuance is
approved at least annually by vote of either the Trustees or the
shareholders, and, in either case, by a majority of the Trustees
who are not "interested persons" of the Adviser or the Funds. In
each of the foregoing cases, the vote of the shareholders is the
affirmative vote of a "majority of the outstanding voting
securities".

Under the terms of the Investment Advisory Agreements, the
Adviser performs certain administrative services as follows: (1)
coordinates with the Funds' custodian and transfer agent and
monitors the services they provide to the Funds; (2) coordinates
with and monitors other third parties furnishing services to the
Funds; (3) provides the Funds with necessary office space,
telephones and other communications facilities and personnel
competent to perform administrative and clerical functions for
the Funds; (4) supervises the preparation by third parties of all
Federal, state and local tax returns and reports of the Funds
required by applicable law; (5) prepares and, after approval by
the Funds, files and arranges for the distribution of proxy
materials and periodic reports to shareholders of the Funds as
required by applicable law; (6) prepares and, after approval by
the Funds, arranges for the filing of such registration
statements and other documents with the Securities and Exchange
Commission and other Federal and state regulatory authorities as
may be required by applicable law; (7) reviews and submits to the
officers of the Funds for their approval invoices or other
requests for payment of Fund expenses; and (8) takes such other
actions with respect to the Funds as may be necessary in the
24
opinion of the Adviser to perform its duties under the
agreements.

The Adviser has voluntarily undertaken to bear normal operating
expenses (excluding litigation, indemnification and other
extraordinary expenses) of the Funds, and, if necessary, to waive
its advisory fee, for the period ending August 1, 2000 such that
total operating expenses would not exceed 0.88% of the average
net assets of the U.S. Equity Market Plus Fund, 0.98% of the
average net assets of each of the High Yield Bond, Asian/Pacific
Equity Market and European Equity Market Funds, and 1.48% of the
average net assets of the Financial Services Fund. Such expense
limitations, if any, are calculated daily based on average net
assets and may be continued or modified by the Adviser at any
time in its sole discretion.

Portfolio Transactions

Investment decisions. Investment decisions for the Funds and for
the other investment advisory clients of the Adviser are made
with a view to achieving their respective investment objectives.
Investment decisions are the product of many factors in addition
to basic suitability for the particular client involved. Thus, a
particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients
at the same time. Likewise, a particular security may be bought
for one or more clients when one or more other clients are
selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens
that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security
are, insofar as possible, averaged as to price and allocated
between such clients in a manner which in the Adviser's opinion
is equitable to each and in accordance with the amount being
purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.

Brokerage and research services. Transactions on U.S. stock
exchanges, commodities markets and futures markets and other
agency transactions involve the payment by the Funds of
negotiated brokerage commissions. Such commissions vary among
different brokers. In addition, a particular broker may charge
different commissions according to such factors as the difficulty
and size of the transaction. There is generally no stated
commission in the case of securities traded in the over-the-
counter markets, but the price paid by the Funds usually includes
an undisclosed dealer commission or mark-up. In underwritten
offerings, the price paid by the Funds includes a disclosed,
fixed commission or discount retained by the underwriter or
25
dealer. The following table details the approximate brokerage
commissions paid by the Funds for the last three fiscal years:

Brokerage Commissions Paid by the Funds

U.S. Asian/Pac European
Fiscal High Equity ific Equity Financial
Year Yield Market Equity Market Services
Ended Bond Fund Plus Fund Market Fund Fund
Fund

March 31, $ 48,899 $ $ $ 33,780
1999 $ 0.00 0.00 0.00
March 31, N/A* $ 26,251 N/A* N/A* $ 25,946
1998
March 31, N/A* $ 3,000 N/A* N/A* N/A*

1997

*The Financial Services Fund commenced operations December
22, 1997. The High Yield Bond, Asian/Pacific Equity Market and
European Equity Market Funds each commenced operations October
15, 1998, and, to date, only the High Yield Bond Fund has paid
brokerage commissions.

For a discussion of brokerage issues relating to investments in
foreign securities, see "Miscellaneous Investment Practices and
Risk Considerations-Foreign Securities".

The Adviser places all orders for the purchase and sale of
portfolio investments for the Funds and may buy and sell
investments for the Funds through a substantial number of brokers
and dealers. In so doing, the Adviser uses its best efforts to
obtain for the Funds the most favorable price and execution
available. In seeking the most favorable price and execution,
the Adviser, having in mind the Funds' best interests, considers
all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for
the security or other investment, the amount of the commission,
the timing of the transaction taking into account market prices
and trends, the reputation, experience and financial stability of
the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.

When it is determined that several brokers or dealers are equally
able to provide the best net price and execution, the Adviser may
execute transactions through brokers or dealers who provide
quotations and other services to its advisory clients, including
the quotations necessary to determine these clients' net assets,
in such amount of total brokerage as may reasonably be required
in light of such services, and through brokers and dealers who
supply statistical and other data to the Adviser and its clients
in such amount of total brokerage as may reasonably be required.

Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to seeking
the most favorable price and execution available and such other
policies as the Trustees may determine, the Adviser may consider
sales of shares of the Funds (and, if permitted by law, of the
other funds managed by the Adviser) as a factor in the selection
26
of broker-dealers to execute portfolio transactions for the
Funds.

The Adviser conducts extensive proprietary research. The Adviser
is not dependent on any broker for such research and analysis
and, thus is able to transact business with brokers regardless of
the brokers' research capabilities or provision of such research
to brokerage customers. The Adviser uses multiple electronic
quotation services for trading and pricing purposes. The Adviser
pays for these services directly out of its advisory fees. The
Adviser is not involved in any soft dollar arrangements. The
Adviser does utilize broker pricing guidance for certain assets
not consistently available through electronic quotation services.

Investor Servicing Agent

First Data Investor Services is each Fund's investor servicing
agent (transfer, plan and dividend disbursing agent), for which
it receives fees which are paid monthly by each Fund as an
expense of all its shareholders. See "Fund Charges and Expenses"
in this Statement for information on fees and reimbursements
received by First Data Investor Services. First Data Investor
Services is also investor-servicing agent for the other funds
managed by the Adviser and receives fees from each of those funds
for its services.

Custodian

The Bank of New York ("Custodian") acts as custodian of each of
the Fund's assets. In carrying out its duties under its
custodian contract, the Custodian may employ one or more
subcustodians whose responsibilities will include safeguarding
and controlling each Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and
dividends on each Fund's investments. Each Fund pays the
Custodian an annual fee based on the assets of the Fund and the
Fund's securities transactions. Each Fund also pays the
Custodian an annual fee based on the Fund's securities holdings
for the year and reimburses the Custodian for certain out-of-
pocket expenses incurred by it or any subcustodian employed by it
in performing custodial services. The Custodian pays the fees and
other charges of any subcustodian employed by it.

PRINCIPAL HOLDERS OF SECURITIES AND CONTROLLING PERSONS

Listed below are the names and addresses of those
shareholders who, to the U.S. Equity Market Plus Fund's best
knowledge, as of April 30, 1999, owned 5% or more of the shares
of the Fund.

Charles Schwab & Co.
For the Beneficial Ownership of Its Accountholders
101 Montgomery Street
San Francisco, CA 94104 55.38%

National Investor Services Company
55 Water Street, 32nd Floor
New York, NY 10041-3299 5.33%
27
Each Fund Trustee owns less than 1% of the shares of the U.S.
Equity Market Plus Fund as of April 30, 1999.

Listed below are the names and addresses of those shareholders
who, to the Financial Services Fund's best knowledge, as of April
30, 1999 owned 5% or more of the shares of the Fund.

Charles Schwab & Co.
For the Beneficial Ownership of Its Accountholders
101 Montgomery Street
San Francisco, CA 94104 9.60%

Smith Breeden Associates, Inc.
100 Europa Drive
Chapel Hill, NC 27514 59.50%

Each Fund Trustee owns less than 1% of the shares of the
Financial Services Fund as of April 30, 1999.

Listed below are the names and addresses of those shareholders
who, to the High Yield Bond Fund's best knowledge, as of April
30, 1999 owned 5% or more of the shares of the Fund.

Smith Breeden Associates, Inc.
100 Europa Drive
Chapel Hill, NC 27514 94.82%

Each Fund Trustee owns less than 1% of the shares of the High
Yield bond Fund as of April 30, 1999.

The Asian/Pacific Equity Market and European Equity Market Funds
commenced operations October 15, 1998, and, as of April 30, 1999,
do not have any shareholders.

DETERMINATION OF NET ASSET VALUE

Each Fund determines net asset value as of the close of regular
trading on the New York Stock Exchange usually at 4 p.m. If any
securities held by a Fund are restricted as to resale, the
Adviser determines their fair value following procedures approved
by the Trustees. The Trustees periodically review such valuation
procedures. The fair value of such securities is generally
determined as the amount which the Fund could reasonably expect
to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in
any specific instance are likely to vary from case to case.
However, consideration is generally given to the financial
position of the issuer and other fundamental analytical data
relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration
expenses that might be borne by the Fund in connection with such
disposition). In addition, specific factors are also generally
considered, such as the cost of the investment, the market value
of any unrestricted securities of the same class (both at the
time of purchase and at the time of valuation), the size of the
holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports
regarding the issuer.
28
Trading in certain securities is substantially completed each day
at various times prior to the close of regular trading on the
Exchange. The values of these securities used in determining the
net asset value of the Fund's shares are computed as of such
times. Because regular trading in most foreign securities
markets is completed simultaneously with, or prior to, the close
of regular trading on the New York Stock Exchange, closing prices
for foreign securities usually are available for purposes of
computing the net asset value of those Funds which may invest in
such securities. However, in the event that the closing price of
a foreign security is not available in time to calculate a Fund's
net asset value on a particular day, the Funds' Board of Trustees
has authorized the use of the market price for the security
obtained from an approved pricing service at an established time
during the day which may be prior to the close of regular trading
in the security. The value of all of the Fund's assets and
liabilities expressed in foreign currencies will be converted
into U.S. dollars at the spot rate of such currencies against
U.S. dollars provided by an approved pricing service. Because of
the amount of time required to collect and process trading
information of large numbers of securities issues, the values of
certain securities (such as convertible bonds and U.S. Government
securities) are determined based on market quotations collected
earlier in the day at the latest practicable time prior to the
close of the Exchange. Occasionally, events affecting the value
of such securities may occur between such times and the close of
the Exchange that will not be reflected in the computation of a
Fund's net asset value. If events materially affecting the value
of such securities occur during such period, then these
securities will be valued at their fair market value following
procedures approved by the Trustees.

ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES

All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of a Fund must be denominated in
U.S. Dollars. A Fund reserves the right, in its sole discretion,
to either (a) reject any order for the purchase or sale of shares
denominated in any other currency, or (b) to honor the
transaction or make adjustments to shareholder's account for the
transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.

Dividend checks which are returned to a Fund marked "unable to
forward" by the postal service will be deemed to be a request to
change the dividend option and the proceeds will be reinvested in
additional shares at the current net asset value until new
instructions are received.

Redemptions in Kind. The Funds are committed to pay in cash all
requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of
$250,000 or 1% of the value of a Fund's net assets at the
beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission. In
the case of requests for redemption in excess of such amounts,
the Trustees reserve the right to make payments in whole or in
29
part in securities or other assets of a Fund in case of any
emergency, or if the payment of such redemption in cash would be
detrimental to the existing shareholders of a Fund. In such
circumstances, the securities distributed would be valued at the
price used to compute the Fund's net assets. Should a Fund do
so, a shareholder may incur brokerage fees or other transaction
costs in converting the securities to cash.

Principal Underwriter. First Data Distributors, Inc. (the
"Principal Underwriter"), 4400 Computer Drive, Westborough, MA
01581, is the principal underwriter for the Funds and is acting
on a best efforts basis. First Data Distributors, Inc. is
registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities
Dealers, Inc. The offering of the Funds' shares is continuous.

The Funds' underwriting agreement with the Principal Underwriter
provides that the Funds will pay all fees and expenses in
connection with: registering and qualifying their shares under
the various state "blue sky" laws; preparing, setting in type,
printing, and mailing its prospectuses and reports to
shareholders; and issuing their shares, including expenses of
confirming purchase orders. The Principal Underwriter acts as the
agent of the Funds in connection with the sale of their shares in
all states in which the shares are qualified and in which the
Principal Underwriter is qualified as a broker-dealer. Under the
underwriting agreement, the Principal Underwriter may accept
orders for Funds' shares at their offering prices. For these
services for the Funds, the Adviser pays the Principal
Underwriter approximately $15,000. The Principal Underwriter may
enter into agreements with other broker-dealers for the sale of
the Funds' shares by them.

Reinvestment Date. The dividend reinvestment date is the date on
which the additional shares are purchased for the investor who
has its dividends reinvested. This date will vary and is not
necessarily the same date as the record date or the payable date
for cash dividends.

Special Services. The Funds may pay certain financial
institutions that maintain accounts with the Funds on behalf of
numerous beneficial owners for record keeping operations
performed with respect to such beneficial owners. Such financial
institutions may also charge a fee for their services directly to
their clients.

SHAREHOLDER INFORMATION

Quarterly statements will be sent to each shareholder. In
addition, each time shareholders directly purchase or redeem
shares or receive a cash distribution, they will receive a
statement confirming the transaction and listing their current
share balance. Direct purchases and redemptions do not include
automatic investment plan purchases or systematic withdrawal plan
redemptions. The Funds also send annual and semiannual reports
that keep shareholders informed about each Fund's portfolio and
performance, and year-end tax information to simplify their
30
recordkeeping. Shareholders may call First Data Investor Services
toll-free at 1-800 221-3137 for more information, including
account balances.

SUSPENSION OF REDEMPTIONS

The Funds may not suspend shareholders' right of redemption, or
postpone payment for more than seven days, unless the New York
Stock Exchange (the "Exchange") is closed for other than
customary weekends or holidays, or if permitted by the rules of
the Securities and Exchange Commission during periods when
trading on the Exchange is restricted or during any emergency
which makes it impracticable for the Funds to dispose of their
securities or to determine fairly the value of their net assets,
or during any other period permitted by order of the Commission
for protection of investors.

