FIRST FUNDS, 485BPOS, 1997-10-27

FIRST FUNDS
485BPOS, 1997-10-27

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<PAGE>

As Filed with the Securities and Exchange Commission on October 24, 1997
Registration Nos. 33-46374
811-6589
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 13 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /X/
AMENDMENT NO. __ / /
(Check appropriate box or boxes)
----------------------------
First Funds
(Exact Name of Registrant as Specified in Charter)
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: 303-623-2577

James V. Hyatt, Esq.
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Name and Address of Agent for Service)

Copy to:
Daniel B. Hatzenbuehler, Esq.
Baker, Donelson, Bearman & Caldwell
165 Madison Avenue, Suite 2100
Memphis, TN 38103

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

_X__ immediately upon filing pursuant to paragraph (b)
____ on (date) pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)
____ 75 days after filing pursuant to paragraph (a)(2)
____ on (date) pursuant to paragraph (a) of Rule 485

Registrant registered an indefinite number of shares pursuant to regulation
24f-2 under the Investment Company Act of 1940 on August , 1997.

================================================================================

<PAGE>

FIRST FUNDS

GROWTH & INCOME PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS

Form N-1A Item Number
- ---------------------

Part A Prospectus Caption
- ------ ------------------
1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. . . . . . . . . . . . . . . . . . . . . . . .Summary of Portfolio Expenses
3 a,b. . . . . . . . . . . . . . . . . . . . . . . . . Financial Highlights
c . . . . . . . . . . . . . . . . . . . . . How is Performance Calculated?
d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
4 a(i). . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
a(ii),b,c . . . . . . . What is the Investment Objective of the Portfolio?;
Is the Portfolio a Suitable Investment? Investment Risks;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks;
5 a . . . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
b,c,d,e,f . . . . . . .What Advisory and Other Fees does the Portfolio Pay?
g . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio Transactions
5A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
6 a(i) . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
a(ii) . . . . . . . . How are Investments, Exchanges and Redemptions Made?
a(iii). . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
b,c,d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
e . . . . Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g . . . . . . . . . How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
h . . . . .Cover Page; How are Investments, Exchanges and Redemptions Made?
7 a . . . . . . . . . . .What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d . . . . . . . How are Investments, Exchanges and
Redemptions Made?
e, f(i, ii). . . . . . What Advisory and Other Fees does the Portfolio Pay?
f(iii). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
8. . . . . . . . . . . . How are Investments, Exchanges and Redemptions Made?
9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .*

* Not Applicable

<PAGE>

FIRST FUNDS

CAPITAL APPRECIATION PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS

<TABLE>
Form N-1A Item Number
- ---------------------
Part A Prospectus Caption
- ------ ------------------
<S> <C>
1........................................................................Cover Page
2.....................................................Summary of Portfolio Expenses
3 a,b.............................................................................*
c..................................................How is Performance Calculated?
4 a(i)..............................................How is the Portfolio Organized?
a(ii),b,c.....................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments,Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.................................................How is the Portfolio Organized?
b,c,d,e......................What Advisory and Other Fees does the Portfolio Pay?
f..........................................................Portfolio Transactions
6 a(i)..............................................How is the Portfolio Organized?
a(ii)........................How are Investments, Exchanges and Redemptions Made?
a(iii)............................................How is the Portfolio Organized?
b,c,d...........................................................................*
e................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.........................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Income Tax on this Investment?
7 a............................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d...How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)..................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..........................................................................*
8..............................How are Investments, Exchanges and Redemptions Made?
9.................................................................................*

* Not Applicable
</TABLE>

<PAGE>

FIRST FUNDS

BOND PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS

Form N-1A Item Number
- ---------------------

Part A Prospectus Caption
- ------ ------------------
1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. . . . . . . . . . . . . . . . . . . . . . . . .Summary of Portfolio Expenses
3 a,b. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Highlights
c . . . . . . . . . . . . . . . . . . . . . . How is Performance Calculated?
d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
4 a(i). . . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
a(ii),b,c . . . . . . . . What is the Investment Objective of the Portfolio?;
Is the Portfolio a Suitable Investment? Investment Risks;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks
5 a . . . . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
b,c,d,e,f . . . . . . . .What Advisory and Other Fees does the Portfolio Pay?
g . . . . . . . . . . . . . . . . . . . . . . . . . . .Portfolio Transactions
5A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
6 a(i). . . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
a(ii) . . . . . . . . . .How are Investments, Exchanges and Redemptions Made?
a(iii). . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
b,c,d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
e . . . . . .Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g . . . . . . . . . . How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
h . . . . . .Cover Page; How are Investments, Exchanges and Redemptions Made?
7 a . . . . . . . . . . . .What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d. . . . . . . . . . How are Investments, Exchanges
and Redemptions Made?
e, f(i, ii) . . . . . . .What Advisory and Other Fees does the Portfolio Pay?
f(iii). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
8 . . . . . . . . . . . . .How are Investments, Exchanges and Redemptions Made?
9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

* Not Applicable

<PAGE>

FIRST FUNDS

INTERMEDIATE BOND PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS

<TABLE>
Form N-1A Item Number
- ---------------------
Part A Prospectus Caption
- ------ ------------------
<S> <C>
1........................................................................Cover Page
2.....................................................Summary of Portfolio Expenses
3 a,b.............................................................................*
c..................................................How is Performance Calculated?
4 a(i)..............................................How is the Portfolio Organized?
a(ii),b,c.....................What is the Investment Objective of the Portfolio?;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments, Strategies, Transactions and Risks;
Is the Portfolio a Suitable Investment?
5 a.................................................How is the Portfolio Organized?
b,c,d,e......................What Advisory and Other Fees does the Portfolio Pay?
f..........................................................Portfolio Transactions
6 a(i)..............................................How is the Portfolio Organized?
a(ii)........................How are Investments, Exchanges and Redemptions Made?
a(iii)............................................How is the Portfolio Organized?
b,c,d...........................................................................*
e................Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g.........................How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
7 a............................What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d...How are Investments, Exchanges and Redemptions Made?
e, f(i, ii)..................What Advisory and Other Fees does the Portfolio Pay?
f(iii)..........................................................................*
8..............................How are Investments, Exchanges and Redemptions Made?
9.................................................................................*

* Not Applicable
</TABLE>

<PAGE>

FIRST FUNDS

TENNESSEE TAX-FREE PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS

Form N-1A Item Number
- ---------------------

Part A Prospectus Caption
- ------ ------------------
1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. . . . . . . . . . . . . . . . . . . . . . . . . Summary of Portfolio Expenses
3 a,b. . . . . . . . . . . . . . . . . . . . . . . . . . . .Financial Highlights
c . . . . . . . . . . . . . . . . . . . . . . .How is Performance Calculated?
d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
4 a(i) . . . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
a(ii),b,c . . . . . . . . What is the Investment Objective of the Portfolio?;
Is the Portfolio a Suitable Investment? Investment Risks;
What are the Portfolio's Investment Policies and Limitations?;
Investment Instruments,Strategies, Transactions and Risks
5 a . . . . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
b,c,d,e,f. . . . . . . . What Advisory and Other Fees does the Portfolio Pay?
g. . . . . . . . . . . . . . . . . . . . . . . . . . . .Portfolio Transactions
5A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
6 a(i) . . . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
a(ii). . . . . . . . . . How are Investments, Exchanges and Redemptions Made?
a(iii) . . . . . . . . . . . . . . . . . . . . How is the Portfolio Organized?
b,c,d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
e. . . . . . .Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g. . . . . . . . . . . How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Income Tax on this Investment?
h. . . . . . .Cover Page; How are Investments, Exchanges and Redemptions Made?
7 a. . . . . . . . . . . . What Advisory and Other Fees does the Portfolio Pay?
b(i, ii, iii, iv, v), c, d. . . . . . . . . How are Investments, Exchanges and
Redemptions Made?
e, f(i, ii). . . . . . . What Advisory and Other Fees does the Portfolio Pay?
f(iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
g. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
8. . . . . . . . . . . . . .How are Investments, Exchanges and Redemptions Made?
9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

* Not Applicable

<PAGE>
FIRST FUNDS

U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
CASH RESERVE PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III PROSPECTUS

Form N-1A Item Number
- ---------------------

Part A Prospectus Caption
- ------ ------------------
1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. . . . . . . . . . . . . . . . . . . . . . . . Summary of Portfolio Expenses
3 a,b. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Highlights
c . . . . . . . . . . . . . . . . . . . . . . How is Performance Calculated?
d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
4 a(i). . . . . . . . . . . . . . . . . . . . How are the Portfolios Organized?
a(ii),b,c . . . . . . . .What is the Investment Objective of each Portfolio?;
Are the Portfolios Suitable Investments? Investment Risks;
What are the Portfolios' Investment Policies, Practices and Risks?;
Investment Instruments, Strategies, Transactions and Risks
5 a . . . . . . . . . . . . . . . . . . . . . How are the Portfolios Organized?
b,c,d,e,f . . . . . . . . What Advisory and Other Fees do the Portfolios Pay?
g . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio Transactions
5A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
6 a(i). . . . . . . . . . . . . . . . . . . . How are the Portfolios Organized?
a(ii) . . . . . . . . . How are Investments, Exchanges and Redemptions Made?
a(iii). . . . . . . . . . . . . . . . . . . How are the Portfolios Organized?
b,c,d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
e . . . . . Cover Page; How are Investments, Exchanges and Redemptions Made?
f,g . . . . . . . . . . How are Investments, Exchanges and Redemptions Made?;
What is the Effect of Federal Income Tax on this Investment?
h . . . . . .Cover Page; How are Investments, Exchanges and Redemptions Made?
7 a . . . . . . . . . . . . What Advisory and Other Fees do the Portfolios Pay?
b(i),(ii) . . . . . . . How are Investments, Exchanges and Redemptions Made?
b(iii, iv,v),c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
d . . . . . . . . . . . .How are Investments, Exchanges and Redemptions Made?
e, f(i),(ii). . . . . . . What Advisory and Other Fees do the Portfolios Pay?
f(iii). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
8. . . . . . . . . . . . . How are Investments, Exchanges and Redemptions Made?
9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .*

* Not Applicable
<PAGE>
FIRST FUNDS

GROWTH & INCOME PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III
STATEMENT OF ADDITIONAL INFORMATION

Form N-1A Item Number Statement of Additional Information Caption
- --------------------- -------------------------------------------

10, 11................................................................Cover Page
12......................................................Description of the Trust
13 a, b, c.......Investment Restrictions and Limitations; Investment Instruments
d...........................................................................*
14 a, b, c.................................................Trustees and Officers
c...........................................................................*
15 a, b, c..............................................Description of the Trust
16 a(i, ii)................Investment Advisory Agreements; Trustees and Officers
a(iii), b, c, d................................Investment Advisory Agreements
e, f.............................Administration Agreement and Other Contracts
g...........................................................................*
h....................................................Description of the Trust
i................................Administration Agreement and Other Contracts
17 a......................................................Portfolio Transactions
b...........................................................................*
c......................................................Portfolio Transactions
d, e........................................................................*
18 a....................................................Description of the Trust
b...........................................................................*
19 a..............................Additional Purchase and Redemption Information
b...........................................Valuation of Portfolio Securities
c...........................................................................*
20.......................................................Distributions and Taxes
21 a(i, ii).........................Administration Agreement and Other Contracts
a(iii), b, c................................................................*
22 a...........................................................................*
b.................................................................Performance
23...............Financial Information for the annual period ended June 30, 1996
............for Class I, II and III of each Portfolio is filed herein as Item 24

* Not Applicable

<PAGE>
FIRST FUNDS

TENNESSEE TAX-FREE PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III
STATEMENT OF ADDITIONAL INFORMATION

Form N-1A Item Number Statement of Additional Information Caption
- --------------------- -------------------------------------------
10, 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
12 . . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Trust
13 a, b, c . . .Investment Restrictions and Limitations; Investment Instruments
d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
14 a, b, c(i). . . . . . . . . . . . . . . . . . . . . . Trustees and Officers
c(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
15 a, b, c . . . . . . . . . . .Description of the Trust; Trustees and Officers
16 a(i, ii). . . . . . . Investment Advisory Agreements; Trustees and Officers
a(iii), b, c, d . . . . . . . . . . . . . . . Investment Advisory Agreements
e, f. . . . . . . . . . . . . . . . . . . . .Investment Advisory Agreements;
Administration Agreement and Other Contracts
g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
h . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Trust
i . . . . . . . . . . . . . . . Administration Agreement and Other Contracts
17 a, b. . . . . . . . . . . . . . . . . . . . . . . . . Portfolio Transactions
c . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio Transactions
d, e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
18 a . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Trust
b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
19 a . . . . . . . . . . . . . . Additional Purchase and Redemption Information
b . . . . . . . . . . . . . . . . . . . . .Valuation of Portfolio Securities
c . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Trust
20 . . . . . . . . . . . . . . . . . . . . . . . . . . .Distributions and Taxes
21 a(i, ii). . . . . . . . . . . . Administration Agreement and Other Contracts
a(iii), b, c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
22 a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance
23 . . . . . . .Financial Information for the annual period ended June 30, 1996
. . . . for Class I, II and III of each Portfolio is filed herein as Item 24(a)

* Not Applicable
<PAGE>
FIRST FUNDS

U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
CASH RESERVE PORTFOLIO
CROSS REFERENCE SHEET FOR CLASS I, II AND III
STATEMENT OF ADDITIONAL INFORMATION

Form N-1A Item Number Statement of Additional Information Caption
- --------------------- -------------------------------------------
10, 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
12 . . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Trust
13 a, b, c . . .Investment Restrictions and Limitations; Investment Instruments
d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .*
14 a, b, c(i). . . . . . . . . . . . . . . . . . . . . . .Trustees and Officers
c(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
15 a, b, c . . . . . . . . . . .Description of the Trust; Trustees and Officers
16 a(i, ii). . . . . . . .Investment Advisory Agreements; Trustees and Officers
a(iii), b, c, d . . . . . . . . . . . . . . . Investment Advisory Agreements
e, f. . . . . . . . . . . . . . . . . . . . .Investment Advisory Agreements;
Administration Agreement and Other Contracts
g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .*
h . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Trust
i . . . . . . . . . . . . . . . Administration Agreement and Other Contracts
17 a, b. . . . . . . . . . . . . . . . . . . . . . . . . Portfolio Transactions
c . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio Transactions
d, e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
18 a . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Trust
b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
19 a . . . . . . . . . . . . . . Additional Purchase and Redemption Information
b . . . . . . . . . . . . . . . . . . . . .Valuation of Portfolio Securities
c . . . . . . . . . . . . . . . . . . . . . . . . . Description of the Trust
20 . . . . . . . . . . . . . . . . . . . . . . . . . . .Distributions and Taxes
21 a(i, ii). . . . . . . . . . . . Administration Agreement and Other Contracts
a(iii), b, c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
22 a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance
b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
23 . . . . . . .Financial Information for the annual period ended June 30, 1996
. . . . for Class I, II and III of each Portfolio is filed herein as Item 24(a)

* Not Applicable

<PAGE>

[LOGO]

FIRST FUNDS 370 17th Street
Suite 3100
GROWTH & INCOME PORTFOLIO Denver, Colorado 80202

- --------------------------------------------------------------------------------
PROSPECTUS FOR CLASS I, II, AND III
October 24, 1997
- --------------------------------------------------------------------------------

First Funds (the Trust) offers investors a convenient and economical means
of investing in a professionally managed equity mutual fund. The objective of
the Growth & Income Portfolio (the Portfolio) is to achieve maximum total return
through a combination of capital appreciation and dividend income consistent
with reasonable risk by investing primarily in equity securities. The
Portfolio's net asset value per share will fluctuate in response to changes in
the value of its investments.

This Prospectus is designed to provide you with information that you should
know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of the Portfolio.
Class I shares are designed exclusively for investment of monies held in
non-retail trust, advisory, agency, custodial or similar accounts (Institutional
Accounts). Class I shares may be purchased for Institutional Accounts by
financial institutions, business organizations, corporations, municipalities,
non-profit institutions and other entities serving in trust, advisory, agency,
custodial or similar capacities (each, an Institutional Investor and
collectively, Institutional Investors) that meet the investment threshold for
this Class of shares. Class II and III shares are designed for individuals and
other investors who seek mutual fund investment convenience plus a lower
investment minimum. These Classes offer investors differing expense and sales
load structures to choose between. See "Expense Summary."