SHAREHOLDER LIABILITY

Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Funds. However, the Agreement and Declaration of Trust
disclaims shareholder liability for acts or obligations of the
Funds and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or
executed by the Funds or the Trustees. The Agreement and
Declaration of Trust provides for indemnification out of Fund
property for all loss and expense of any shareholder held
personally liable for the obligations of a Fund. Thus, the risk
of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which a Fund
would be unable to meet its obligations. The likelihood of such
circumstances is remote.

STANDARD PERFORMANCE MEASURES

Total return data for the Funds may from time to time be
presented in this Statement and in advertisements. Total return
for the one-year period and for the life of a Fund is determined
by calculating the actual dollar amount of investment return on a
$1,000 investment in a Fund made at the net asset value at the
beginning of the period, and then calculating the annual
compounded rate of return which would produce that amount. Total
return for a period of one year is equal to the actual return of
the Fund during that period. Total return calculations assume
reinvestment of all Fund distributions at net asset value on
their respective reinvestment dates. The following table shows
the average annual total return for the periods stated, as of the
fiscal year end of March 31, 1999.
31
Average Annual Total Return
One Year Five Years Inception

U.S. Equity Market 17.17% 26.30% 21.99%
Plus Fund
Financial Services (10.79%) N/A* (0.22%)
Fund
High Yield Bond N/A* N/A* 0.39%
Fund

*The Financial Services Fund commenced operations December 22,
1997. The U.S. Equity Market Plus Fund commenced operations June
30, 1992.

The High Yield Bond, Asian/Pacific Equity Market and European
Equity Market Funds commenced operations October 15, 1998, and,
to date, only the High Yield Bond Fund has total return data
available.

At times, the Adviser may reduce its compensation or assume
expenses of a Fund in order to reduce a Fund's expenses. The per
share amount of any such fee reduction or assumption of expenses
for the life of a Fund, will be reflected in the Prospectus as
updated. Any such fee reduction or assumption of expenses would
increase a Fund's total return during the period of the fee
reduction or assumption of expenses.

Independent statistical agencies measure a Fund's investment
performance and publish comparative information showing how the
Fund, and similar investment companies, performed in specified
time periods. The agencies whose reports are commonly used are
Morningstar, Inc, Lipper Analytical Services and Wiesenberger
Investment Companies Service. From time to time, a Fund may
distribute these comparisons to its shareholders or to potential
investors.

The Funds' performance may also from time to time be compared to
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500
Index"). Standard & Poor's performance figures reflect changes of
market prices and reinvestment of all regular cash dividends and
are not adjusted for commissions or other costs. Because each
Fund is a managed portfolio investing in a variety of securities
and derivative instruments, the securities it owns will not match
those in the Index. Other publications, indices, and averages
that may be used are as follows:

a) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk,
total return and average rate of return (average annual
compounded growth rate) over specified time periods for the
mutual fund industry.

b) Mutual Fund Source book, published by Morningstar, Inc.--
analyzes price, yield, risk and total return for equity and
fixed income funds.

c) Financial publications: Barron's, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines
- rate fund performance over specified time periods.
32
d) Consumer Price Index (or Cost of Living Index) published by
the U.S. Bureau of Labor Statistics a statistical measure of
change, over time, in the price of goods and services in
major expenditure groups.

e) Stocks, Bonds, Bills, and Inflation, published by Ibbotson
Associates - historical measure of yield, price and total
return for common and small company stock, long-term
government bonds, treasury bills, and inflation.

f) Savings and Loan Historical Interest Rates - as published in
the U.S. Savings & Loan League Fact Book.

g) Salomon Brothers Broad Bond Index or its component indices -
The Broad Index measures yield, price and total return for
Treasury, Agency, Corporate, and Mortgage bonds.

h) Salomon Brothers Composite High Yield Index or its component
indices - The High Yield Index measures yield, price and
total return for Long-Term High-Yield Index, Intermediate-
Term High-Yield Index and Long-Term Utility High-Yield
Index.

i) Lehman Brothers Aggregate Bond Index or its component
indices - The Aggregate Bond Index measures yield, price and
total return for Treasury, Agency, Corporate, Mortgage, and
Yankee bonds.

j) Lehman Brothers Government/Corporate Bond Index.

k) Other taxable investments including certificates of deposit
(CD's), money market deposit accounts (MMDA's), checking
accounts, savings accounts, money market mutual funds,
repurchase agreements, and government securities.

l) Historical data supplied by the research departments of
Lehman Brothers, First Boston Corporation, Morgan Stanley,
Salomon Brothers, Merrill Lynch, Goldman Sachs, Prudential
Securities and Donaldson Lufkin and Jenrette.

m) Donoghues's Money Fund Report--industry averages for seven-
day annualized and compounded yields taxable, tax-free and
government money funds.

n) Total returns and yields for Treasury Securities and fixed
income indices as published by Ryan Laboratories or other
suppliers.

o) Merrill Lynch High Yield Master Index or other high yield
bond indices as published by a brokerage firm or others.

p) Average of competitive funds as published by Lipper
Analytical Services, Inc.

q) Morgan Stanley Capital International (MSCI) - Pacific (Free)
Index, which consists of common stocks of companies located in
Australia, Hong Kong, Japan, Malaysia, New Zealand, and
Singapore.

33
r) Morgan Stanley Capital International (MSCI) - Europe Index,
which is comprised of common stocks of companies located in 15
European countries (Austria, Belgium, Denmark, Finland,, France,
Germany, Ireland, Italy, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland, and the United Kingdom).

s) Standard & Poor's Financial Composite.

t) An investment of 80% in the S&P Financial Composite Index
and 20% in Money Market funds.

u) The Keefe Bruyette & Woods Index.

v) The average of the mutual funds in Morningstar's Specialty
Financial category.

Volatility. Occasionally statistics may be used to specify Fund
volatility or risk. Measures of volatility or risk are generally
used to compare fund net asset value or performance relative to a
market index. One measure of volatility is beta. The ratio of
the expected excess return on the portfolio to the expected
excess return on the market index is called beta. Equity funds
commonly use the S&P 500 as their market index. A beta of more
than 1.00 indicates volatility greater than the market, and a
beta of less than 1.00 indicates volatility less than the market.
Another measure of volatility or risk is standard deviation.
Standard deviation is used to measure variability of net asset
value or total return around an average, over a specified period
of time. The premise is that greater volatility connotes greater
risk undertaken in achieving performance. A statistic often used
by sophisticated institutional investors when comparing the
relative performance of portfolios is the Sharpe Ratio. This
statistic is the portfolio's excess return (relative to T-Bills)
divided by the standard deviation of its returns.

All data are based on past performance and do not predict future
results.

EXPERTS

Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey
08540, are the Funds' independent auditors, providing audit
services, tax return review and preparation services and
assistance and consultation in connection with the review of
various Securities and Exchange Commission filings. The annual
financial statements of the U.S. Equity Market Plus,
Financial Services Fund, and High Yield Bond Fund and related
notes thereto attached to
this Statement of Additional Information have been so attached in
reliance upon the report of Deloitte & Touche LLP, given on the
authority of said firm as experts in auditing and accounting. No
statements are provided for the European Equity Market Fund and Asian/Pacific
Equity Market Fund since they have not yet commenced operations.

FINANCIAL STATEMENTS
Fiscal Year Ended March 31, 1999

Audited Financial Statements for fiscal year ended March 31,
1999 are attached.

SMITH BREEDEN TRUST

Smith Breeden U.S. Equity Market Plus Fund
Smith Breeden Financial Services Fund
Smith Breeden High Yield Bond Fund

SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
- --------------------------------------------------------------------------------
PERFORMANCE REVIEW

The Smith Breeden U.S. Equity Market Plus Fund returned 17.17% in the year
ending March 31, 1999. The S&P 500 Index return was 18.49%, and the average
Growth and Income Fund, as tracked by Morningstar, returned 7.42%, over the
same period.

[GRAPHIC APPEARS HERE WITH THE FOLLOWING PLOT POINTS:]

CHANGE IN VALUE OF A $10,000 INVESTMENT

<TABLE>
<CAPTION>
12/22/97 12/31/97 03/31/98 06/30/98 09/30/98 12/31/98 03/31/99
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Smith Breeden Financial Services Fund(1) 10,000 10,100 11,178 11,149 8,135 9,614 9,972
Morningstar Avg. Financial Services Fund 10,000 10,201 11,247 11,421 9,207 10,783 11,067
S&P 500 10,000 10,181 11,601 11,984 10,794 13,093 13,746

- ------------
(1) Fund Returns are net fees and sales charges. Index returns are market returns without deduction of fees
or rebalancing transaction costs.

Past performance is no guarantee of future results.
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS
ENDING MARCH 31, 1999
-----------------------------------------
SINCE INCEPTION FINAL VALUE OF
1 YEAR 5 YEARS (6/30/92) $10,000 INVESTMENT
----------- ----------- ----------------- -------------------
<S> <C> <C> <C> <C>
Smith Breeden U.S. Equity Market Plus Fund 17.17% 26.30% 21.99% $38,263
S&P 500 ................................... 18.49% 26.26% 21.30% 36,808
Morningstar Avg. Growth and Income Fund ... 7.42% 20.31% 17.34% 29,432
</TABLE>

The U.S. Equity Fund is comprised of two segments. The equity segment
purchases S&P 500 futures contracts with a total value approximately equal to
Fund net assets. S&P 500 futures contracts have a price at expiration equal to
the value of the S&P Index at that time. Prior to expiration, S&P 500 index
futures are usually priced at the value of the S&P Index at such time, plus a
spread representing the funding cost paid by buyers of futures to sellers of
futures. The income segment invests in mortgage securities, and then reduces
the interest-rate and prepayment risk to a low level using interest-rate
futures and options. The income segment of the fund aims to exceed the funding
cost of the S&P 500 futures plus the Fund's operating expenses.

In the year ending March 31, 1999 the fixed income segment underperformed
the implied funding cost of the S&P 500 futures contracts by about 1.3% after
expenses. This was primarily due to the period from August to October 1998,
when the international financial crisis caused much turmoil in bond and equity
markets. The Fund benefited in the first quarter of 1999 from lower interest
rate volatility and reduced prepayment expectations, which caused mortgage
securities to outperform comparable Treasury securities, and in this period,
despite slowly rising interest rates, the fund outperformed the S&P 500 by
0.5%.

<PAGE>

SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS MARCH 31, 1999

<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- -------------- ---------------------------------------------------------------------------------- --------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 124.0%
FREDDIE MAC -- 56.5% (1)
Fixed-Rate
$ 19,965,620 Gold 6.00%, due 1/1/29 ........................................................... $ 19,419,931
19,000,000 Gold 6.00% 15 Year, due date to be announced ..................................... 18,873,086
63,900,000 Gold 6.50% 30 Year, due date to be announced ..................................... 63,533,074
38,386 9.50%, due 7/1/02 ................................................................ 39,331
Discount Notes
100,000 4.79%, due 5/7/99 (2),(3) ........................................................ 99,526
600,000 4.79%, due 5/20/99 (2),(3) ....................................................... 596,129
1,700,000 4.80%, due 5/26/99 (2),(3) ....................................................... 1,687,663
600,000 4.98%, due 4/19/99 (2),(3) ....................................................... 598,536
------------
104,847,276
------------
FANNIE MAE -- 43.2% (1)
Fixed-Rate
55,000,000 6.00%, due 5/1/28 to 3/1/29 ...................................................... 53,454,635
9,700,000 6.50% 30 Year, due date to be announced .......................................... 9,651,500
14,876,563 7.00%, due 8/1/11 to 11/1/28 ..................................................... 15,154,877
1,250,000 7.00% 30 Year, due date to be announced .......................................... 1,267,383
64,994 12.50%, due 9/1/12 ............................................................... 73,588
Adjustable-Rate
325,363 7.277%, due 9/1/18 ............................................................... 334,330
Discount Notes
200,000 4.81%, due 7/2/99 (2),(3) ........................................................ 197,507
100,000 5.00%, due 10/29/99 (2),(3) ...................................................... 97,193
------------
80,231,013
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 20.0% (1)
Fixed-Rate
4,820,668 7.00%, due 3/15/28 ............................................................... 4,897,596
Adjustable-Rate
24,504,314 5.00%, due 1/20/28 to 3/20/28 .................................................... 24,818,325
4,471,040 5.50%, due 3/20/28 ............................................................... 4,532,999
137,378 6.625%, due 9/20/21 to 9/20/22 ................................................... 140,230
2,621,396 6.875%, due 2/20/16 to 5/20/22 ................................................... 2,670,393
------------
37,059,543
------------
U.S. TREASURY OBLIGATIONS -- 4.3%
1,700,000 5.875% Note, due 7/31/99(3) ...................................................... 1,706,906
6,250,000 6.375% Note, due 5/15/99(3) ...................................................... 6,262,695
------------
7,969,601
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $230,560,698)............................................................... 230,107,433
------------
CONTRACTS OPTIONS CONTRACTS -- 0.2%
- ------------
142 Call on Ten-Year US Treasury Note Futures, expires 8/99, strike price $118........ 51,031
40 Call on Thirty-Year US Treasury Bond Futures, expires 5/99, strike price $136..... 625
150 Call on Thirty-Year US Treasury Bond Futures, expires 5/99, strike price $142..... 2,344
415 Put on Thirty-Year US Treasury Bond Futures, expires 8/99, strike price $114...... 272,344
------------
TOTAL OPTIONS CONTRACTS (COST $1,356,144)......................................... 326,344
------------
</TABLE>

<PAGE>

SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 1999

<TABLE>
<CAPTION>
MARKET
FACE AMOUNT SECURITY VALUE
- ---------------- ------------------------------------------------------------------------------- ----------------
<S> <C> <C>
OPTION CONTRACTS ON THREE-MONTH LIBOR INTEREST-RATE SWAP
AGREEMENTS -- 0.6%
$ 30,000,000 Option to enter a pay-fixed 6.5% interest-rate swap with Deutsche Bank AG
beginning 9/29/03 and expiring 9/29/08 ........................................ $ 762,697
30,000,000 Option to enter a receive-fixed 5.25% interest-rate swap with Deutsche Bank
AG beginning 9/29/03 and expiring 9/29/08 ..................................... 361,239
-------------
TOTAL OPTION CONTRACTS ON THREE-MONTH LIBOR INTEREST-RATE
SWAP AGREEMENTS (COST $1,356,144).............................................. 1,123,936
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 7.8% (1)
5,000,000 First Union-Lehman Brothers-Bank of America Commercial Mortage Trust
6.56%, due 11/18/08 ........................................................... 5,063,332
5,500,000 GMAC Commercial Mortgage Securities 6.42%, due 8/15/08 ........................ 5,518,850
4,000,000 Nomura Asset Securities Corporation Commercial Mortgage Trust 6.59%,
due 3/17/28 ................................................................... 4,014,298
-------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $14,714,492)............................................................. 14,596,480
-------------
TOTAL INVESTMENTS (COST $246,631,334)--132.6%.................................. 246,154,193
-------------
REPURCHASE AGREEMENTS -- 17.0%
27,500,000 Morgan Stanley Dean Witter, 4.83%, due 04/01/99 dated 03/25/99 ................ 27,500,000
4,000,000 Morgan Stanley Dean Witter, 4.88%, due 04/05/99 dated 03/29/99 ................ 4,000,000
-------------
31,500,000
-------------
FORWARD SALES -- (28.8%)
(55,000,000) Fannie Mae 6.00%, due date to be announced (4) ................................ (53,440,234)
-------------
(53,440,234)
-------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (20.8%) ............................. (38,629,838)
-------------
NET ASSETS -- 100.00% ......................................................... $ 185,584,121
=============
</TABLE>

- ---------
(1) Mortgage-backed obligations are subject to principal paydowns as a result
of prepayments or refinancings of the underlying mortgage instruments. As a
result, the average life may be substantially less than the original
maturity. Adjustable-rate mortgages have coupon rates that adjust
periodically. The interest rate shown is the rate in effect at March 31,
1999. The adjusted rate is determined by adding a spread to a specified
index.