A Statement of Additional Information (dated October 24, 1997) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus, the Annual Report and the
Statement of Additional Information are available free upon request from ALPS
Mutual Funds Services, Inc., (ALPS), the Portfolio's Distributor. The Annual
Report for the fiscal period ended June 30, 1997 for the Portfolio is
incorporated into the Statement of Additional Information by reference. Please
call ALPS at 1-800-442-1941 (option 1) for more information concerning each
Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.

MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED
BY, FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY INSTITUTION.
SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY
STATE OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
IN SUCH STATE OR JURISDICTION.

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

<PAGE>

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

TABLE OF CONTENTS
Page
----
Summary Of Portfolio Expenses. . . . . . . . . . . . . . . . . . . . 3
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . 4
What Is The Investment Objective Of The Portfolio? . . . . . . . . . 5
Is The Portfolio A Suitable Investment?; Investment Risks. . . . . . 6
What Are The Portfolio's Investment Policies And Limitations?. . . . 6
How Are Investments, Exchanges And Redemptions Made? . . . . . . . . 7
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . 14
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . 14
What Is The Effect Of Federal Income Tax On This Investment? . . . . 15
What Advisory And Other Fees Does The Portfolio Pay? . . . . . . . . 15
How Is The Portfolio Organized?. . . . . . . . . . . . . . . . . . . 16
Investment Instruments, Transactions, Strategies And Risks . . . . . 17
- --------------------------------------------------------------------------------

<PAGE>

- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------

The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear, directly or indirectly, by
investing in the Portfolio. This standard format was developed for use by all
mutual funds to help you make your investment decisions. The information below
is based upon the Portfolio's expenses for the fiscal year ended June 30, 1997
adjusted to reflect new servicing arrangements. This expense information should
be considered along with other important information, such as the Portfolio's
investment objective.

A. EXPENSE SUMMARY

GROWTH & INCOME
PORTFOLIO
-----------------------------------

SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
Maximum Sales Load on Purchases
(as a percentage of offering price) None 5.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None

ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .50% .50% .50%
12b-1 Fees .00% .00% .75%
Other Expenses .33% .64% .69%
----- ----- -----
Total Portfolio Operating Expenses* .83% 1.14% 1.94%
----- ----- -----
----- ----- -----

*After expense waivers

ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its investment advisory fee down to
.50% of the Portfolio's average net assets; however, there is no guarantee that
the waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS, as
Administrator, is entitled to and charges .15% of the Portfolio's average net
assets for administration services. First Tennessee, as Co-Administrator, is
entitled to and charges .05% of the Portfolio's average net assets for
co-administration services. Other Expenses also include Shareholder Servicing
Fees of 0.25% with respect to Class II and Class III of the Portfolio.

If the waivers were not in effect, Management Fees would be .65% for the
current fiscal year for each Class. Total Portfolio Operating Expenses would be
as follows:

GROWTH & INCOME
PORTFOLIO
--------------------------------------

CLASS I CLASS II CLASS III
------- -------- ---------
Total Portfolio Operating Expenses .98% 1.29% 2.09%

There is no guarantee that any waivers will continue at their stated
levels.

<PAGE>

Portfolio to Investment Professionals for services and expenses incurred in
connection with providing personal service to shareholders and/or maintenance of
shareholder accounts. Long-term shareholders may pay more than the economic
equivalent of the maximum 8.50% front-end sales charge permitted by the National
Association of Securities Dealers, Inc. (NASD) due to 12b-1 fees applicable to
Class III shares. Please see "What Advisory And Other Fees Does The Portfolio
Pay - Distribution Plan and Shareholder Servicing Plans for further information.

B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Growth & Income Portfolio assuming (1)
5% annual return, (2) redemption at the end of each time period, (3) that
operating expenses (net of expense waivers) are the same as described above, and
(4) reinvestment of all dividends and distributions. THE RETURN OF 5% AND
EXPENSES SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED PERFORMANCE
OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:

GROWTH & INCOME
PORTFOLIO
------------------------------------

CLASS I CLASS II CLASS III
------- -------- ---------
1 year $9 $69* $20
3 years $27 $92* $61
5 years $46 $117* $106
10 years $103 $189* $228

*Reflects imposition of maximum sales charge at the beginning of the period.

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The table that follows is included in the Annual Report for the Portfolio
dated June 30, 1997 and has been audited by Price Waterhouse LLP, independent
accountants. Their report on the financial statements and the financial
highlights for the Portfolio is included in the Annual Report. The financial
statements and financial highlights are incorporated by reference into the
Portfolio's Statement of Additional Information. The Annual Report contains
additional performance information and will be made available upon request and
without charge.

GROWTH & INCOME PORTFOLIO

CLASS I
------------------------------------------------------------
For the Year Ended June 30,
------------------------------------------------------------
1997 1996 1995 1994**
---- ---- ---- ------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $14.12 $12.22 $10.53 $10.00
------------------------------------------------------------
Income from investment operations:
Net investment income 0.18 0.19 0.23 0.17
Net realized and unrealized gain on investments 3.75 2.58 2.21 0.57
------------------------------------------------------------
Total from investment operations 3.93 2.77 2.44 0.74
------------------------------------------------------------
Distributions:
Net investment income (0.18) (0.19) (0.23) (0.17)
Net realized gain (0.84) (0.68) (0.52) (0.04)
------------------------------------------------------------
Total distributions (1.02) (0.87) (0.75) (0.21)
------------------------------------------------------------
Net asset value, end of period $17.03 $14.12 $12.22 $10.53
------------------------------------------------------------
------------------------------------------------------------

TOTAL RETURN+ 28.83% 23.54% 24.20% 7.39%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $221,136 $159,146 $114,000 $82,751
Ratio of expenses to average daily net assets(1) 0.83% 0.76% 0.47% 0.34%*
Ratio of net investment income to average net assets 1.19% 1.40% 2.12% 1.83%*
Portfolio turnover rate 25% 41% 33% 83%*
Average commission rate $ 0.0604 n/a n/a n/a

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had such
waivers not occurred is as follows. 0.98% 1.00% 0.99% 1.05%*
</TABLE>

<PAGE>

GROWTH & INCOME PORTFOLIO

<TABLE>
<CAPTION>
CLASS II CLASS III
----------------------------- -----------------------------------
For the Year Ended June 30, For the Year Ended June 30,
----------------------------- -----------------------------------
1997 1996** 1997 1996 1995 1994**
---- ------ ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $14.12 $13.05 $14.11 $12.23 $10.51 $10.60
-------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.13 0.09 0.02 0.03 0.06 0.06
Net realized and unrealized gain (loss) on investments 3.76 1.74 3.74 2.60 2.24 (0.05)
-------------------------------------------------------------------------
Total from investment operations 3.89 1.83 3.76 2.63 2.30 0.01
-------------------------------------------------------------------------
Distributions:
Net investment income (0.12) (0.08) (0.04) (0.07) (0.06) (0.06)
Net realized gain (0.84) (0.68) (0.84) (0.68) (0.52) (0.04)
-------------------------------------------------------------------------
Total distributions (0.96) (0.76) (0.88) (0.75) (0.58) (0.10)
-------------------------------------------------------------------------
Net asset value, end of period $17.05 $14.12 $16.99 $14.11 $12.23 $10.51
-------------------------------------------------------------------------
-------------------------------------------------------------------------

TOTAL RETURN+ 28.48%*** 14.71%# 27.44% 22.19% 22.61% 0.08%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $16,514 $1,918 $50,178 $36,892 $19,363 $2,094
Ratio of expenses to average daily net assets (1) 1.14% 1.06%* 1.94% 1.87% 1.72% 1.83%*
Ratio of net investment income to average net assets 0.88% 1.10%* 0.08% 0.29% 0.87% 0.34%*
Portfolio turnover rate 25% 41% 25% 41% 33% 83%*
Average commission rate $0.0604 n/a $0.0604 n/a n/a n/a

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had such
waivers not occurred is as follows. 1.29% 1.30%* 2.09% 2.11% 2.26% 6.03%*
</TABLE>

For fiscal years beginning on or after September 1, 1995, a fund that
invests more than 10% of the value of its average net assets in equity
securities is required to disclose its average commission rate per share
for security trades on which commissions are charged.
* Annualized.
** Classes I, II and III commenced operations on August 2, 1993, December 20,
1995 and December 9, 1993, respectively.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.

- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF the PORTFOLIO?
- --------------------------------------------------------------------------------

First Tennessee serves as Investment Adviser to the Portfolio and, with the
prior approval of the Board of Trustees (the Trustees), has engaged Highland
Capital Management Corp. (Highland), to act as Sub-Adviser to the Portfolio.
Subject to First Tennessee's supervision, Highland is responsible for the
day-to-day investment management of the Portfolio, including providing
investment research and credit analysis concerning Portfolio investments and
conducting a continuous program of investment of Portfolio assets in accordance
with the investment policies and objectives of the Portfolio. For additional
information about the Portfolio's investment advisory arrangements, see "What
Advisory And Other Fees Does The Portfolio Pay? - Investment Advisory and
Management and Sub-Advisory Agreements."

The investment objective of the Portfolio is to achieve maximum total
return through a combination of capital appreciation and dividend income by
investing at least 65% of its total assets in equity securities. However, the
Investment Adviser and Sub-Adviser currently intend, under normal circumstances,
to invest at least 80% of the Portfolio's total assets in equity securities,
except where prevailing market conditions require a more defensive posture.
There is no assurance that the Portfolio will achieve its investment objective.
The permitted investments of the Portfolio are as follows:

The Portfolio invests primarily in common stock and American Depository
Receipts (ADRs) of U.S. and international companies that trade on major
exchanges (NYSE, ASE, NASDAQ). Highland will analyze the fundamental values both
of particular companies and industries. Fundamental analysis considers a
company's essential soundness and future prospects, as well as overall industry
outlook.

The Portfolio may also invest in convertible preferred stock, bonds and
debentures that are convertible into common stock, options and may sell short
securities it owns. The Portfolio may engage in repurchase agreements and
reverse

<PAGE>

repurchase agreements, may buy and sell securities on a when-issued or
delayed-delivery basis, and may purchase warrants, interests in real estate
investment trusts, forward currency contracts, illiquid and restricted
securities, and shares in other investment companies. The Portfolio may, for
temporary defensive purposes, invest without limit in short-term money market
securities including, but not limited to, U.S. government obligations,
commercial paper, and certificates of deposit.

- --------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- --------------------------------------------------------------------------------

By itself, the Portfolio does not constitute a balanced investment plan.
The Growth & Income Portfolio emphasizes maximizing total return through a
combination of capital appreciation and dividend income by investing primarily
in equity securities. An investment in the Portfolio may involve greater risk
than is inherent in other types of investments since it seeks capital
appreciation, and the value of its investments will generally fluctuate in
response to stock market conditions. Further, investment in the securities of
issuers in any foreign country involves special risks and considerations not
typically associated with investing in U.S. issuers. The Portfolio's share
price, yield and total return will fluctuate. An investment in the Portfolio may
be worth more or less than the original cost when shares are redeemed.

Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks " and in the Statement of Additional
Information.

- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIO'S INVESTMENT POLICIES AND LIMITATIONS?
- --------------------------------------------------------------------------------

INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:

(1) With respect to 75% of the Portfolio's assets, the Portfolio will not
purchase a security, other than U.S. government securities, if, as a result, (a)
more than 5% of its total assets would be invested in the securities of any
single issuer; or (b) the Portfolio would own more than 10% of the voting
securities of any single issuer.

(2) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.

(3) (a) The Portfolio may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets. (b) The
Portfolio may borrow money from banks, or by engaging in reverse repurchase
agreements. (c) The Portfolio will not purchase securities when borrowings
exceed 5% of its total assets. If the Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. To this
extent, purchasing securities when borrowings are outstanding may involve an
element of leverage.

(4) (a) The Portfolio may temporarily lend its portfolio securities to
broker-dealers and institutions, but only when the loans are fully
collateralized. (b) Loans, in the aggregate, will be limited to 33 1/3% of the
Portfolio's total assets.

Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, and limitations (1), (2),
(3)(a), and (4)(b) above. With the exception of the Portfolio's policies and
limitations regarding borrowing and investments in illiquid securities, these
limitations and the Portfolio's policies are considered at the time of purchase
of securities; the sale of securities is not required in the event of a
subsequent change in circumstances.

<PAGE>

The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that the Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.

From time to time, the Portfolio, to the extent consistent with its
investment objective, policies, and restrictions, may invest in securities of
companies with which First Tennessee or any affiliates have lending
relationships.

- --------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- --------------------------------------------------------------------------------

CLASS I
- -------

WHO MAY INVEST?

Class I shares are designed exclusively for investment of monies held in
non-retail trust, advisory, agency, custodial or similar Institutional Accounts.
Class I shares may be purchased for Institutional Accounts by financial
institutions, business organizations, corporations, municipalities, non-profit
institutions, and other Institutional Investors serving in a trust, advisory,
agency, custodial or similar capacity who meet the investment threshold for this
Class of shares.

HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?

An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from the Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.

HOW ARE INVESTMENTS MADE?

Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC
prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the section
"How Are Investments, Exchanges And Redemptions Made - Class I, II and III - How
Are Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received and accepted by CGFSC. The Portfolio requires
advance notification of all wire purchases. To secure same day acceptance of
federal funds (monies transferred from one bank to another through the Federal
Reserve System with same-day availability), an Institutional Investor must call
CGFSC at 1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time on any
Business Day to advise it of the wire. The Trust may discontinue offering its
shares in any Class of a Portfolio without notice to shareholders.

MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $750,000. Institutional Investors may satisfy the
minimum investment by aggregating their Institutional Accounts within the
Portfolio. Subsequent investments may be in any amount. If an Institutional
Investor's Class I account falls below $375,000 due to redemption, the Portfolio
may close the account. An Institutional Investor may be notified if the minimum
balance is not being maintained and will be allowed 30 days to make additional
investments before its account is closed. Shares will be redeemed at the NAV on
the day the account is closed, and proceeds will be sent to the address of
record.

Should an Institutional Investor or a beneficial owner of Class I shares
cease to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class. Any such
conversion will be effected on the basis of the relative NAVs of the two Classes
without the imposition of any sales load, fee or other charge. Institutional
Investors or beneficial owners will receive at least 30 days prior notice of any
proposed conversion.

HOW ARE REDEMPTIONS MADE?

Institutional Investors may redeem all or a portion of their account shares
on any Business Day. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will earn dividends declared, if
any, through the day prior to redemption. If an account is closed, any accrued
dividends will be paid at the beginning of the following month.

<PAGE>

Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941, (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. The Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.

Pursuant to the Investment Company Act of 1940, as amended (1940 Act), if
making immediate payment of redemption proceeds could adversely affect the
Portfolio, payments may be made up to seven days later. Also, when the New York
Stock Exchange (NYSE) is closed (or when trading is restricted) for any reason
other than customary weekend or holiday closings, or under any emergency
circumstances as determined by the SEC to merit such action, the right of
redemption may be suspended or the date of payment postponed for a period of
time that may exceed seven days. To the extent Portfolio securities are traded
in other markets on days when either the NYSE or the Federal Reserve Bank of New
York (New York Federal Reserve) is closed, the Portfolio's NAV may be affected
on days when investors do not have access to the Portfolio to purchase or redeem
shares.

If transactions by telephone cannot be executed (for example, during times
of unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, the Institutional Investor may either
withdraw its request for redemption or it will receive payment based on the NAV
next determined after the termination of the suspension.

ADDITIONAL INFORMATION

The Portfolio also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be refused
if, in First Tennessee's opinion, they are of a size that would disrupt
management of the Portfolio.

In order to allow First Tennessee to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.

Transactions may be initiated by telephone. Please note that the Portfolio
and its agents will not be responsible for any losses resulting from
unauthorized telephone transactions if the Portfolio or its agents follow
reasonable procedures designed to verify the identity of the caller. These
procedures may include requesting additional information or using personalized
security codes. The Portfolio or its agents may also record calls and an
Institutional Investor should verify the accuracy of confirmation statements
immediately after receipt. If an Institutional Investor does not want to be able
to initiate redemptions and exchanges by telephone, please call CGFSC for
instructions.

CLASS II AND III
- ----------------

WHO MAY INVEST?

Class II and III shares are designed for individuals and other investors
who seek mutual fund investment convenience plus a lower investment minimum.
These Classes offer investors differing expense and sales load structures to
choose between. See "Summary Of Portfolio Expenses."