(2) The interest rate shown for discount notes is the discount rate paid at the
time of purchase by the fund.

(3) Security is held as collateral by Carr Futures, Inc.

(4) The forward sale position represents the unsettled sale of securities held
by the Fund.

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999

<TABLE>
<S> <C>
ASSETS
Investments at market value (identified cost $246,631,334) (Note 1)...................... $ 246,154,193
Cash .................................................................................... 2,687,349
Repurchase agreements (Cost $31,500,000) (Note 1)........................................ 31,500,000
Receivables:
Subscriptions ......................................................................... 434,172
Interest and maturities ............................................................... 1,166,636
Securities sold ....................................................................... 117,419,101
-------------
TOTAL ASSETS .......................................................................... 399,361,451
-------------
LIABILITIES
Short sales at market value (proceeds $53,401,563)....................................... 53,440,234
Payables:
Variation margin on futures contracts (Note 2) ........................................ 2,905,661
Redemptions ........................................................................... 267,137
Securities purchased .................................................................. 156,924,382
Due to Advisor (Note 3) ................................................................. 112,703
Accrued expenses ........................................................................ 127,213
-------------
TOTAL LIABILITIES ..................................................................... 213,777,330
-------------
NET ASSETS
(Applicable to outstanding shares of 11,058,974; unlimited number of shares of beneficial
interest authorized; no stated par) ................................................... $ 185,584,121
=============
Net asset value, offering price and redemption price per share ($185,584,121 /
11,058,974)............................................................................. $ 16.78
SOURCE OF NET ASSETS
Paid in capital ......................................................................... $ 168,177,438
Undistributed net investment income ..................................................... 1,113,690
Accumulated net realized gain on investments and futures contracts ...................... 15,225,816
Net unrealized depreciation of investments .............................................. (515,812)
Net unrealized appreciation of futures contracts ........................................ 1,582,989
-------------
NET ASSETS ............................................................................ $ 185,584,121
=============
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

FOR THE YEAR ENDED MARCH 31, 1999

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest and discount earned, net of premium amortization and interest expense ($10,148)
(Note 1) .............................................................................. $ 8,548,332
EXPENSES
Advisory fees (Note 3) .................................................................. 1,090,372
Accounting and pricing services fees .................................................... 61,513
Custodian fees........................................................................... 46,928
Audit and tax preparation fees .......................................................... 49,057
Legal fees .............................................................................. 49,383
Transfer agent fees ..................................................................... 156,367
Registration fees ....................................................................... 47,991
Trustees fees and expenses .............................................................. 99,339
Insurance expense ....................................................................... 11,698
Other ................................................................................... 9,157
------------
TOTAL EXPENSES BEFORE REIMBURSEMENT ................................................... 1,621,805
Expenses reimbursed by Advisor (Note 3) ............................................... (251,051)
------------
NET EXPENSES .......................................................................... 1,370,754
------------
NET INVESTMENT INCOME ................................................................. 7,177,578
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments ........................................................ 24,541,887
Change in unrealized depreciation of investments and futures contracts .................. (8,018,115)
------------
Net realized and unrealized gain on investments and futures contracts ................... 16,523,772
------------
Net increase in net assets resulting from operations .................................... $ 23,701,350
============
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income .................................................... $ 7,177,578 $ 2,908,437
Net realized gain on investments ......................................... 24,541,887 9,514,596
Change in unrealized appreciation (depreciation) of investments .......... (8,018,115) 9,573,592
------------- -------------
Net increase in net assets resulting from operations ..................... 23,701,350 21,996,625
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ..................................... (6,376,285) (2,632,273)
Distributions from net realized gains on investments ..................... (17,138,874) (2,556,880)
------------- -------------
Total distributions ...................................................... (23,515,159) (5,189,153)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Shares sold .............................................................. 114,008,937 123,373,056
Shares issued on reinvestment of distributions ........................... 22,832,882 4,918,950
Shares redeemed .......................................................... (88,111,328) (21,939,416)
------------- -------------
Increase in net assets resulting from capital share transactions (a) ..... 48,730,491 106,352,590
------------- -------------
TOTAL INCREASE IN NET ASSETS ........................................... 48,916,682 123,160,062
NET ASSETS
Beginning of period ...................................................... 136,667,439 13,507,377
------------- -------------
End of period ............................................................ $ 185,584,121 $ 136,667,439
============= =============
(a) Transactions in capital shares were as follows:
Shares sold .............................................................. 7,288,068 8,130,007
Shares issued on reinvestment of distributions ........................... 1,546,502 330,714
Shares redeemed .......................................................... (5,883,230) (1,428,596)
------------- -------------
Net increase ............................................................. 2,951,340 7,032,125
Beginning balance ........................................................ 8,107,634 1,075,509
------------- -------------
Ending balance ........................................................... 11,058,974 8,107,634
============= =============
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN U.S. EQUITY MARKET PLUS FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

The following average per share data, ratios and supplemental information
has been derived from information provided in the financial statements.

<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................ $ 16.86 $ 12.56 $ 12.27 $ 10.84 $ 9.88
----------- ----------- ---------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............. 0.686 0.591 0.592 0.615 0.568
Net realized and unrealized
gain (loss) on investments ...... 1.765 4.940 1.813 2.768 1.081
------------ ------------ ----------- ---------- ----------
Total from investment
operations ...................... 2.451 5.531 2.405 3.383 1.649
------------ ------------ ----------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment
income .......................... ( 0.624) ( 0.586) ( 0.590) ( 0.583) ( 0.568)
Dividends in excess of net
investment income ............... -- -- -- -- ( 0.001)
Distributions from net realized
gains on investments ............ ( 1.905) ( 0.645) ( 1.525) ( 1.370) ( 0.047)
Distributions in excess of net
realized gains on
investments ..................... -- -- -- -- ( 0.073)
------------ ------------ ----------- ---------- ----------
Total distributions ............... ( 2.529) ( 1.231) ( 2.115) ( 1.953) ( 0.689)
------------ ------------ ----------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD ............................ $ 16.78 $ 16.86 $ 12.56 $ 12.27 $ 10.84
------------ ------------ ----------- ---------- ----------
TOTAL RETURN ....................... 17.17% 45.71% 21.41% 32.30% 17.18%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ......... $185,584,121 $136,667,439 $13,507,377 $4,766,534 $2,107,346
Ratio of net expenses to
average net assets .............. 0.88% 0.88% 0.88% 0.90% 0.90%
Ratio of net investment
income to average net
assets .......................... 4.62% 4.79% 5.30% 5.53% 7.44%
Portfolio turnover rate ........... 527% 424% 182% 107% 120%
Ratio of expenses to average
net assets before
reimbursement of expenses
by the Advisor .................. 1.04% 1.23% 2.60% 4.58% 7.75%
Ratio of net investment
income to average net
assets before
reimbursement of expenses
by the Advisor .................. 4.45% 4.44% 3.58% 1.85% 0.59%
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

The Board of Trustees and Shareholders,
Smith Breeden U.S. Equity Market Plus Fund of the Smith Breeden Trust:

We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Breeden U.S. Equity Market
Plus Fund (formerly "Smith Breeden Equity Market Plus" Fund) of the Smith
Breeden Trust (the "Fund") as of March 31, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended and the financial
highlights for each of the years in the five-year period presented. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1999 by correspondence with the custodian and brokers, and where replies
were not received, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
positions of the Smith Breeden U.S. Equity Market Plus Fund of the Smith
Breeden Trust as of March 31, 1999, the results of its operations, the changes
in its net assets, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Princeton, New Jersey
May 14, 1999

<PAGE>

SMITH BREEDEN FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
PERFORMANCE REVIEW

Financial services funds significantly lagged the Standard and Poor's 500
stock index in performance in the year ended March 31, 1999, as Morningstar's
average financial services fund index returned -1.6%, while the S&P 500
returned +18.5%. The Smith Breeden Financial Services Fund lagged both of these
averages with a return of -10.8%. The graph below shows these results for the
year.

[GRAPHIC APPEARS HERE WITH THE FOLLOWING PLOT POINTS:]

CHANGE IN VALUE OF A $10,000 INVESTMENT

<TABLE>
<CAPTION>
10/15/98 10/31/98 11/30/98 12/31/98 01/31/99 02/26/99 03/31/99
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Smith Breeden High Yield Bond Fund 10,000 10,057 10,218 10,133 10,143 10,029 10,039
Merrill Lynch High Yield 175 Index 10,000 10,319 10,855 10,802 11,014 10,903 11,012
Morningstar Avg. High Yield Bond Fund 10,000 10,234 10,785 10,746 10,903 10,875 11,036

- ------------
(1) Fund Returns are net fees and sales charges. Index returns are market returns without deduction of fees
or rebalancing transaction costs.

Past performance is no guarantee of future results.
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS FOR PERIODS ENDING
MARCH 31, 1999
------------------------------
SINCE INCEPTION FINAL VALUE OF
1 YEAR (12/22/97) $10,000 INVESTMENT
------------ ----------------- -------------------
<S> <C> <C> <C>
Smith Breeden Financial Services Fund ........ -10.79% -0.22% $ 9,972
S&P 500 ...................................... 18.49% 28.44% 13,746
Morningstar Avg. Financial Services Fund ..... -1.60% 8.30% 11,067
</TABLE>

Our fund lagged the average financial services fund for two reasons: (1)
leverage and (2) overweighting of small capitalization (less than $200 million)
banks and thrifts, as well as some mid-sized takeover candidates. We will
discuss each of these factors in turn and then comment on the global
environment that caused the entire financial sector to lag the S&P 500 in
performance.

First, our fund employs some leverage, which averaged $1.19 of assets
purchased per $1.00 invested in the fund. As noted, the average financial
services fund lagged the S&P 500 by -20.1%, which means that 19% leverage in a
typical financial services portfolio resulted in incremental negative
performance of 0.19 times -20.1% = -3.8%. Leverage is a two-edged sword: when
financial services stocks underperform the S&P, leverage will hurt performance,
whereas it helps performance when financial services stocks outperform the S&P.
As we believe that financial services stocks are quite reasonably valued
relative to the S&P 500, we expect to continue to use leverage for some time.
The maximum leverage permitted in the fund is $1.50 assets per $1.00 NAV;
however, the maximum leverage used to date has been approximately $1.33 per
$1.00.

The second major reason the fund underperformed last year was its
overweighting of very small bank and thrift stocks, as well as some mid-sized
takeover candidates. We estimate that our overweighting in these stocks caused
the other 5.4% of our underperformance relative to financial sector funds. In
general, takeover premiums declined during the year. As many small bank and
thrift stocks are viewed as takeover candidates, this hurt their

<PAGE>

SMITH BREEDEN FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
PERFORMANCE REVIEW (CONT.)

stock performance, as well as the performance of mid-sized bank takeover
candidates. One reason given by some analysts for this decline in potential
takeover stocks' prices is the lower likelihood of takeovers as the end of the
millenium nears, i.e., the "Year 2000" (Y2K) issue. As takeover premiums have
been reduced during this past year, the fund has increased its weighting in
stocks that are believed to have a greater than normal chance of takeovers. Our
view is that the takeover premiums are now small enough that these institutions
offer excellent values even if they are not taken over.

The financial sector lagged the entire stock market in the past year due
to increasing global economic turmoil. This began in Asia and quickly moved to
other global markets, including Eastern Europe and South America. Global
problems generally affect the quality of loans, as well as earnings growth at
financial companies. Additionally, there are concerns of "systemic risk" in
financial stocks, as the problems of a major international financial
institution could affect its dealings with other banks and thrifts, which may
not have any direct global exposure.

Market volatility and uncertainty reached a peak in late summer and early
fall of 1998 following the Russian bond default and currency devaluation. In
response to increased market volatility, the U.S. Federal Reserve reduced
short-term interest rates three times. The financial markets reacted positively
to these Fed moves, as financial stocks recovered much of their September 1998
quarter losses in the December 1998 quarter, but still ended the year well
behind the S&P 500.

In early 1999, the global financial markets have stabilized and the
environment appears to be better for financial sector stocks. Some markets in
Asia appear to have stabilized and have begun to grow again. However, Y2K
concerns periodically worry investors in financial sector equities, and these
concerns probably will not be totally allayed until the year 2000 is entered
and the problems are known and resolved. Aside from those concerns,
profitability of financial services firms is nearly the highest it has ever
been in the 20th century.

In summary, we are dismayed by the poor performance of our fund in the
past year. However, we continue to believe that our fund holds a portfolio of
excellent investments, which will provide a fine risk/reward combination in
coming years.

<PAGE>

SMITH BREEDEN FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS MARCH 31, 1999

<TABLE>
<CAPTION>
MARKET
SHARES SECURITY VALUE
- -------- ------------------------------------------------------------ ---------------
<S> <C> <C>
EQUITY HOLDINGS -- 127.9%
COMMERCIAL BANKING -- 54.7%
12,000 Bank One Corp. ............................................. $ 660,750
9,000 First Union Corp. .......................................... 480,938
13,000 KeyCorp .................................................... 394,062
9,000 Mercantile Bancorporation Inc. ............................. 427,500
18,000 Pacific Century Financial Corp. ............................ 375,750
11,000 PNC Bank Corp. ............................................. 611,188
12,000 U.S. Bancorp ............................................... 408,750
11,000 Wells Fargo Company ........................................ 385,687
------------
3,744,625
------------
INVESTMENT BANKING AND BROKERAGE -- 4.4%
5,000 Lehman Brothers, Inc. ...................................... 298,750
------------
298,750
------------
MONEY CENTER BANKING -- 19.3%
6,000 BankAmerica Corp. .......................................... 423,750
7,000 BankBoston Corporation ..................................... 303,188
5,000 Chase Manhattan Corp. ...................................... 406,562
1,000 Citigroup .................................................. 63,875
1,000 J.P. Morgan & Co. .......................................... 123,375
------------
1,320,750
------------
INVESTMENT MANAGEMENT AND ADVISORY -- 11.7%
10,000 Franklin Resources, Inc. ................................... 281,250
11,000 PIMCO Advisors Holdings LP (1) ............................. 345,813
5,000 Price (T. Rowe) Assoc., Inc. ............................... 171,875
------------
798,938
------------
CONSUMER FINANCE -- 5.3%
8,000 Household International, Inc. .............................. 365,000
------------
365,000
------------
SAVINGS & LOANS -- 32.5%
2,000 Community Bank Shares of Indiana, Inc. ..................... 32,750
1,000 First Oak Brook Bancshares, Inc. -- Class A ................ 17,438
22,000 First Security Corporation ................................. 424,874
14,500 Home Federal Bancorp ....................................... 319,906
18,500 Indiana United Bancorp ..................................... 388,500
11,000 Marion Capital Holdings, Inc. .............................. 242,000
26,700 Piedmont Bancorp, Inc. ..................................... 226,950
14,000 Washington Mutual, Inc. .................................... 572,250
------------
2,224,668
------------
TOTAL EQUITY HOLDINGS (COST $8,654,885)..................... 8,752,731
------------
LIABILITIES LESS CASH AND OTHER ASSETS -- (27.9%) .......... (1,910,317)
------------
NET ASSETS -- 100.0% ....................................... $ 6,842,414
============
</TABLE>

- ---------
(1) Limited partnership units

<PAGE>

SMITH BREEDEN FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999

<TABLE>
<S> <C>
ASSETS
Investments at market value (identified cost $8,654,885) (Note 1)..................... $ 8,752,731
Cash ................................................................................. 59,057
Receivables:
Variation margin on futures contracts (Note 2) ..................................... 152,600
Dividends .......................................................................... 22,949
Due from Advisor (Note 3) .......................................................... 16,871
Other assets ......................................................................... 4,611
-----------
TOTAL ASSETS ....................................................................... 9,008,819
-----------
LIABILITIES
Bank loan (Note 5) ................................................................... 2,125,000
Payables:
Redemption ......................................................................... 12
Interest and loan fees ............................................................. 29,036
Accrued expenses ..................................................................... 12,357
-----------
TOTAL LIABILITIES .................................................................. 2,166,405
-----------
NET ASSETS
(Applicable to outstanding shares of 768,736; unlimited number of shares of beneficial
interest authorized; no stated par) ................................................ $ 6,842,414
===========
Net asset value, offering price and redemption price per share ($6,842,414 / 768,736). $ 8.90
===========
SOURCE OF NET ASSETS
Paid in capital ...................................................................... $ 7,048,508
Undistributed net investment income .................................................. 2,066
Accumulated net realized loss on investments and futures contracts ................... (248,379)
Net unrealized appreciation of investments ........................................... 97,846
Net unrealized depreciation of futures contracts ..................................... (57,627)
-----------
NET ASSETS ......................................................................... $ 6,842,414
===========
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

FOR THE YEAR ENDED MARCH 31, 1999

<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends and interest earned net of interest expense ($87,491) (Note 1).... $ 112,276
EXPENSES
Advisory fees (Note 3) ..................................................... 107,863
Accounting and pricing services fees ....................................... 25,878
Custodian fees.............................................................. 8,440
Audit and tax preparation fees ............................................. 2,136
Legal fees ................................................................. 11,336
Transfer agent fees ........................................................ 25,270
Registration fees .......................................................... 31,236
Trustees fees and expenses ................................................. 4,701
Insurance expense .......................................................... 3,228
Other ...................................................................... 4,085
----------
TOTAL EXPENSES BEFORE REIMBURSEMENT ...................................... 224,173
Expenses reimbursed by Advisor (Note 3) .................................. (117,431)
----------
NET EXPENSES ............................................................. 106,742
----------
NET INVESTMENT INCOME .................................................... 5,534
----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS .................................
Net realized loss on investments and futures contracts ..................... (248,893)
Change in unrealized depreciation of investments and futures contracts ..... (638,575)
----------
Net realized and unrealized loss on investments and futures contracts ...... (887,468)
----------
Net decrease in net assets resulting from operations ....................... $ (881,934)
==========
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
MARCH 31, 1999 MARCH 31, 1998 (1)
---------------- -------------------
<S> <C> <C>
OPERATIONS
Net investment income .................................................... $ 5,534 $ 12,415
Net realized gain (loss) on investments .................................. (248,893) 50,408
Net unrealized appreciation (depreciation) of investments ................ (638,575) 678,794
------------ ----------
Net increase (decrease) in net assets resulting from operations .......... (881,934) 741,617
------------ ----------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ..................................... (15,881) --
Distributions from net realized gains on investments ..................... (49,896) --
------------ ----------
Total distributions ...................................................... (65,777) --
------------ ----------
CAPITAL SHARE TRANSACTIONS
Shares sold .............................................................. 1,911,182 6,588,508
Shares issued on reinvestment of distributions ........................... 54,326 --
Shares redeemed .......................................................... (1,492,099) (13,409)
------------ ----------
Increase in net assets resulting from capital share transactions (a) ..... 473,409 6,575,099
------------ ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS ................................. (474,302) 7,316,716
NET ASSETS
Beginning of period ...................................................... 7,316,716 --
------------ ----------
End of period ............................................................ $ 6,842,414 $7,316,716
============ ==========
(a) Transactions in capital shares were as follows:
Shares sold .............................................................. 206,371 729,112
Shares issued on reinvestment of distributions ........................... 5,482 --
Shares redeemed .......................................................... (170,725) (1,504)
------------ ----------
Net increase ............................................................. 41,128 727,608
Beginning balance ........................................................ 727,608 --
------------ ----------
Ending balance ........................................................... 768,736 727,608
============ ==========
</TABLE>

- ---------
(1) Commenced operations on December 22, 1997

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED MARCH 31, 1999

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net decrease in net assets resulting from operations ................................ $ (881,934)
Change in net realized and unrealized loss on investments ........................... 887,468
-------------
Net investment income ............................................................. 5,534
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Increase in interest and dividends receivable ....................................... (9,796)
Limited partnership income accrual .................................................. (11,126)
Limited partnership distributions ................................................... 23,675
Decrease in other assets ............................................................ 11,813
Increase in other liabilities ....................................................... 25,351
-------------
Net cash provided by operating activities ......................................... 45,451
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for futures variation ...................................................... (392,418)
Proceeds from sales of long-term investments ........................................ 8,965,506
Purchases of long-term investments .................................................. (11,055,264)
-------------
Net cash used in investing activities ............................................. (2,482,176)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank borrowings ......................................................... 2,125,000
Proceeds from shares tendered ....................................................... 1,856,856
Payments for shares redeemed ........................................................ (1,492,111)
Cash paid for distributions of net investment income and realized capital gains ..... (11,451)
-------------
Net cash provided by financing activities ......................................... 2,478,294
-------------
Net increase in cash .............................................................. 41,569
CASH AT BEGINNING OF YEAR ............................................................ 17,488
-------------
CASH AT END OF YEAR .................................................................. $ 59,057
-------------
NONCASH FINANCING ACTIVITIES
Market value of shares issued to stockholders through reinvestment of dividends ..... $ 54,326
-------------
SUPPLEMENTAL DISCLOSURE
Interest and loan fees paid ......................................................... $ 87,491
-------------
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

The following average per share data, ratios and supplemental information
has been derived from information provided in the financial statements.

<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
MARCH 31, 1999 MARCH 31, 1998 (1)
---------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ......................................... $ 10.06 $ 9.00
--------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ....................................................... 0.006 0.017
Net realized and unrealized gain (loss) on investments ...................... ( 1.082) 1.043
---------- ---------
Total from investment operations ............................................ ( 1.076) 1.060
---------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income ........................................ ( 0.020) --
Dividends in excess of net investment income ................................ -- --
Distributions from net realized gains on investments ........................ ( 0.063) --
Distributions in excess of net realized gains on investments ................ -- --
---------- ---------
Total distributions ....................................................... ( 0.083) --
---------- ---------
NET ASSET VALUE, END OF PERIOD ............................................... $ 8.90 $ 10.06
---------- ---------
TOTAL RETURN ................................................................. (10.79%) 11.78 %
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ................................................... $6,842,414 $7,316,716
Ratio of net expenses to average net assets ................................. 1.48% 1.48%*
Ratio of net investment income to average net assets ........................ 0.08% 0.79%*
Portfolio turnover rate ..................................................... 105% 85%
Ratio of expenses to average net assets before reimbursement of expenses
by the Advisor ............................................................ 3.12% 3.20%*
Ratio of net investment income to average net assets before reimbursement
of expenses by the Advisor ................................................ ( 1.56%) ( 0.92 %)*
</TABLE>

- ---------
(1) Commenced operations on December 22, 1997.

* Annualized

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

The Board of Trustees and Shareholders,
Smith Breeden Financial Services Fund of the Smith Breeden Trust:

We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Breeden Financial Services
Fund of the Smith Breeden Trust (the "Fund") as of March 31, 1999, and the
related statement of operations and statement of cash flows for the year then
ended, the statements of changes in net assets for each of the periods in the
two-year period then ended, and the financial highlights for each of the years
in the two-year periods presented. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.

In our opinion, such financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
positions of the Smith Breeden Financial Services Fund of the Smith Breeden
Trust as of March 31, 1999, the results of its operations, the changes in its
net assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Princeton, New Jersey
May 14, 1999

<PAGE>

SMITH BREEDEN HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
PERFORMANCE REVIEW

The Smith Breeden High Yield Bond Fund commenced operations on October 15,
1998. Through March 31, 1999, the Fund generated a total return of 0.39%. The
return of the Merrill Lynch High Yield 175 Index was 10.12% for the same
period. The graph below shows the return on the Fund compared to the Merrill
Lynch High Yield 175 Index, as well as the average High Yield Fund as measured
by Morningstar.

[GRAPHIC]

<TABLE>
<CAPTION>
TOTAL RETURN FROM 10/15/98 TO
3/31/99
--------------------------------
SINCE
INCEPTION FINAL VALUE OF
(10/15/98) $10,000 INVESTMENT
------------ -------------------
<S> <C> <C>
Smith Breeden High Yield Bond Fund ............ 0.39% $10,039
Merrill Lynch High Yield 175 Index ............ 10.12% 11,012
Morningstar Avg. High Yield Bond Fund ......... 10.36% 11,036
</TABLE>

The Fund opened on October 15, 1998 with a 100% cash weighting and with
the surprise announcement by the Federal Reserve that rates were being lowered
by 0.25%. The rate cut by the Fed sparked equities and high yield bonds to
record returns for the remainder of the year. The high yield market, where it
was difficult to sell a bond in August and September 1998 due to investor's
avoidance of risk, sprang to life quickly, reversing the trend and making it
difficult to find quality bonds for sale. The High Yield Fund, which continued
to selectively purchase securities, was fully invested in the high yield market
by the end of 1998, but missed most of the fourth quarter returns.

Returns in the first quarter of 1999 were negatively influenced by the
price movement of two of the Fund's investments: ForceEnergy and Iridium. The
remainder of the portfolio (without Iridium and ForceEnergy) performed
strongly.

<PAGE>

SMITH BREEDEN HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
PERFORMANCE REVIEW (CONT.)

ForceEnergy, an oil and gas exploration and production company, had a
planned equity cash infusion fall through in January and filed for Chapter 11
Bankruptcy reorganization in March. ForceEnergy was hurt by the prolonged
period of low oil prices. With the rise in energy prices, ForceEnergy's assets
are regaining their value and we are hopeful the company will emerge quickly
from bankruptcy protection.

Iridium, a satellite communications company, missed its revenue and
subscriber estimates in March 1999 which led to management changes at the top
of the organization. Iridium is a company in transition, changing its focus
from building and launching satellites to marketing the telecommunications
services it kicked off late last year.