INVESTMENT REQUIREMENTS

The minimum initial investment in Class II or III shares is $1,000.
Subsequent investments may be in any amount greater than $100. If you
participate in the Systematic Investing Program (see "Systematic Investing
Program" below) or the "A Plus Card Program" (a consumer discount card program
provided by "A" Plus Strategic Alliances, Inc., a subsidiary of First
Tennessee), the minimum initial investment is $250, and subsequent investments
may be in any amount of $25 or greater. If you are an employee of First
Tennessee or any of its affiliates and you participate in the Systematic
Investing Program, the minimum initial investment is $50, and subsequent
investments may be in any amount of $25 or greater. If your balance in the
Portfolio falls below the applicable minimum investment requirement due to
redemption, you may be given 30 days' notice to reestablish the minimum balance.
If you do not reestablish the minimum balance, your account may be closed and
the proceeds mailed to you at the address on record. Shares will be redeemed on
the day the account is closed.

<PAGE>

investment requirement). The Portfolio reserves the right to limit the number of
checks processed at one time. If your check does not clear, your purchase will
be canceled and you could be liable for any losses or fees incurred.

You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly) or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.

HOW DO I SET UP AN ACCOUNT?

You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional (see "How Do I Invest Through
My Investment Professional" below). Shares will be purchased based on the NAV
next calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
Time in order for you to receive that day's share price. CGFSC must receive
payment within three business days after an order is placed. Otherwise, the
purchase order may be canceled and you could be held liable for the resulting
fees and/or losses. An investor will earn dividends declared, if any, on the day
of purchase if the funds are received by CGFSC that day.

HOW DO I INVEST DIRECTLY?

When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941, (option 2) between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.

Investments may be made in several ways:

BY MAIL: Make your check payable to First Funds: Growth & Income
Portfolio, and mail it, along with the application, to the address indicated on
the application. Your account will be credited on the business day that CGFSC
receives your application in good order .

BY BANK TRANSFER: Bank transfer allows you to move money between your bank
account and your First Funds account. This automatic service allows you to
transfer money from your bank account via the Automated Clearing House (ACH)
network to your Portfolio account. First, a Portfolio account must be
established, and an application sent to CGFSC. Next, a deposit account must be
opened at a bank providing bank transfer services and you must arrange for this
service to be provided. Once you have completed this process, you can initiate a
bank transfer by contacting a representative from your bank, providing the
required information for the bank, and authorizing the transfer to take place.
Please allow two or three days after the authorization for the transfer to
occur.

BY WIRE: Call 1-800-442-1941, (option 2) to set up your Portfolio account
to accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:

Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*

Prior to sending wires, please be sure to call 1-800-442-1941, (option 2)
to receive a Wire Control Number to be included in the body of the wire (see
above).

Your bank may charge you a fee for this service.

<PAGE>

HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?

You may redeem all or a portion of your shares on any day that the
Portfolio is open for business. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request and will earn
dividends declared, if any, through the day prior to redemption. If a Portfolio
account is closed, any accrued dividends will be paid at the beginning of the
following month.

You May Redeem Shares in Several Ways:

BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account.
You will need the letter of instruction signed by all persons required to sign
for transactions, exactly as their names appear on the account application,
along with a signature guarantee as described below.

A signature guarantee is designed to protect you, the Portfolio, and its
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.

BY BANK TRANSFER: When establishing your account in the Portfolio, you
must have indicated this account privilege in order to authorize the redemption
of monies with the proceeds transferred to your bank account. To authorize a
redemption, simply contact CGFSC at 1-800-442-1941, (option 2) and your
redemption will be processed at the NAV next calculated. Please allow two or
three days after the authorization for monies to reach your bank account.

BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern Time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.

ADDITIONAL REDEMPTION REQUIREMENTS: The Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE is closed
(or when trading is restricted) for any reason other than its customary weekend
or holiday closings, or under any emergency circumstances as determined by the
SEC to merit such action, the right of redemption may be suspended or the date
of payment postponed for a period of time that may exceed seven days. To the
extent that Portfolio securities are traded in other markets on days when either
the NYSE or the New York Federal Reserve is closed, the Portfolio's NAV may be
affected on days when investors do not have access to the Portfolio to purchase
or redeem shares.

If you are unable to reach CGFSC by telephone (for example, during times of
unusual market activity), consider placing your order by mail directly to CGFSC.
In case of suspension of the right of redemption, you may either withdraw your
request for redemption or you will receive payment based on the NAV next
determined after the termination of the suspension.

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

If you are investing through your Investment Professional, you may be
required to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of the Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.

SYSTEMATIC INVESTING PROGRAM

The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by

<PAGE>

calling CGFSC at 1-800-442-1941, (option 2) or your Investment Professional at
least three Business Days prior to your next scheduled investment date.

SYSTEMATIC WITHDRAWAL PLAN

You can have monthly, quarterly or semi-annual checks sent from your
account to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per month. If Systematic Withdrawal
Plan redemptions exceed income dividends earned on your shares, your account
eventually may be exhausted. Please contact ALPS at 1-800-442-1941 (option 1) or
your Investment Professional for more information.

ADDITIONAL INFORMATION

TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in the Portfolio under one of several tax-deferred plans. These plans
let you invest for retirement and defer the tax on your investment income.
Minimums may differ from those listed previously under "Investment
Requirements". Plans include Individual Retirement Accounts (IRAs), Rollover
IRAs, Keogh Plans, and Simplified Employee Pension Plans (SEP-IRAs).

CLASS II
- --------

PUBLIC OFFERING PRICE

The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which have entered into an agreement with ALPS, the
Portfolio's Distributor (Service Organizations). You may calculate your sales
load as follows:

REALLOWANCE TO
TOTAL SALES LOAD FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------------------------ ---------------------
AS A % OF OFFERING AS A % AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $50,000 5.75 6.10 5.00
$50,000 to $99,999 4.50 4.71 4.00
$100,000 to $249,999 3.50 3.63 3.00
$250,000 to $499,999 2.50 2.56 2.25
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40
</TABLE>

The reallowance to Service Organizations may be changed from time to time.
ALPS, at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.

You may purchase Class II shares without a sales load if the purchase will
be (a) through an IRA, 401 Plan, 403 Plan or directed agency account if the
trustee, custodian, or agent thereof is a direct or indirect subsidiary or
franchisee bank of First Tennessee or its affiliates; (b) by registered
representatives, directors, advisory directors, officers and employees (and
their immediate families) of First Tennessee or its affiliates; (c) by a current
or former Trustee, officer or employee of First Funds; the spouse of a First
Funds Trustee, officer or employee; a First Funds Trustee acting as a custodian
for a minor child or grandchild of a First Funds Trustee, officer or employee;
or the child or grandchild of a current or former Trustee, officer or employee
of First Funds who has reached the age of majority; (d) by a charitable
remainder trust or life income pool established for the benefit of a charitable
organization (as defined in Section 501(c)(3) of the Internal Revenue Code); (e)
for use in a financial institution or investment adviser managed account for
which a management or investment advisory fee is charged; (f) with redemption
proceeds from other mutual fund complexes on which the investor has paid a
front-end sales charge within the past 60 days upon presentation of purchase
verification information; or (g) through certain promotions where the load is
waived for investors.

In addition, you will not pay a sales load on the reinvestment of dividends
or distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" Further, you generally will not pay a sales load on Class II shares of
the Portfolio which you buy using proceeds from the redemption of a First Funds
Portfolio which does not charge a front-end load, if you obtained such shares
through an exchange for Class II shares which you purchased with a sales load.
A sales load will apply to your purchase of Class II shares in the foregoing
situation only to the extent that the Portfolio's sales load exceeds the sales
load you paid in the prior purchase of the Class II shares.

<PAGE>

In addition, if you purchase Class II shares within 60 days after redeeming
shares of the Portfolio, you will receive credit towards the sales load payable
on the purchase to the extent of the sales load you paid on the shares you
redeemed. This reinstatement privilege may be exercised only with respect to
redemptions and purchases in the same First Funds Portfolio. The reinstatement
privilege can be exercised only one time with respect to any particular
redemption.

QUANTITY DISCOUNTS

You may be entitled to reduced sales charges through the Right of
Accumulation or a Letter of Intent, even if you do not make an investment of a
size that would normally qualify for a quantity discount.

To qualify for a reduction of or exception to the sales load, you or your
Investment Professional must notify the Transfer Agent, CGFSC, at the time of
purchase or exchange. The reduction in sales load is subject to confirmation of
your holdings through a check of records. The Trust may modify or terminate
quantity discounts at any time. For more information about quantity discounts,
contact your Service Organization or ALPS at 1-800-442-1941 (option 1).

RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How
Are Investments, Exchanges And Redemptions Made? - Public Offering Price" shows
that the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If, for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.50% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.

LETTER OF INTENT. A Letter of Intent allows you to purchase Class II
shares over a 13-month period at a reduced sales charge. The sales charge is
based on the total amount you intend to purchase plus the total net asset value
of Class II shares which you already own on which you have paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also credit towards
completion of your Letter of Intent any Class II shares held through the IRA or
in the plan, even if a load was not paid. Each investment you make during the
period may be made at the reduced sales charge that would apply to the total
amount you intend to invest. The reduced sales load applies only to new
purchases. If you do not invest the total amount within the period, you may pay
the difference between the higher sales charge rate that would have been applied
to the purchases you made and the reduced sales charge rate you have paid.
Shares of the Portfolio equal to 5% of the amount you intend to invest will be
held in escrow and, if you do not pay the difference within 20 days following
the mailing of a request, the Transfer Agent will redeem a sufficient amount of
your escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.

If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class II
shares. You will be entitled to the applicable sales load that is in effect at
the date you submit the Letter of Intent until you complete your intended
purchase.

QUALIFICATION OF DISCOUNTS. As shown in the schedule of Class II sales
charges, larger purchases may result in lower sales charges to you. For purposes
of determining the amount of purchases using the Right of Accumulation and
Letter of Intent privileges, you may combine your purchase with:

- purchases by your spouse or his, her or your joint account or for
the account of any minor children, and

- the aggregate investment of any trustee or other Institutional
Investor for you and/or your spouse or your minor children.

A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.

OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "What Advisory And Other Fees Does The Portfolio Pay? -
Distribution Plan and Shareholder Servicing Plan."

<PAGE>

CLASS III
- ---------

Class III shares are bought without a front-end load; that is, the offering
price for such shares will be their NAV. Class III shares incur Distribution
Fees and Shareholder Servicing Fees. See discussion under "What Advisory And
Other Fees Does The Portfolio Pay? - Distribution Plan and Shareholder Servicing
Plan."

CLASS I, II AND III
- -------------------

HOW ARE PORTFOLIO SHARES VALUED?

The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class specific liabilities, and dividing the result by the
number of shares outstanding in that Class.

The Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated at the
close of the Portfolio's Business Day, which coincides with the close of regular
trading of the NYSE (normally 4:00 p.m. Eastern Time).

The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or if quotations are
not available, by a method that the Trustees believe accurately reflects fair
value. Foreign securities are valued on the basis of quotations from the primary
United States market in which they are traded or, if not traded on a U.S.
market, then their primary foreign market, and translated from foreign market
quotations into U.S. dollars using current exchange rates.

DISTRIBUTION OPTIONS: The Portfolio earns dividends from its stocks and
interest from bond, money market, and other fixed-income investments. These are
passed along as dividend distributions. The Portfolio may realize capital gains
if it sells securities for a higher price than it paid for them. These are
passed along as capital gain distributions. Income dividends for the Portfolio
are declared and paid monthly.

When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:

1. REINVESTMENT OPTION. Your dividend distributions and capital gain
distributions, if any, will be automatically reinvested in additional shares of
the Portfolio. Reinvestment of distributions will be made at that day's NAV. If
you do not indicate a choice on your application, you will be assigned this
option.

2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.

3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.

HOW ARE EXCHANGES MADE?

Class II shares of the First Funds Money Market Portfolios are not
currently available for investment. Investors in Class II shares wishing to
exchange into one of the Money Market Portfolios will receive Class III shares.

When making an exchange or opening an account in another Portfolio by
exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open a new account through exchange, the minimum
initial investment requirements must be met.

<PAGE>

portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege upon 60 days notice and to suspend the offering of shares
in any Class without notice to shareholders. You or your Institutional Investor,
if you are invested in Class I, will receive written confirmation of each
exchange transaction.

Exchanges are generally not permitted from Class I to another Class. Should
a beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I, Class I shares held in an Institutional Account may be converted to
shares of another Class.

STATEMENTS AND REPORTS

You, or if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor, will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.

- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------

From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.

TOTAL RETURN for Class I, II or III of the Portfolio is based on the
overall dollar or percentage change in value of a hypothetical investment,
assuming dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects
performance over a stated period of time. An AVERAGE ANNUAL TOTAL RETURN
reflects the hypothetical annually compounded rate that would have produced the
same cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in
performance, you should recognize that they are not the same as actual
year-by-year results. The yield and total returns of the three Classes of the
Portfolio are calculated separately due to separate expense structures as
indicated in the "Summary Of Portfolio Expenses"; the yields and total returns
of Class II and Class III will be lower than that of Class I.

For additional performance information, contact your Investment
Professional or ALPS for a free Annual Report and Statement of Additional
Information for the Portfolio.

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

Broker-dealers are utilized to conduct securities transactions for the
Portfolio and are chosen based upon professional ability and quality of service.
In addition, the Portfolio's investment advisers may consider a broker-dealer's
sales of shares of the Portfolio or recommendations to its customers that they
purchase shares of the Portfolio as a factor in the selection of broker-dealers
to execute transactions for the Portfolio. In placing business with such
broker-dealers, the advisers will seek the best execution of each transaction.

Higher commissions may be paid to firms that provide research services to
the extent permitted by law. The frequency of Portfolio transactions - the
portfolio turnover rate - will vary from year to year depending on market
conditions. The Portfolio's portfolio turnover rate for the fiscal year ended
June 30, 1997 was 25%.

<PAGE>

- --------------------------------------------------------------------------------
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------

The Portfolio intends to distribute substantially all of its net investment
income and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio, if any, are
declared and paid monthly.

FEDERAL TAXES. Distributions from the Portfolio's taxable income and
short-term capital gains, if any, are taxed as dividends, and long-term capital
gain distributions, if any, are taxed as long-term capital gains. A portion of
the Portfolio's dividends may qualify for the dividends-received deduction for
corporations. Distributions are taxable when they are paid, whether taken in
cash or reinvested in additional shares, except that distributions declared in
December and paid in January are taxable as if paid on December 31. The
Portfolio will send each investor or, if Class I, each Institutional Investor an
IRS Form 1099-DIV by January 31.

CAPITAL GAINS. A capital gain or loss may be realized when shares of the
Portfolio are redeemed or exchanged. For most types of accounts, the Portfolio
will report the proceeds of redemptions to each investor or, if Class I, the
Institutional Investor, and the IRS annually. However, because the tax treatment
also depends on the purchase price and your personal tax position, regular
account statements should be used to determine the tax gain or loss.

"BUYING A DIVIDEND." On the record date for a capital gain distribution or
an income dividend, the Portfolio's share price is reduced by the amount of the
distribution. If shares are bought just before the record date ("buying a
dividend"), the full price for the shares will be paid, and a portion of the
price will be received back as a taxable distribution.

OTHER TAX INFORMATION. The information above is only a summary of some of
the federal tax consequences generally affecting the Portfolio and its
shareholders, and no attempt has been made to discuss individual tax
consequences. In addition to federal tax, distributions may be subject to state
or local taxes. Institutional Investors and other shareholders should consult
their tax advisers for details and up-to-date information on the tax laws in
your state to determine whether the Portfolio is suitable given your particular
tax situation. It is not anticipated that the Portfolio's distributions will be
exempt from Tennessee personal income tax, except to the extent that any
distributions of income are attributable to interest on bonds or securities of
the U.S. government or any of its agencies or instrumentalities.

When you sign your account application, you will be asked to certify that
your taxpayer identification number is correct and that you are not subject to
backup withholding for failing to report income to the IRS. If you do not comply
with IRS regulations, the IRS can require the Portfolio to withhold 31% of
taxable distributions from your account.

- --------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DOES THE PORTFOLIO PAY?
- --------------------------------------------------------------------------------

INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Portfolio is obligated to pay
First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management
fee at the annual rate of .65% of its average net assets. First Tennessee has
voluntarily agreed to waive its advisory fees to .50% of the Portfolio's average
net assets. This voluntary waiver can be discontinued at any time.

Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees and the shareholders of the
Portfolio, engage one or more sub-advisers which may have full investment
discretion to make all determinations with respect to the investment and
reinvestment of all or any portion of the Portfolio's assets, subject to the
terms and conditions of the Investment Advisory and Management Agreement and the
written agreement with any such sub-adviser. In the event one or more
sub-advisers is appointed by First Tennessee, First Tennessee shall monitor and
evaluate the performance of such sub-advisers, allocate Portfolio assets to be
managed by such sub-advisers, recommend any changes in or additional
sub-advisers when appropriate and compensate each sub-adviser out of the
investment advisory fee received by First Tennessee from the Portfolio.