Overall, we feel the high yield bond sector remains attractive. The sector
has regained a large portion of the losses associated with the August-September
1998 period, but junk bond yields continue to be offered at spreads to
comparable US Treasuries that are wide in relationship to their 1998 levels.
Spreads to US Treasuries peaked in October 1998 near 750 basis points* and as
of March 1999 were at 575 bps, still above their long term average of 500 bps
and well above their March 1998 level of 350 bps. We believe that the risk of
bond defaults is more than compensated by these higher yields. The last time
this risk was priced with yields of 750 bps above US Treasuries was in 1991,
when high yield bond defaults were over 10% annually. In 1998, high yield
defaults were 3.31%, according to Moody's. Although defaults have been
increasing, the increase has not been dramatic. Moody's trailing-twelve-month
default rate (percentage of issuers) reached 3.68% in March, the highest level
since April 1993, but well below 1990-1991 levels. We believe long term
investors are being well rewarded by the added yield spreads for taking on
these levels of default risk.
- ---------
* 100 basis points (bps) = 1%

<PAGE>

SMITH BREEDEN HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS MARCH 31, 1999

<TABLE>
<CAPTION>
FACE MARKET
AMOUNT SECURITY VALUE
- --------- ---------------------------------------------------------------- -------------
<S> <C> <C>
CORPORATE BOND HOLDINGS -- 99.9%
MEDIA AND COMMUNICATIONS -- 37.4%
100,000 Chancellor Media 12/15/07 8.125% ............................... $ 102,250
100,000 Echostar DBS Corp. 2/1/09 9.375% (1) ........................... 104,375
100,000 Intermedia Communications 7/15/07 Step-up, 11.07% (3) .......... 76,250
100,000 Iridium LLC/CAP 7/15/05 10.875% ................................ 38,000
100,000 Level 3 Communications 5/1/08 9.125% ........................... 101,250
100,000 Pegasus Communication 12/1/06 9.75% (1) ........................ 104,000
100,000 PSINet Inc. 2/15/05 10.00% ..................................... 106,250
200,000 Qwest Communications Int. 10/15/07 Step-up, 8.02% (3) .......... 160,000
----------
792,375
----------
HOUSING -- 9.6%
100,000 American Standard Companies 2/15/10 7.625% ..................... 98,500
100,000 Kaufman & Broad 11/15/06 9.625% ................................ 105,250
----------
203,750
----------
INFORMATION TECHNOLOGY -- 9.5%
100,000 Apple Computer Inc. 2/15/04 6.50% .............................. 91,625
100,000 Unisys Corp. 4/15/03 12.00% .................................... 110,500
----------
202,125
----------
GAMING AND LEISURE -- 9.5%
100,000 HMH Properties 8/1/05 7.875% ................................... 98,250
100,000 Hollywood Park 8/1/07 9.50% .................................... 103,000
----------
201,250
----------
HEALTHCARE -- 9.4%
200,000 Tenet Healthcare Corp. 1/15/07 8.625% .......................... 201,000
----------
201,000
----------
ENERGY -- 6.6%
100,000 ForceEnergy, Inc. 11/1/06 9.50% (2) ............................ 47,500
100,000 Pogo Producing Co. 5/15/07 8.75% ............................... 92,500
----------
140,000
----------
AEROSPACE -- 4.7%
100,000 Atlas Air, Inc. 11/15/06 9.375% ................................ 100,500
----------
100,500
----------
FOOD AND DRUG -- 4.7%
100,000 Great Atlantic & Pacific 4/15/07 7.75% ......................... 99,107
----------
99,107
----------
FINANCIAL -- 4.4%
100,000 Conseco Financing 11/15/26 8.70% ............................... 92,738
----------
92,738
----------
INTERNATIONAL -- 4.1%
100,000 Asia Pulp & Paper Intl. 10/1/00 10.25% ......................... 88,250
----------
88,250
----------
TOTAL CORPORATE BOND HOLDINGS (COST $2,195,739)................. 2,121,095
----------
CASH AND OTHER ASSETS LESS LIABILITIES -- 0.1% ................. 291
----------
NET ASSETS -- 100.0% ........................................... $2,121,386
==========
</TABLE>

- ---------
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. Such securities may be resold in transactions exempt from
registration, normally to qualified insitutional buyers. In total, 144A
securities represent 9.8% of net assets.

(2) Security is in default on interest payments due to Chapter 11 bankruptcy
reorganization by the issuing company. The security in default represents
2.2% of net assets.

(3) Yield shown is the purchased yield to maturity for step-up bonds.

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1999

<TABLE>
<S> <C>
ASSETS
Investments at market value (identified cost $2,195,739) (Note 1)........................ $ 2,121,095
Cash .................................................................................... 11,780
Interest receivable ..................................................................... 49,964
Due from Advisor (Note 3) ............................................................... 12,068
Other assets ............................................................................ 91
-----------
TOTAL ASSETS .......................................................................... 2,194,998
-----------
LIABILITIES
Bank loan (Note 5) ...................................................................... 60,000
Interest and loan fees payable .......................................................... 637
Accrued expenses ........................................................................ 12,975
-----------
TOTAL LIABILITIES ..................................................................... 73,612
-----------
NET ASSETS:
(Applicable to outstanding shares of 243,392; unlimited number of shares of beneficial
interest authorized; no stated par) ..................................................... $ 2,121,386
===========
Net asset value, offering price and redemption price per share ($2,121,386 / 243,392).... $ 8.72
===========
SOURCE OF NET ASSETS
Paid in capital ......................................................................... $ 2,195,571
Accumulated net realized gain on investments ............................................ 459
Net unrealized depreciation of investments .............................................. (74,644)
-----------
NET ASSETS ............................................................................ $ 2,121,386
===========
</TABLE>

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

FOR THE PERIOD ENDED MARCH 31, 1999 (1)

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest and discount earned, net of premium amortization and interest expense ($637) $ 79,890
(Note 1) ---------
EXPENSES
Advisory fees (Note 3) .................................................................. 6,058
Accounting and pricing services fees .................................................... 13,750
Custodian fees........................................................................... 1,962
Audit and tax preparation fees .......................................................... 5,220
Legal fees .............................................................................. 1,644
Transfer agent fees ..................................................................... 9,144
Registration fees ....................................................................... 17,875
Trustees fees and expenses .............................................................. 337
Insurance expense ....................................................................... 2,400
Other ................................................................................... 639
---------
TOTAL EXPENSES BEFORE REIMBURSEMENT ................................................... 59,029
Expenses reimbursed by Advisor (Note 3) ............................................... (50,547)
---------
NET EXPENSES .......................................................................... 8,482
---------
NET INVESTMENT INCOME ................................................................. 71,408
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments ........................................................ 459
Change in unrealized depreciation of investments ........................................ (74,644)
---------
Net realized and unrealized loss on investments ......................................... (74,185)
---------
Net decrease in net assets resulting from operations .................................... $ (2,777)
=========
</TABLE>

- ---------
(1) Commenced operations on October 15, 1998

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, 1999 (1)
-------------------
<S> <C>
OPERATIONS
Net investment income .................................................... $ 71,408
Net realized gain on investments ......................................... 459
Net unrealized depreciation of investments ............................... (74,644)
----------
Net decrease in net assets resulting from operations ..................... (2,777)
----------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ..................................... (71,405)
----------
Total distributions ...................................................... (71,405)
----------
CAPITAL SHARE TRANSACTIONS
Shares sold .............................................................. 2,126,127
Shares issued on reinvestment of distributions ........................... 71,423
Shares redeemed .......................................................... (1,982)
----------
Increase in net assets resulting from capital share transactions (a) ..... 2,195,568
----------
TOTAL INCREASE IN NET ASSETS ........................................... 2,121,386
NET ASSETS
Beginning of period ...................................................... --
----------
End of period ............................................................ $2,121,386
==========
(a) Transactions in capital shares were as follows:
Shares sold .............................................................. 235,588
Shares issued on reinvestment of distributions ........................... 8,031
Shares redeemed .......................................................... (227)
----------
Net increase ............................................................. 243,392
Beginning balance ........................................................ --
----------
Ending balance ........................................................... 243,392
==========
</TABLE>

- ---------
(1) Commenced operations on October 15, 1998

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

SMITH BREEDEN HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

The following average per share data, ratios and supplemental information
has been derived from information provided in the financial statements.

<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, 1999 (1)
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..................................................... $ 9.00
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................................................................... 0.318
Net realized and unrealized loss on investments ......................................... (0.280)
---------
Total from investment operations ........................................................ 0.038
---------
LESS DISTRIBUTIONS
Dividends from net investment income .................................................... (0.318)
Dividends in excess of net investment income ............................................ --
Distributions from net realized gains on investments .................................... --
Distributions in excess of net realized gains on investments ............................ --
---------
Total distributions ................................................................... (0.318)
---------
NET ASSET VALUE, END OF PERIOD ........................................................... $ 8.72
---------
TOTAL RETURN ............................................................................. 0.39 %
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ............................................................... $2,121,386
Ratio of net expenses to average net assets ............................................. 0.98%*
Ratio of net investment income to average net assets .................................... 8.30%*
Portfolio turnover rate ................................................................. 12%
Ratio of expenses to average net assets before reimbursement of expenses by the
Advisor ............................................................................... 6.86%*
Ratio of net investment income to average net assets before reimbursement of expenses
by the Advisor ........................................................................ 2.43%*
</TABLE>

- ---------
(1) Commenced operations on October 15, 1998.

* Annualized

- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.

<PAGE>

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

The Board of Trustees and Shareholders,
Smith Breeden High Yield Bond Fund of the Smith Breeden Trust:

We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Breeden High Yield Bond
Fund of the Smith Breeden Trust (the "Fund") as of March 31, 1999, and the
related statement of operations, the statement of changes in net assets, and
the financial highlights for the period October 15, 1998 (commencement of
operations) to March 31, 1999. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1999 by correspondence with the custodian and brokers, and where replies
were not received, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Smith Breeden High Yield Bond Fund of the Smith Breeden Trust
as of March 31, 1999, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated period in
conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Princeton, New Jersey
May 14, 1999

<PAGE>

SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

The Smith Breeden Series Fund and the Smith Breeden Trust (the "Trusts") are
open-end, diversified management investment companies registered under the
Investment Company Act of 1940, as amended. The Smith Breeden Series Fund
offers shares in two series: the Smith Breeden Short Duration U.S. Government
Fund (the "Short Fund") and the Smith Breeden Intermediate Duration U.S.
Government Fund (the "Intermediate Fund"). The Smith Breeden Trust offers
shares in three series: the Smith Breeden U.S. Equity Market Plus Fund (the
"U.S. Equity Fund", formerly the Smith Breeden Equity Market Plus Fund), the
Smith Breeden High Yield Bond Fund (the "High Yield Fund"), and the Smith
Breeden Financial Services Fund (the "Financial Services Fund"). The following
is a summary of accounting policies consistently followed by the Short Fund,
the Intermediate Fund, the High Yield Fund, the U.S. Equity Fund and the
Financial Services Fund (collectively, the "Funds").

A. SECURITY VALUATION: Portfolio securities are valued at the current market
value provided by a pricing service, or by a bank or broker/dealer experienced
in such matters when over-the-counter market quotations are readily available.
Securities and other assets for which market prices are not readily available
are valued at fair market value as determined in accordance with procedures
approved by the Board of Trustees.

B. REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
member banks of the Federal Reserve System with total assets in excess of $500
million, and securities dealers, provided that such banks or dealers meet the
credit guidelines of the Funds' Board of Trustees. In a repurchase agreement, a
Fund acquires securities from a third party, with the commitment that they will
be repurchased by the seller at a fixed price on an agreed upon date. The
Funds' custodian maintains control or custody of the securities collateralizing
the repurchase agreement until maturity. The value of the collateral is
monitored daily, and, if necessary, additional collateral is received to ensure
that the market value of the collateral remains sufficient to protect the Fund
in the event of the seller's default. However, in the event of default or
bankruptcy of the seller, the Fund's right to the collateral may be subject to
legal proceedings.

C. REVERSE REPURCHASE AGREEMENTS: A reverse repurchase agreement involves the
sale of portfolio assets together with an agreement to repurchase the same
assets later at a fixed price. Additional assets are maintained in a segregated
account with the custodian, and are marked to market daily. The segregated
assets may consist of cash, U.S. Government securities, or other liquid
high-grade debt obligations at least equal in value to the obligations under
the reverse repurchase agreements. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, a
Fund's use of the proceeds under the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to
enforce the obligation to repurchase the securities.

D. DOLLAR ROLL AND REVERSE DOLLAR ROLL AGREEMENTS: A dollar roll is an
agreement to sell securities for delivery in the current month and to
repurchase substantially similar (same type and coupon) securities on a
specified future date. During the roll period, principal and interest paid on
these securities are not received. When a Fund invests in a dollar roll, it is
compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
earnings on the cash proceeds of the initial sale.

A reverse dollar roll is agreement to buy securities for delivery in the
current month and to sell substantially similar (same type and coupon)
securities on a specified future date, typically at a lower price. During the
roll period, the fund receives the principal and interest on the securities
purchased in compensation for the cash invested in the transaction.

E. DISTRIBUTIONS AND TAXES: Dividends to shareholders are recorded on the
ex-dividend date. Each Fund intends to continue to qualify for and elect the
special tax treatment afforded to regulated investment companies under
Subchapter M of the Internal Revenue Code, thereby relieving the Funds of
Federal income taxes. To so qualify, the Funds intend to distribute
substantially all net investment income and net realized capital gains, if any,
less any available capital loss carryforward. The following table summarized
the available capital loss carryforwards for each Fund.

<PAGE>

SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED

<TABLE>
<CAPTION>
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
CARRYFORWARD CARRYFORWARD CARRYFORWARD
FUND EXPIRES 3/31/2004 EXPIRES 3/31/2005 EXPIRES 3/31/2007
- ---------------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Short Duration Fund ........ $658,505 $829,556 $ 0
Intermediate Duration Fund . 0 0 126,641
U.S. Equity Fund ........... 0 0 0
Financial Services Fund .... 0 0 196,832
High Yield Bond Fund ....... 0 0 0
</TABLE>

F. SECURITIES TRANSACTIONS, INVESTMENT INCOME AND OPERATING EXPENSES:
Securities transactions are recorded on the trade date. Interest income is
accrued daily, and includes net amortization from the purchase of fixed-income
securities. Discounts and premiums on fixed-income securities purchased are
amortized over the life of the respective securities. Dividend income is
recorded on the ex-dividend date. Gains or losses on the sale of securities are
calculated for accounting and tax purposes on the identified cost basis.

Expenses are accrued daily. Common expenses incurred by the Trusts are
generally allocated among the funds comprising the Trusts based on the ratio of
net assets of each Fund to the combined net assets of each Trust. Other
expenses are charged to each Fund on a specific identification basis.

G. ACCOUNTING ESTIMATES: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.

2. FINANCIAL INSTRUMENTS

A. FUTURES CONTRACTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING: The Short
Fund, Intermediate Fund, and U.S. Equity Fund use interest-rate futures
contracts for risk management purposes in order to reduce fluctuations in the
Funds' net asset values relative to the Funds' targeted option-adjusted
durations. The Financial Services Fund uses S&P 500 futures contracts for risk
management purposes in order to manage the Fund's equity market risk relative
to its benchmark. On entering into a futures contract, either cash or
securities in an amount equal to a certain percentage of the contract value
(initial margin) must be deposited with the futures broker. Subsequent payments
(variation margin) are made or received each day. The variation margin payments
equal the daily changes in the contract value and are recorded as unrealized
gains or losses. The Funds recognize a realized gain or loss when the contract
is closed or expires equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.

<PAGE>

SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. FINANCIAL INSTRUMENTS -- CONTINUED
The Short Fund had the following open futures contracts as of March 31, 1999:

<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
- ---------------------------- ----------- ---------- ----------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 43 Short June, 1999 $ 7,791
10 Year Treasury ........... 113 Short June, 1999 53,226
3 Month Eurodollar ......... 31 Short June, 1999 (1,140)
3 Month Eurodollar ......... 55 Short September, 1999 (9,898)
3 Month Eurodollar ......... 12 Long December, 1999 (6,054)
3 Month Eurodollar ......... 12 Long March, 2000 (10,004)
3 Month Eurodollar ......... 12 Long June, 2000 (10,891)
3 Month Eurodollar ......... 12 Long September, 2000 (11,429)
3 Month Eurodollar ......... 12 Long December, 2000 (10,541)
3 Month Eurodollar ......... 12 Long March, 2001 (11,429)
3 Month Eurodollar ......... 12 Long June, 2001 (11,729)
3 Month Eurodollar ......... 62 Long September, 2001 94,284
3 Month Eurodollar ......... 12 Long December, 2001 (10,529)
3 Month Eurodollar ......... 12 Long March, 2002 (11,980)
3 Month Eurodollar ......... 12 Long June, 2002 (12,305)
3 Month Eurodollar ......... 12 Long September, 2002 (12,342)
3 Month Eurodollar ......... 12 Long December, 2002 (10,804)
3 Month Eurodollar ......... 12 Long March, 2003 (12,241)
3 Month Eurodollar ......... 12 Long June, 2003 (12,316)
3 Month Eurodollar ......... 12 Long September, 2003 (12,316)
3 Month Eurodollar ......... 12 Long December, 2003 (10,841)
3 Month Eurodollar ......... 12 Long March, 2004 (11,804)
3 Month Eurodollar ......... 12 Long June, 2004 (11,879)
3 Month Eurodollar ......... 12 Long September, 2004 (12,079)
3 Month Eurodollar ......... 12 Long December, 2004 (10,854)
3 Month Eurodollar ......... 12 Long March, 2005 (11,579)
3 Month Eurodollar ......... 12 Long June, 2005 (11,654)
3 Month Eurodollar ......... 12 Long September, 2005 (11,479)
3 Month Eurodollar ......... 4 Long December, 2005 (1,168)
3 Month Eurodollar ......... 2 Long March, 2006 (559)
---------
Total ($ 116,543)
=========
</TABLE>

The Intermediate Fund had the following open futures contracts as of March 31,
1999:

<PAGE>

SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. FINANCIAL INSTRUMENTS -- CONTINUED
The U.S. Equity Fund had the following open interest-rate futures contracts as
of March 31, 1999:

<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
- ---------------------------- ----------- ---------- ----------------- --------------
<S> <C> <C> <C> <C>
5 Year Treasury ............ 126 Short June, 1999 $ 18,527
10 Year Treasury ........... 81 Short June, 1999 60,409
3 Month Eurodollar ......... 185 Long June, 1999 31,543
3 Month Eurodollar ......... 166 Short September, 1999 (214,510)
3 Month Eurodollar ......... 18 Short December, 1999 7,819
3 Month Eurodollar ......... 55 Short March, 2000 (31,048)
3 Month Eurodollar ......... 18 Short June, 2000 15,032
3 Month Eurodollar ......... 127 Short September, 2000 (164,284)
3 Month Eurodollar ......... 18 Short December, 2000 14,007
3 Month Eurodollar ......... 49 Short March, 2001 (3,208)
3 Month Eurodollar ......... 18 Short June, 2001 15,132
3 Month Eurodollar ......... 123 Short September, 2001 (148,704)
3 Month Eurodollar ......... 18 Short December, 2001 12,769
3 Month Eurodollar ......... 48 Short March, 2002 3,059
3 Month Eurodollar ......... 18 Short June, 2002 15,494
3 Month Eurodollar ......... 117 Short September, 2002 (35,589)
3 Month Eurodollar ......... 18 Short December, 2002 13,369
3 Month Eurodollar ......... 62 Short March, 2003 (3,129)
3 Month Eurodollar ......... 18 Short June, 2003 15,544
3 Month Eurodollar ......... 102 Short September, 2003 35,204
3 Month Eurodollar ......... 16 Short December, 2003 10,803
3 Month Eurodollar ......... 65 Short March, 2004 9,645
3 Month Eurodollar ......... 16 Short June, 2004 12,803
3 Month Eurodollar ......... 16 Short September, 2004 13,103
3 Month Eurodollar ......... 16 Short December, 2004 11,678
3 Month Eurodollar ......... 135 Short March, 2005 26,768
3 Month Eurodollar ......... 16 Short June, 2005 13,003
3 Month Eurodollar ......... 13 Short September, 2005 11,167
3 Month Eurodollar ......... 4 Short December, 2005 2,007
3 Month Eurodollar ......... 78 Short March, 2006 18,424
3 Month Eurodollar ......... 24 Short March, 2007 8,292
---------
Total ($ 204,874)
=========
</TABLE>

The Financial Services Fund had the following open futures contracts on the S&P
500 Index as of March 31, 1999:

<TABLE>
<CAPTION>
NUMBER OF UNREALIZED
TYPE CONTRACTS POSITION EXPIRATION MONTH GAIN/(LOSS)
- ----------------- ----------- ---------- ------------------ ------------
<S> <C> <C> <C> <C>
S&P 500 ......... 7 Short June, 1999 ($ 57,627)
--------
Total ($ 57,627)
========
</TABLE>

Futures transactions involve costs and may result in losses. The effective use
of futures depends on the Funds' ability to close futures positions at times
when the Funds' Advisor deems it desirable to do so. The use of futures also
involves the risk of imperfect correlation among movements in the values of the
securities underlying the futures purchased and sold by the Funds, of the
futures contract themselves, and of the securities that are the subject of a
hedge.

<PAGE>

SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. FINANCIAL INSTRUMENTS -- CONTINUED
B. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES: The
U.S. Equity Fund invests in futures contracts on the S&P 500 Index whose
returns are expected to track movements in the S&P 500 Index.

The U.S. Equity Fund had the following open futures contracts on the S&P 500
Index as of March 31, 1999:

<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
TYPE CONTRACTS POSITION MONTH GAIN/(LOSS)
- ------------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
S&P 500 ......... 580 Long June, 1999 $1,787,863
----------
Total $1,787,863
==========
</TABLE>

C. ASSETS PLEDGED TO COVER MARGIN REQUIREMENTS FOR OPEN FUTURES POSITIONS: The
aggregate market value of assets pledged to cover margin requirements for the
open futures positions at March 31, 1999 was:

<TABLE>
<CAPTION>
FUND ASSETS PLEDGED
- ------------------------------- ---------------
<S> <C>
Short Fund .................. $ 353,496
Intermediate Fund ........... 215,792
U.S. Equity Fund ............ 11,246,155
Financial Services Fund ..... 115,500
</TABLE>

E. INTEREST-RATE SWAP CONTRACTS: The Funds may use interest-rate swap contracts
to help manage interest-rate risk. Interest-rate swaps represent an agreement
between counterparties to exchange cash flows based on the difference between
two interest rates, applied to a notional principal amount for a specified
period. The most common type of interest-rate swap involves the exchange of
fixed-rate cash flows for variable-rate cash flows. Interest-rate swaps do not
involve the exchange of principal between the parties. The Funds will not enter
into interest-rate swap contracts unless the unsecured commercial paper,
unsecured senior debt or the claims-paying ability of the counterparty is rated
either AA or A or better by Standard & Poor's Corporation, or Aa or P-1 or
better by Moody's Investors Service, Inc. (or is otherwise acceptable to either
agency) at the time of entering into such a transaction. If the counterparty to
the swap transaction defaults, the Funds will be limited to contractual
remedies pursuant to the agreements governing the transaction. There is no
assurance that interest-rate swap contract counterparties will be able to meet
their obligations under the swap contracts or that, in the event of default,
the Funds will succeed in pursuing contractual remedies. The Funds may thus
assume the risk that payments owed the Funds under a swap contract will be
delayed, or not received at all. Should interest rates move unexpectedly, the
Funds may not achieve the anticipated benefits of the interest-rate swaps, and
may realize a loss. The Funds recognize gains and losses under interest-rate
swap contracts as realized gains or losses on investments upon sale of the swap
contracts.

As of March 31, 1999, the Short Fund had two open interest-rate swap contracts.
In each of the contracts, the Short Fund has agreed to pay a fixed rate and
receive a floating rate. The Short Fund's interest-rate swap contracts have
been entered into on a net basis, i.e., the two payment streams are netted out,
with the Short Fund receiving or paying, as the case may be, only the net
amount of the two payments. The floating rate on the contracts resets quarterly
and is the three-month London Inter-Bank Offered Rate ("LIBOR"). The Short
Fund's interest payable on the interest-rate swap contracts as of March 31,
1999 was $57,776. No collateral is required under these contracts.

F. INTEREST-RATE CAP CONTRACTS: The purchase of an interest-rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate caps. The Short Fund had one
interest-rate cap contract open at March 31, 1999.

<PAGE>

SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. FINANCIAL INSTRUMENTS -- CONTINUED
G. OPTIONS ON INTEREST-RATE SWAP CONTRACTS: The Funds may enter into
over-the-counter transactions swapping interest rates, or purchase options to
enter into such contracts. Purchased options on interest-rate swap contracts
("swaptions") give the right, but not the obligation, to enter into a swap
contract with the counterparty which has written the option on a date, at an
interest rate, and with a notional amount as specified in the swaption
agreement.

As of March 31, 1999, the U.S. Equity Fund had two open swaptions. In each of
the contracts, the Fund has paid a sum of money, called a premium, to the
counterparty, in return for the swaptions. These swaptions may be exercised by
entering into a swap contract with the counterparty only on the date specified
in each contract. If the swaptions are exercised, the Fund will enter into a
swap either to pay a specified fixed interest rate in return for receiving a
floating rate, or receive a fixed rate in return for paying a floating rate,
based on the respective contracts, or both. The floating rate on the swap
contracts as specified in the swaption agreements resets quarterly and is the
three-month London Inter-Bank Offered Rate ("LIBOR"). If the counterparty to
the swaption transaction defaults, the Fund will be limited to contractual
remedies pursuant to the agreements governing the transaction. There is no
assurance that the interest rate swap or swaption contract counterparty will be
able to meet its obligation under the contracts, or that, in the event of
default, the Fund will succeed in pursuing contractual remedies. The Fund thus
assumes the risk that it may be delayed in, or prevented from, receiving
payments owed to it under the swaption, or swap contracts should the swaptions
be exercised. Should interest rates move unexpectedly, the Fund may not achieve
the anticipated benefits of the swaptions, and may realize a loss. The Fund
recognizes gains and losses under swaptions as realized gains or losses on
investments upon sale or expiration of the contracts.

3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

Smith Breeden Associates, Inc. (the "Advisor"), a registered Investment
Advisor, provides the Funds with investment management services. As
compensation for these services, the Funds pay the Advisor a fee computed daily
and payable monthly at a fixed annual rate based on the Funds' average daily
net assets.

The Advisor has voluntarily agreed to reimburse normal business expenses of the
Funds through August 1, 1999 so that total direct and indirect operating
expenses do not exceed the percentages listed below of each fund's average net
assets. This voluntary agreement may be terminated or modified at any time by
the Advisor in its sole discretion except that the Advisor has agreed to limit
expenses to these levels until August 1, 1999. The table below lists the fees
received by the Advisor and the expenses reimbursed by the Advisor to each Fund
during the year ending March 31, 1999.

<TABLE>
<CAPTION>
NET EXPENSE FEES RECEIVED EXPENSES REIMBURSED
FUND RATIO BY ADVISOR BY ADVISOR
- ------------------------------- ------------- --------------- --------------------
<S> <C> <C> <C>
Short Fund .............. 0.78% $ 508,343 $ 155,616
Intermediate Fund ....... 0.88% 355,620 83,434
U.S. Equity Fund ........ 0.88% 1,090,372 251,051
Financial Services Fund . 1.48% 107,863 117,431
High Yield Bond Fund .... 0.98% 6,058 50,547
</TABLE>

The Funds have adopted a Distribution and Services Plan (the "Plan") under Rule
12b-1 under the Investment Company Act of 1940. The purpose of the Plan is to
permit the Advisor to compensate investment dealers and other persons involved
in servicing shareholder accounts for services provided and expenses incurred
in promoting the sale of shares of the Funds, reducing redemptions, or
otherwise maintaining or improving services provided to shareholders by such
dealers or other persons. The Plan provides for payments by the Advisor, which
may come out of the advisory fee, to dealers and other persons at the annual
rate of up to 0.25% of each Fund's average net assets, subject to the authority
of the Trustees of the Fund, to reduce the amount of payments permitted under
the Plan or to suspend the Plan for such periods as they may determine. Subject
to these limitations, the Advisor shall determine the amount of such payments
and the purposes for which they are made.

<PAGE>

SMITH BREEDEN MUTUAL FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES -- CONTINUED
Certain officers and trustees of the Fund are also officers and directors of
the Advisor.

4. INVESTMENT TRANSACTIONS

During the year ended March 31, 1999 purchases and proceeds from sales of
securities, other than short-term investments, aggregated:

<TABLE>
<CAPTION>
PURCHASES OF PROCEEDS FROM
FUND SECURITIES SALES OF SECURITIES
- ------------------------------- ---------------- --------------------
<S> <C> <C>
Short Fund .................. $ 257,690,659 $ 254,290,486
Intermediate Fund ........... 259,809,711 229,277,078
U.S. Equity Fund ............ 875,819,709 790,168,109
Financial Services Fund ..... 11,055,264 8,877,443
High Yield Bond Fund ........ 2,398,197 213,563
</TABLE>

The cost of securities held for Federal tax purposes, and the net unrealized
appreciation (depreciation) of investments, short sales and futures contracts
is as follows:

<TABLE>
<CAPTION>
COST OF SECURITIES NET UNREALIZED
FOR FEDERAL TAX GROSS UNREALIZED GROSS UNREALIZED APPRECIATION
FUND PURPOSES APPRECIATION DEPRECIATION (DEPRECIATION)
- ------------------------------ -------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Short Fund .................. $ 93,524,013 $ 1,102,601 ($ 3,534,330) ($ 2,431,729)
Intermediate Fund ........... 66,373,425 213,025 (360,020) (146,995)
U.S. Equity Fund ............ 246,631,334 2,443,797 (1,376,620) 1,067,177
Financial Services Fund ..... 8,654,885 503,012 (462,793) 40,219
High Yield Bond Fund ........ 2,195,739 46,929 (121,573) (74,644)
</TABLE>

5. CREDIT FACILITY

The High Yield Bond Fund and the Financial Services Funds have available
unsecured lines of credit from Bank of New York, the Funds' custodian. Total
borrowing allowed under the lines of credit is limited to the lesser of:

a) The amount of the line of credit;

b) 33 1/3% of the amount by which each Fund's total assets exceed each Fund's
total liabilities at the time a borrowing request is made;

c) The maximum amount the Funds are permitted to borrow under the Investment
Company Act of 1940, as amended; or

d) The maximum amount the Bank of New York is permitted to loan to the Funds
under regulations promulgated by the Board of Governors of the Federal Reserve
System.