First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $15.6 billion in assets under
administration (including nondiscretionary accounts) and $6.1 billion in assets
under management as of June 30, 1997, as well as experience in supervising
sub-advisers.

<PAGE>

with and into First Tennessee Investment Management, Inc. (FTIM), an affiliate
of First Tennessee, and changed its name to Highland Capital Management Corp.
FTIM (now Highland), has been a wholly-owned subsidiary of First Tennessee
National Corporation since 1972. First Tennessee and Highland have a history of
investment management that dates back to 1929. Highland has a total of $2.6
billion in assets under management as of June 30, 1997. First Tennessee is
obligated to pay Highland a monthly sub-advisory fee at the annual rate of .38%
of the Portfolio's average net assets. Highland is currently waiving some or all
of its fees for the Portfolio.

First Tennessee, serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in the Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to and receives from the Portfolio a monthly fee at the
annual rate of .05% of average net assets.

As the Distributor, ALPS sells shares of the Portfolio as agent on behalf
of the Trust at no additional cost to the Trust. First Tennessee and its
affiliates do not participate in and are not responsible for selling as an agent
on behalf of the Trust, underwriting or distributing Trust shares. Consistent
with applicable law, affiliates of First Tennessee may receive commissions or
asset-based fees.

TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a
division of Chase Manhattan Bank, N.A. (CGFSC), provides transfer agent and
related services for the Portfolio. Chase Manhattan Bank, N.A. is Custodian of
the Portfolio's assets.

PRICING AND ACCOUNTING. CGFSC also serves as Fund Accountant and thereby
calculates the NAV and dividends of each Class and maintains the Portfolio and
general accounting records.

DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant to
Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The Distribution Plan provides for payment of a fee to ALPS at the annual rate
of .75% of the average net assets of Class III. All or a portion of these fees
will in turn be paid to Investment Professionals as compensation for selling
shares of Class III and for providing ongoing sales support services. The
Trustees have also adopted Shareholder Servicing Plan on behalf of Class II and
III of the Portfolio, under which Service Organizations are paid at the annual
rate of .25% of each Class' average net assets for shareholder services and
account maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend posting.
The Distribution Fees are expenses of Class III and the Shareholder Servicing
Fees are expenses of Class II and III in addition to the Management Fee, and the
Administration and Co-Administration Fees, and will reduce the net income and
total return of both Classes.

- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------

The Portfolio is a diversified portfolio of First Funds, an open-end management
investment company organized as a Massachusetts business trust by a Declaration
of Trust dated March 6, 1992, as amended and restated on September 4, 1992. The
Portfolio consists of three separate Classes. The Trustees supervise the Trust's
activities and review its contractual arrangements with companies that provide
the Trust with services. The Trust is not required to hold annual shareholder
meetings, although special meetings may be called for a specific Portfolio or
Class with respect to issues affecting that Portfolio or Class, or the Trust as
a whole, for purposes such as electing or removing Trustees, changing
fundamental policies or approving investment advisory agreements. Shareholders
receive one vote for each share owned and fractional votes for fractional shares
owned. A Portfolio or Class votes separately with respect to issues affecting
only that Portfolio or Class. Pursuant to the Declaration of Trust, the Trustees
have the authority to issue additional Classes of shares for the Portfolio.

<PAGE>

PORTFOLIO MANAGEMENT

Edward J. Goldstein, one of the Portfolio Managers for the Portfolio, is a
Director and Executive Vice President of Highland. He joined Highland in
September, 1989. Mr. Goldstein is a graduate of Boston University and received a
Master of Business Administration from Columbia University.

David L. Thompson, one of the Portfolio Managers for the Portfolio, is
Senior Vice President of Highland. He joined Highland in May 1995 and is
Chartered Financial Analyst. Mr. Thompson is a graduate of the University of
Mississippi and received a Masters of Business Administration from the
University of North Carolina.

- --------------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------

The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions each may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.

EQUITY SECURITIES may include common stocks, preferred stocks, convertible
securities, ADRs and warrants. Common stock purchased by the Portfolio is
evidence of ownership of a corporation. Owners typically are entitled to vote on
the selection of directors and other important matters as well as to receive
dividends on their holdings. In the event that a corporation is liquidated, the
claims of secured and unsecured creditors and owners of bonds and preferred
stock take precedence over the claims of those who own common stock. For the
most part, however, common stock has more potential for appreciation. Preferred
Stock is a class of capital stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions.

FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory, or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. Highland considers these factors in
making foreign investments for the Portfolio.

The Portfolio may also enter into currency forward contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities. Although currency forward
contracts can be used to protect the Portfolio from adverse exchange rate
changes, they involve a risk of loss if Highland fails to predict foreign
currency values correctly or employs a strategy that does not correlate well
with a Portfolio's investments. A loss to the Portfolio may also result if the
counterparty to a transaction fails to perform as obligated. Please see
discussion under "Forwards" below.

DELAYED-DELIVERY AND WHEN-ISSUED TRANSACTIONS. The Portfolio may buy and
sell obligations on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value of obligations
purchased in this way may change before the delivery date, which could increase
fluctuations in the Portfolio's share price, yield, and return. Ordinarily, the
Portfolio will not earn interest on obligations until they are delivered.

FORWARDS. A forward represents a contract that obligates the counterparty
to buy, and the other to sell, a specific underlying asset at a specific price,
amount, and date in the future. Forwards are similar to futures except for the
fact that forwards are privately negotiated. The most common type of forward
contracts are foreign currency exchange contracts.

The Portfolio may enter into forward exchange currency contracts in order
to hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain firm purchase and sale
commitments denominated in foreign currencies. A forward exchange currency
contract is a commitment to purchase or sell a foreign currency at a future date
at a negotiated forward rate. The gain or loss arising from the difference
between the original contract and the closing of such contract is included in
net realized gain or loss on foreign currency transactions.

<PAGE>

Fluctuations in the value of forward exchange currency contracts are
recorded for financial reporting purposes as unrealized gains or losses by the
Portfolio.

ILLIQUID SECURITIES. Under guidelines established by the Board of
Trustees, Highland, under First Tennessee's supervision, determines the
liquidity of the Portfolio's investments. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments or securities subject to legal restrictions
may involve time-consuming negotiation and legal expenses. It may be difficult
or impossible for the Portfolio to sell illiquid or restricted securities
promptly at an acceptable price. The Portfolio may invest up to 15% of its
assets in illiquid investments.

RESTRICTED SECURITIES. The Portfolio may purchase securities which cannot
be sold to the public without registration under the Securities Act of 1933
(restricted securities). Unless registered for sale, these securities can only
be sold in privately negotiated transactions or pursuant to an exemption from
registration. Provided that the security has a demand feature of seven days or
less, or a dealer or institutional trading market exists, these restricted
securities are not treated as illiquid securities for the purposes of the
Portfolio's investment limitations. Investing in restricted securities could
have the effect of increasing the level of Portfolio illiquidity if qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.

MONEY MARKET INSTRUMENTS are high quality instruments that present minimal
credit risk. They may include U.S. government obligations, commercial paper and
other short-term corporate obligations, and certificates of deposit, bankers'
acceptances, bank deposits and other financial institution obligations. These
instruments may carry fixed or variable rates.

OPTIONS CONTRACTS. An option is a contract that gives the owner the right,
but not the obligation, to either buy (call option) or sell (put option) an
underlying security or currency at a fixed price for a specified period of time.
The Portfolio may buy and sell (write) put and call options contracts to manage
its exposure to changing interest rates and security prices. To the extent it
invests in securities denominated in foreign currencies, the Portfolio may also
buy and sell options contracts to manage exposure to currency exchange rates.
Some option strategies, including buying puts and writing calls, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including writing puts and buying calls, tend to increase market exposure.
Options may be combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into forward
contracts for settlement or hedging purposes. The Portfolio may invest in
options based on any type of security, index, or currency, including options
traded on foreign exchanges and options not traded on exchanges.

Options can be volatile investments and involve certain risks. If Highland
applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolio's
return. The Portfolio could also experience losses if the prices of its options
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. The use of
options may increase the volatility of the Portfolio and may involve the
investment of a small amount of cash relative to the risk assumed.