The Financial Services Fund pays a fee of 0.15% per annum, and the High Yield
Fund pays a fee of 0.25% per annum on the total line of credit, whether used or
unused. In addition, the Financial Services Fund pays interest at a rate per
annum equal to the overnight Federal Funds Rate plus 1%, and the High Yield
Fund pays interest at a rate per annum equal to the overnight Federal Funds
Rate plus 1 1/4%, on amounts borrowed under the lines of credit. The total
amount of the line of credit is $2,500,000 for the Financial Services Fund and
$1,000,000 for the High Yield Bond Fund. As of March 31, 1999, the Financial
Services Fund had borrowed $2,125,000 and the High Yield Bond Fund had borrowed
$60,000 under the Funds' respective lines of credit.

SMITH BREEDEN TRUST
FORM N-1A
PART C. OTHER INFORMATION

Item 23. Exhibits.

(a) Declaration of Trust: Incorporated by Reference
(b) By-Laws: Incorporated by Reference
(c) Instruments Defining Rights of Security Holders:
Incorporated by Reference
(d) Form of Investment Advisory Agreement for Smith
Breeden Trust: Incorporated by Reference
(e) Form of Underwriting or Distribution Agreement
(f) Bonus, Profit Sharing, Pension and Other
Similar Arrangements: Not Applicable
(g) Custodian Agreement: Incorporated by Reference
(h) Other Material Contracts:
Accounting and Shareholder Services Agreement:
Incorporated by Reference for the
Smith Breeden U.S. Equity Market Plus
Fund and the Smith Breeden Financial
Services Fund; to be filed by an amendment
hereto for each of the Smith Breeden High
Yield Bond Fund, the Smith Breeden
Asian/Pacific Equity Market Fund, and the
Smith Breeden European Equity Market Fund
(i) Legal Opinion: Incorporated by Reference to
Pre-Effective Amendment Number 2 filed April
14, 1992
(j) Other Opinions:
Independent Auditors' Consent
(k) Financial Statements Omitted from Item 22: Not
Applicable
(l) Initial Capital Agreements: Incorporated by
Reference
(m) Form of Rule 12b-1 Plan for Smith Breeden
Trust: Incorporated by Reference
(n) Financial Data Schedule: Not Applicable
(o) Rule 18f-3 Multiclass Plan: Not Applicable

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

As of 4/30/99, there were no persons controlled by
or under common control with any of the Smith Breeden
U.S. Equity Market Plus Fund, the Smith Breeden
Asian/Pacific Equity Market Fund, or the Smith
Breeden European Equity Market Fund. Smith Breeden
Associates, Inc. of Chapel Hill, North Carolina may
be deemed to control the Smith Breeden Financial
Services Fund and the Smith Breeden High Yield Bond
Fund by virtue of owning 59.50% and 94.82% of the
outstanding shares of those Funds, respectively, as
of 4/30/99.

Item 25. Indemnification.

Reference is made to Article IV,Sections 4.2 and 4.3
of Registrant's Declaration of Trust with respect to
indemnification of the Trustees and officers of
Registrant against liabilities which may be incurred
by them in such capacities.

Insofar as indemnification for liability arising under
the Securities Act of 1933, as amended (the "Act"),
may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and
Exchange Commission ("SEC"), such indemnification is
against public policy as expressed in the Act, and is
therefore, unenforceable. In the event that a claim
for indeminfication against such liabilities (other
than the payment by the Registrant of expenses incurred
or paid by a trustee, an officer or a 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 precedent, submit to a
court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.

Each disinterested Trustee has entered into an
indemnity agreement with the Adviser whereby the
Adviser indemnifies each disinterested Trustee against
defense costs in connection with a civil claim which
involves the Trustee by virtue of his position with
the Fund.

Item 26. Business and Other Connections of Adviser.

Smith Breeden Associates, Inc. (the "Adviser") acts as
investment adviser to financial institution, insurance,
pension, charitable foundation clients and other
registered investment companies. For a description of
the officers and directors of the Adviser and their
business affiliations, see "Management of the Funds"
in the Prospectus contained within this Registration
Statement.

Item 27. Principal Underwriters

(a) First Data Distributors, Inc. ("FDDI"), the
principal underwriter for the Registrant's
securities, currently acts as principal underwriter
for the following entities:

BT Insurance Funds Trust
CT&T Funds
First Choice Funds Trust
Forward Funds, Inc.
The Galaxy Fund
Galaxy Fund II
The Galaxy VIP Fund
The Govett Funds, Inc.
IAA Trust Asset Allocation Fund, Inc.
IAA Trust Growth Fund, Inc.
IAA Trust Taxable Fixed Income Series Fund, Inc.
IAA Trust Tax Exempt Bond Fund, Inc.
IBJ Funds Trust
ICM Series Trust
Light Index Funds, Inc.
LKCM Funds
Matthews International Funds
McM Funds
Metropolitan West Funds
Panorama Trust
The Potomac Funds
Rembrandt Funds
RWB/WPG U.S. Large Stock Fund
Smith Breeden Series Fund
Smith Breeden Trust
The Sports Funds Trust
The Stratton Funds, Inc.
Stratton Growth Fund, Inc.
Stratton Monthly Dividend REIT Shares, Inc.
Tomorrow Funds Retirement Trust
Trainer, Wortham First Mutual Funds
Undiscovered Managers Funds
Weiss, Peck & Greer Funds Trust
Weiss, Peck & Greer International Fund
Wilshire Target Funds, Inc.
WorldWide Index Funds
WPG Growth Fund
WPG Growth and Income Fund
WPG Tudor Fund

(b) The table below sets forth certain information as
to the Underwriter's Directors, Officers and
Control Persons:

NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND
BUSINESS ADDRESS WITH UNDERWRITER OFFICES WITH
REGISTRANT

Robert Guillocheau Director None
4400 Computer Drive
Westborough, MA 01581

Francis Koudelka President & Chief None
4400 Computer Drive Executive Officer
Westborough, MA 01581

Jack Kutner Director None
4400 Computer Drive
Westborough, MA 01581

Scott Hacker Vice President, None
4400 Computer Drive Treasurer & Chief
Westborough, MA 01581 Compliance Officer

Bruno DiStefano Vice President None
4400 Computer Drive
Westborough, MA 01581

Sue Moscaritolo Vice President None
4400 Computer Drive
Westborough, MA 01581

Bernard Rothman Vice President None
4400 Computer Drive
Westborough, MA 01581

Christine Ritch Chief Legal Officer None
4400 Computer Drive and Clerk
Westborough, MA 01581

Bradley Stearns Assistant Clerk None
4400 Computer Drive
Westborough, MA 01581

Item 28. Locations of Accounts and Records.

The accounts, books or other documents required to be
maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules thereunder will be kept by
the Registrant at the following offices:

(1) First Data Investor Services, Inc., 3200
Horizon Drive, P. O. Box 61503, King of
Prussia, Pennsylvania 19406-0903
(2) Smith Breeden Associates, Inc., 100 Europa
Drive, Suite 200, Chapel Hill, NC 27514

Item 29. Management Services.

There are no management-related service contracts
not discussed in Part A or Part B.

Item 30. Undertakings.

(a) The Registrant previously has undertaken to
promptly call a meeting of shareholders for the purpose
of voting upon the question of removal of any trustee
or trustees when requested in writing to do so by the
record holders of not less than 10 percent of the
Registrant's outstanding shares and to assist its
shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications.

(b) The Registrant hereby undertakes to furnish to
each person to whom a prospectus is delivered a copy
of the Registrant's latest annual report to
shareholders upon request and without charge.

SIGNATURES

Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940,
as amended, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(a) under the Securities Act
of 1933 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City
of Chapel Hill, the State of North Carolina, on the 28th
day of May, 1999.

SMITH BREEDEN TRUST

By
Michael J. Giarla
President

Pursuant to the requirements of the Securities Act
of 1933, this Amendment to the Registration Statement
has been signed below by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE

Michael J. Giarla President, Principal May 28, 1999
Executive Officer,
and Trustee

Douglas T. Breeden* Trustee May 28, 1999

Stephen M. Schaefer* Trustee May 28, 1999

Myron S. Scholes* Trustee May 28, 1999

William F. Sharpe* Trustee May 28, 1999

Marianthe S. Mewkill Principal Financial May 28, 1999
and Accounting Officer

* By Marianthe S. Mewkill, Attorney-in-Fact pursuant to
power-of-attorney filed previously.

CONSENT OF INDEPENDENT AUDITORS

Smith Breeden Trust:

We consent to the use in Post-Effective Amendment No. 17 to
Registration Statement No. 33-44909 of our reports dated May 14,
1999 relating to the Smith Breeden U.S. Equity Market Plus Fund,
Smith Breeden Financial Services Fund and Smith Breeden High
Yield Bond Fund of Smith Breeden Trust appearing in the
Statement of Additional Information, which is a part of such
Registration Statement and to the references to us under the
captions "Experts" appearing in the Statement of Additional
Information and "Financial Highlights" appearing in the
Prospectus, which also is a part of such Registration Statement.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
May 28, 1999

UNDERWRITING AGREEMENT

This Agreement, dated as of January 1, 1999, is made by and
between The Smith Breeden Trust, a Massachusetts business trust (the
"Fund") operating as an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the
"Act"), Smith Breeden Associates, Inc. (the "Company"), a registered
investment advisor duly organized and existing as a corporation under
the laws of the State of Kansas, and First Data Distributors, Inc.
("FDDI"), a corporation duly organized and existing under the laws of
the Commonwealth of Massachusetts (collectively, the "Parties").

WITNESSETH THAT:

WHEREAS, the Fund is authorized to issue separate series of
shares representing interests in separate investment portfolios (the
"Series"), which Series are identified on Schedule "C" attached
hereto, and which Schedule "C" may be amended from time to time by
mutual agreement among the Parties; and

WHEREAS, the Company has been appointed investment advisor to
the Fund; and

WHEREAS, FDDI is a broker-dealer registered with the U.S.
Securities and Exchange Commission (the "SEC") and a member in good
standing of the National Association of Securities Dealers, Inc. (the
"NASD"); and

WHEREAS, the Parties are desirous of entering into an agreement
providing for the distribution by FDDI of the shares of the Fund (the
"Shares").

NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, and in exchange of good and valuable
consideration, the sufficiency and receipt of which is hereby
acknowledged, the Parties hereto, intending to be legally bound, do
hereby agree as follows:

1. Appointment

The Fund hereby appoints FDDI as its principal agent for the
distribution of the Shares, and FDDI hereby accepts such
appointment under the terms of this Agreement. The Fund agrees
that it will not sell any Shares to any person except to fill
orders for the Shares received through FDDI, provided, however,
that the foregoing exclusive right shall not apply to: (a)
Shares issued or sold in connection with the merger or
consolidation of any other investment company with the Fund or
the acquisition by purchase or otherwise of all or
substantially all of the assets of any investment company or
substantially all of the outstanding shares of any such company
by the Fund; (b) Shares which may be offered by the Fund to its
stockholders for reinvestment of cash distributed from capital
gains or net investment income of the Fund; or (c) Shares which
may be issued to shareholders of other funds who exercise any
exchange privilege set forth in the Fund's Prospectus.
Notwithstanding any other provision hereof, the Fund may
terminate, suspend, or withdraw the offering of the Shares
whenever, in their sole discretion, they deem such action to be
1
desirable.

2. Sale and Repurchase of Shares

(a) FDDI is hereby granted the right, as agent for the Fund,
to sell Shares to the public against orders received at
the public offering price as defined in the Fund's
Prospectus and Statement of Additional Information.

(b) FDDI will also have the right to take, as agent for the
Fund, all actions which, in FDDI's judgment, and subject
to the Fund's reasonable approval, are necessary to carry
into effect the distribution of the Shares.

(c) FDDI will act as agent for the Fund in connection with
the repurchase of Shares by the Fund upon the terms set
forth in the Fund's Prospectus and Statement of
Additional Information.

(d) The net asset value of the Shares shall be determined in
the manner provided in the then current Prospectus and
Statement of Additional Information relating to the
Shares, and when determined shall be applicable to all
transactions as provided in the Prospectus. The net
asset value of the Shares shall be calculated by the Fund
or by another entity on behalf of the Fund. FDDI shall
have no duty to inquire into, or liability for, the
accuracy of the net asset value per Share as calculated.

(e) On every sale, FDDI shall promptly pay to the Fund the
applicable net asset value of the Shares.

(f) Upon receipt of purchase instructions, FDDI will transmit
such instructions to the Fund or its transfer agent for
registration of the Shares purchased.

(g) Nothing in this Agreement shall prevent FDDI or any
affiliated person (as defined in the Act) of FDDI from
acting as underwriter for any other person, firm or
corporation (including other investment companies), or in
any way limit or restrict FDDI or such affiliated person
from buying, selling or trading any securities for its or
their own account or for the account of others for whom
it or they may be acting, provided, however, that FDDI
expressly agrees that it will not for its own account
purchase any Shares of the Fund except for investment
purposes, and that it will not for its own account
dispose of any such Shares except by redemption of such
Shares with the Fund, and that it will not undertake in
any activities which, in its judgment, will adversely
affect the performance of its obligations to the Fund
under this Agreement.

3. Rules of Sale of Shares

FDDI does not agree to sell any specific number of Shares and
serves only in the capacity of Statutory Underwriter. The Fund
reserves the right to terminate, suspend or withdraw the sale
of its Shares for any reason deemed adequate by it, and the
2
Fund reserves the right to refuse at any time or times to sell
any of its Shares to any person for any reason deemed adequate
by it.

4. Rules of NASD, etc.

(a) FDDI will conform to the Conduct Rules of the NASD and
the securities laws of any jurisdiction in which it
directly or indirectly sells any Shares.

(b) FDDI will require each dealer with whom FDDI has a
selling agreement to conform to the applicable provisions
of the Prospectus, with respect to the public offering
price of the Shares, and FDDI shall not cause the Fund to
withhold the placing of purchase orders so as to make a
profit thereby.

(c) The Fund and the Company agree to furnish FDDI sufficient
copies of any and all: agreements, plans, communications
with the public or other materials which the Fund or the
Company intend to use in connection with any sales of
Shares, in adequate time for FDDI to file and clear such
materials with the proper authorities before they are put
in use. FDDI and the Fund or the Company may agree that
any such material does not need to be filed subsequent to
distribution. In addition, the Fund and the Company
agree not to use any such materials until so filed and
cleared for use, if required, by appropriate authorities
as well as by FDDI.

(d) FDDI, at its own expense, will qualify as a dealer or
broker, or otherwise, under all applicable state or
federal laws required in order that the Shares may be
sold in such states as may be mutually agreed upon by the
Parties.

(e) FDDI shall remain registered with the SEC and a member of
the NASD for the term of this Agreement.

(f) FDDI shall not, in connection with any sale or
solicitation of a sale of the Shares, make or authorize
any representative, service organization, broker or
dealer to make any representations concerning the Shares,
except those contained in the Prospectus offering the
Shares and in communications with the public or sales
materials approved by FDDI as information supplemental to
such Prospectus. Copies of the Prospectus will be
supplied by the Fund or the Company to FDDI in reasonable
quantities upon request.

(g) FDDI shall only be authorized to make representations in
respect of the Fund consistent with the then current
Prospectus, Statement of Additional Information, and
other written information provided by the Fund or its
agents to be used explicitly with respect to the sale of
Shares.

5. Records to be Supplied by the Fund

3
The Fund shall furnish to FDDI copies of all information,
financial statements and other papers which FDDI may reasonably
request for use in connection with the underwriting of the
Shares including, but not limited to, one certified copy of all
financial statements prepared for the Fund by its independent
public accountants.

6. Expenses

(a) The Fund will bear the following expenses:

(i) preparation, setting in type, and printing of
sufficient copies of the Prospectus and Statement
of Additional Information for distribution to
shareholders, and the cost of distribution of same
to the shareholders;

(ii) preparation, printing and distribution of reports
and other communications to shareholders;

(iii) registration of the Shares under the federal
securities laws;

(iv) qualification of the Shares for sale in the
jurisdictions as directed by the Fund;

(v) maintaining facilities for the issue and transfer
of the Shares;

(vi) supplying information, prices and other data to be
furnished by the Fund under this Agreement; and

(vii) any original issue taxes or transfer taxes
applicable to the sale or delivery of the Shares or
certificates therefor.

(b) The Company will pay all other expenses incident to the
sale and distribution of the Shares sold hereunder.

7. Term and Compensation

(a) The term of this Agreement shall commence on the date on
hereinabove first written (the "Effective Date").

(b) This Agreement shall remain in effect for one (1) year
from the Effective Date. This Agreement shall continue
thereafter for periods not exceeding one (1) year, if
approved at least annually (i) by a vote of a majority of
the outstanding voting securities of each Series, or (ii)
by a vote of a majority of the Board Members of the Fund
who are not parties to this Agreement (other than as
Board Members of the Fund) or interested persons of any
such party, cast in person at a meeting called for the
purpose of voting on such approval.

(c) Fees payable to FDDI shall be paid by the Company as set
4
forth in Schedule "B" attached and shall be fixed for the
one (1) year period commencing on the Effective Date of
this Agreement. Thereafter, the fee schedule will be
subject to annual review and adjustment.

(d) This Agreement (i) may be terminated at any time without
the payment of any penalty, either by a vote of the
Trustees of the Fund or by a vote of a majority of the
outstanding voting securities of each Series with respect
to such Series, on sixty (60) days' written notice to
FDDI; and (ii) may be terminated by FDDI on sixty (60)
days' written notice to the Fund with respect to any
Series.

(e) This Agreement shall automatically terminate in the event
of its assignment, as defined in the Act.

8. Indemnification of FDDI by the Company and the Fund

FDDI is responsible for its own conduct and the employment,
control, and conduct of its agents and employees and for injury
to such agents or employees or to others caused by it, its
agents or employees. Notwithstanding the above, the Company
and the Fund will indemnify and hold FDDI harmless for the
actions of the Company's employees registered with the NASD as
registered representatives of FDDI, and the Company hereby
undertakes to maintain compliance with all NASD and SEC rules
and regulations concerning any activities of such employees.
FDDI shall have the right, in its reasonable discretion, to
refuse to register any individual as its representative.

9. Liability of FDDI

(a) FDDI, its directors, officers, employees, shareholders
and agents shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Fund in
connection with the performance of this Agreement, except
a loss resulting from a breach of FDDI's obligations
pursuant to Section 4 of this Agreement (Rules of NASD),
a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on the
part of FDDI in the performance of its obligations and
duties or by reason of its reckless disregard of its
obligations and duties under this Agreement. FDDI agrees
to indemnify and hold harmless the Fund and each person
who has been, is, or may hereafter be a Trustee, officer,
or employee of the Fund against expenses reasonably
incurred by any of them in connection with any claim or
in connection with any action, suit, or proceeding to
which any of them may be a party, which arises out of or
is alleged to arise out of any misrepresentation or
omission to state a material fact, or out of any alleged
misrepresentation or omission to state a material fact,
on the part of FDDI or any agent of employee of FDDI or
any of the persons for whose acts FDDI is responsible or
is alleged to be responsible unless such
misrepresentation or omission was made in reliance upon
written information furnished to FDDI by the Fund. FDDI
5
also agrees to indemnify and hold harmless the Fund and
each such person in connection with any claim or in
connection with any action, suit, or proceeding which
arises out of or is alleged to arise out of FDDI's
failure to exercise reasonable care and diligence with
respect to its services rendered in connection with the
purchase and sale of Shares. The foregoing rights of
indemnification shall be in addition to any other rights
to which the Fund or any such person shall be entitled to
as a matter of law.

(b) The Fund agrees to indemnify and hold harmless FDDI
against any and all liability, loss, damages, costs or
expenses (including reasonable counsel fees) which FDDI
may incur or be required to pay hereafter, in connection
with any action, suit or other proceeding, whether civil
or criminal, before any court or administrative or
legislative body, in which FDDI may be involved as a
party or otherwise or with which FDDI may be threatened,
by reason of the offer or sale of the Fund's Shares by
persons other than FDDI or its representatives, prior to
the execution of this Agreement. If a claim is made
against FDDI as to which FDDI may seek indemnity under
the Section, FDDI shall notify the Fund promptly after
any written assertion of such claim threatening to
institute an action or proceeding with respect thereto
and shall notify the Fund promptly of any action
commenced against FDDI within 10 days time after FDDI
shall have been served with a summons or other legal
process, giving information as to the nature and basis of
the claim. Failure to notify the Fund shall not,
however, relieve the Fund from any liability which it may
have on account of the indemnity under this Section 9(b)
if the Fund has not been prejudiced in any material
respect by such failure. The Fund shall have the sole
right to control the settlement of any such action, suit
or proceeding subject to FDDI approval, which shall not
be unreasonably withheld. FDDI shall have the right to
participate in the defense of an action or proceeding and
to retain its own counsel, and the reasonable fees and
expenses of such counsel shall be borne by the Fund
(which shall pay such fees, costs and expenses at least
quarterly) if:

(i) FDDI has received an opinion of counsel
stating that the use of counsel chosen by the
Fund to represent FDDI would present such
counsel with a conflict of interest:

(ii) the defendants in, or targets of, any such
action or proceeding include both FDDI and
the Fund, and legal counsel to FDDI shall
have reasonably concluded that there are
legal defenses available to it which are
different from or additional to those
available to the trust or which may be
adverse to or inconsistent with defenses
available to the Fund (in which case the Fund
shall not have the right to direct the
6
defense of such action on behalf of FDDI); or

(iii) the Fund shall authorize FDDI to employ
separate counsel at the expense of the Fund.

(c) Any person, even though also a director, officer,
employee, shareholder or agent of FDDI who may be or
become an officer, director, trustee, employee or agent
of the Fund, shall be deemed, when rendering services to
the Fund or acting on any business of the Fund (other
than services or business in connection with FDDI's
duties hereunder), to be rendering such services to or
acting solely for the Fund and not as a director,
officer, employee, shareholder or agent, or one under the
control or direction of FDDI even though receiving a
salary from FDDI.

(d) The Fund agrees to indemnify and hold harmless FDDI, and
each person who controls FDDI within the meaning of
Section 15 of the Securities Act of 1933, as amended (the
"Securities Act"), or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"),
against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable
investigative, legal and other expenses incurred in
connection therewith) to which they, or any of them, may
become subject under the Act, the Securities Act, the
Exchange Act or other federal or state law or
regulations, at common law or otherwise insofar as such
losses, claims, damages or liabilities (or actions, suits
or proceedings in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue
statement of a material fact contained in a Prospectus,
Statement of Additional Information, supplement thereto,
sales literature (or other written information) prepared
by the Fund and furnished by the Fund to FDDI for FDDI's
use hereunder, disseminated by the trust or which arise
out of or are based upon any omission or alleged omission
to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading.

Such indemnity shall not, however, inure to the benefit
of FDDI (or any person controlling FDDI) on account of
any losses, claims, damages or liabilities (or actions,
suits or proceedings in respect thereof) arising from the
sale of the Shares of the Fund to any person by FDDI (i)
if such untrue statement or omission or alleged untrue
statement or omission was made in the Prospectus,
Statement of Additional Information, or supplement, sales
or other literature, in reliance upon and in conformity
with information furnished in writing to the Fund by FDDI
specifically for use therein or (ii) if such losses,
claims, damages or liabilities arise out of or are based
upon an untrue statement or omission or alleged untrue
statement or omission found in any Prospectus, Statement
of Additional Information, supplement, sales or other
literature, subsequently corrected, but negligently
distributed by FDDI and a copy of the corrected
7
Prospectus was not delivered to such person at or before
the confirmation of the sale to such person

(e) FDDI shall not be responsible for any damages,
consequential or otherwise, which the Company or the Fund
may experience, due to the disruption of the distribution
of Shares caused by any action or inaction of any
registered representative or affiliate of FDDI or of FDDI
itself.

(f) Notwithstanding anything in this Agreement to the
contrary, in no event shall any party to this Agreement,
its affiliates or any of its or their directors,
trustees, officers, employees, agents or subcontractors
be liable for consequential damages.

10. Amendments

No provision of this Agreement may be amended or modified in
any manner whatsoever, except by a written agreement properly
authorized and executed by the Parties.

11. Section Headings

Section and paragraph headings are for convenience only and
shall not be construed as part of this Agreement.

12. Reports

FDDI shall prepare reports for the Board of the Fund, on a
quarterly basis, showing such information as, from time to
time, shall be reasonably requested by the Board.

13. Severability

If any part, term or provision of this Agreement is held by any
court to be illegal, in conflict with any law or otherwise
invalid, the remaining portion or portions shall be considered
severable and not affected, and the rights and obligations of
the Parties shall be construed and enforced as if the Agreement
did not contain the particular part, term or provision held to
be illegal or invalid provided that the basic agreement is not
thereby substantially impaired.

14. Governing Law

This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts and the exclusive venue of any
action arising under this Agreement shall be the City of
Boston, Commonwealth of Massachusetts.

15. Authority to Execute

The Parties represent and warrant to each other that the
execution and delivery of this Agreement by the undersigned
officer of each Party has been duly and validly authorized;
and, when duly executed, this Agreement will constitute a valid
and legally binding and enforceable obligation of each Party.

8
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be signed by their duly authorized officer, of the day and year first
above written.

FIRST DATA DISTRIBUTORS, INC.

_____________________________
By:
Title:

THE SMITH BREEDEN TRUST

_____________________________
By:
Title:

SMITH BREEDEN ASSOCIATES, INC.

_____________________________
By:
Title:

SCHEDULE A

UNDERWRITER SERVICES

1. Underwriter services include:

A) Preparation and execution of Underwriter and 12b-1 Plan
Agreements
? Monitoring accruals
? Monitoring expenses
? Disbursements for expenses and tail commissions

B) Quarterly 12b-1 Reports to Board

C) Literature review, recommendations and submission to the
NASD

D) Initial NASD Licensing and Transfers of Registered
Representatives
? U-4 Form and Fingerprinting Submission to NASD
? Supplying Series 6 and 63 written study material
? Registration for Exam Preparation classes
? Renewals and Termination of Representatives

E) Written supervisory procedures and manuals for Registered
Representatives
9
F) Ongoing compliance updates for Representatives regarding
sales practices, written correspondence and other
communications with the public.

G) NASD Continuing Education Requirement

SCHEDULE B

FEE SCHEDULE

This Fee Schedule is fixed for a period of one (1) year from the
Effective Date as that term is defined in the Agreement.

1. Statutory Underwriter Services

A) The Trust agrees to pay First Data Distributors, Inc.
(FDDI) $15,000 for the services performed under this Agreement.

B) The Trust agrees to pay FDDI an additional $5,000 per
Series above the initial two Series beginning in the first quarter
that the Series first offers shares to the public.

C) FDDI agrees register certain employees of Smith Breeden
Associates, Inc., as its representatives as follows:

Up to 10 States $2,000 per Representative per
Year
All 50 States $4,000 per Representative
per Year

SCHEDULE C

IDENTIFICATION OF SERIES

Below are listed the Series and Classes of Shares to which services
under this Agreement are to be performed as of the Effective Date of
this Agreement:

"The Smith Breeden Trust"

*Smith Breeden Equity Market Plus Fund
*Smith Breeden Financial Services Fund
Smith Breeden High Yield Bond Fund
Smith Breeden Asian/Pacific Equity Market Fund
Smith Breeden European Equity Market Fund

This Schedule "C" may be amended from time to time by agreement of
the Parties.

*Indicates initial two (2) Series.

Dated: January 1, 1999
10