The Portfolio will be able to hedge its total assets by writing calls or
purchasing puts under normal conditions. In addition, the Portfolio will not
write puts whose underlying value exceeds 25% of total assets, and will not buy
calls with a value exceeding 5% of total assets.

REPURCHASE AGREEMENTS are transactions by which a Portfolio agrees to
purchase a security subject to the seller's agreement to repurchase it at a
mutually agreed upon date and price. In the event of the bankruptcy of the
seller, a Portfolio could experience delays in recovering its cash. In the event
of the bankruptcy of the other party to a repurchase agreement or a securities
loan, the Portfolio could experience delays in recovering its cash or the
securities it lent. To the extent that, in the meantime, the value of the
obligations purchased had decreased, or the value of obligations lent had
increased, the Portfolio could experience a loss. In all cases, Highland must
find the creditworthiness of the other party to the transaction satisfactory.

U.S. GOVERNMENT OBLIGATIONS purchased by the Portfolio are debt obligations
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the full
faith and credit of the United States. For example, obligations issued by the
Federal Farm Credit Bank or by the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Obligations issued by the Federal Home Loan Bank are
supported only by the credit of the agency. There is no guarantee that the
government will support these types of obligations, and therefore they involve
more risk than other government obligations.

U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued
by the United States and backed by its full faith and credit.

18
<PAGE>

ZERO COUPON BONDS purchased by the Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change. In
calculating its daily dividend, the Portfolio takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.

A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.

The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. The risks of
these securities are similar to those of other debt securities, although they
may be more volatile and the value of certain types of stripped securities may
move in the same direction as interest rates. Original issue zeros are zero
coupon securities originally issued by the U.S. government, a government agency,
or a corporation in zero coupon form.

<PAGE>

INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------

First Tennessee Bank National Association
Memphis, TN

SUB-ADVISER
-----------

Highland Capital Management Corp.
Memphis, TN

OFFICERS
--------

Richard C. Rantzow, President
Jeremy O. May, Treasurer
James V. Hyatt, Secretary

TRUSTEES
--------

Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow

ADMINISTRATOR AND DISTRIBUTOR
------------------------------

ALPS Mutual Funds Services, Inc.
Denver, CO

TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------

Chase Global Funds Services Company
Boston, MA

CUSTODIAN
---------

Chase Manhattan Bank, N.A.
New York, NY

<PAGE>

[LOGO]

FIRST FUNDS 370 17th Street
Suite 3100
CAPITAL APPRECIATION PORTFOLIO Denver, Colorado 80202

First Funds (the Trust) offers investors a convenient and economical means
of investing in a professionally managed equity mutual fund. The objective of
the Capital Appreciation Portfolio (the Portfolio) is to seek long-term capital
appreciation by investing in equity securities of medium and smaller
capitalization companies. The Portfolio's net asset value per share will
fluctuate in response to changes in the value of its investments.

A Statement of Additional Information (dated October 24, 1997) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus and the Statement of
Additional Information are available free upon request from ALPS Mutual Funds
Services, Inc., (ALPS), the Portfolio's Distributor. Please call ALPS at
1-800-442-1941 (option 1) for more information concerning each Class of shares.
If you are investing through a broker, other financial institution or adviser
(Investment Professional), please contact that institution directly.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY
STATE OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
IN SUCH STATE OR JURISDICTION.

<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
Summary Of Portfolio Expenses. . . . . . . . . . . . . . . . . . . . . . . .3
What Is The Investment Objective Of The Portfolio? . . . . . . . . . . . . .4
Is The Portfolio A Suitable Investment?; Investment Risks. . . . . . . . . .5
What Are The Portfolio's Investment Policies And Limitations?. . . . . . . .5
How Are Investments, Exchanges And Redemptions Made? . . . . . . . . . . . .6
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 13
What Is The Effect Of Federal Income Tax On This Investment? . . . . . . . 14
What Advisory And Other Fees Does The Portfolio Pay? . . . . . . . . . . . 14
How Is The Portfolio Organized?. . . . . . . . . . . . . . . . . . . . . . 15
Investment Instruments, Transactions, Strategies And Risks . . . . . . . . 16
- --------------------------------------------------------------------------------

2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------

The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear, directly or indirectly, by
investing in the Portfolio. This standard format was developed for use by all
mutual funds to help you make your investment decisions. The information below
is based upon anticipated operating expenses. This expense information should be
considered along with other important information, such as the Portfolio's
investment objective.

A. EXPENSE SUMMARY

CAPITAL APPRECIATION
PORTFOLIO
----------------------------

SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------

Maximum Sales Load on Purchases
(as a percentage of offering price) None 5.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None

ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .70% .70% .70%
12b-1 Fees .00% .00% .75%
Other Expenses* .49% .84% .85%
---- ---- ----

Total Portfolio Operating Expenses* 1.19% 1.54% 2.30%
----- ----- -----
----- ----- -----

*After expense waivers

ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
and to Investment Advisers, Inc. (IAI). First Tennessee, as Co-Investment
Adviser has voluntarily agreed to waive its entire investment advisory fee which
amounts to .15% of the Portfolio's average net assets; however, there is no
guarantee that the waiver will continue. The Portfolio incurs Other Expenses,
including Administration and Co-Administration Fees, for maintaining shareholder
records, furnishing shareholder statements and reports, and other services.
ALPS, as Administrator, is entitled to .15% of the Portfolio's average net
assets for administration services. Through March 31, 1998, ALPS has voluntarily
agreed to waive its administration fee for the Portfolio to .075% of the
Portfolio's average net assets up to $20,000,000, .1125% on the next $5,000,000
and .15% thereafter. First Tennessee, as Co-Administrator, is entitled to and
charges .05% of the Portfolio's average net assets for co-administration
services. Other Expenses also include Shareholder Servicing Fees of 0.25% with
respect to Class II and Class III of the Portfolio.

If the waivers were not in effect, Management Fees would be .85% for the
current fiscal year for each Class. Other Expenses (estimated) and Total
Portfolio Operating Expenses would be as follows:

CAPITAL APPRECIATION
PORTFOLIO
----------------------------

CLASS I CLASS II CLASS III
------- -------- ---------

Other Expenses (estimated) .52% .87% .88%
Total Portfolio Operating Expenses 1.38% 1.73% 2.49%

There is no guarantee that any waivers will continue at their stated levels.

3
<PAGE>

Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other Expenses
are reflected in the Portfolio's share price and are not charged directly to
individual accounts. 12b-1 Fees are paid by Class III of the Portfolio to ALPS
for services and expenses in connection with distribution. Shareholder Servicing
Fees are paid by Class II and III of the Portfolio to Investment Professionals
for services and expenses incurred in connection with providing personal service
to shareholders and/or maintenance of shareholder accounts. Long-term
shareholders may pay more than the economic equivalent of the maximum 8.50%
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (NASD) due to 12b-1 fees applicable to Class III shares. "What
Advisory And Other Fees Does The Portfolio Pay - Distribution Plan and
Shareholder Servicing Plans" for further information.

B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Capital Appreciation Portfolio
assuming (1) 5% annual return, (2) redemption at the end of each time period,
(3) that operating expenses (net of expense waivers) are the same as described
above, and (4) reinvestment of all dividends and distributions. THE RETURN OF 5%
AND EXPENSES SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED
PERFORMANCE OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY
SIGNIFICANTLY:

CAPITAL APPRECIATION
PORTFOLIO
----------------------------

CLASS I CLASS II CLASS III
------- -------- ---------

1 year $12 $72* $24
3 years $36 $100* $69

*Reflects imposition of maximum sales charge at the beginning of the period.

- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO?
- --------------------------------------------------------------------------------

First Tennessee and IAI serve as Co-Investment Advisers to the Portfolio.
First Tennessee, among other things, provides investment management evaluations
to the Board of Trustees, monitors the activities of IAI, including IAI's
Portfolio transactions, and coordinates IAI's activities with the Portfolio's
custodian, transfer agent, Administrator and independent accountants. IAI is
responsible for the day-to-day investment management of the Portfolio, including
providing investment research and credit analysis concerning Portfolio
investments and conducting a continuous program of investment of Portfolio
assets in accordance with the investment policies and objective of the
Portfolio. For additional information about the Portfolio's investment advisory
arrangements, see "What Advisory And Other Fees Does The Portfolio Pay? -
Investment Advisory and Management Agreements".

The investment objective of the Portfolio is to seek long-term capital
appreciation by investing at least 65% of its total assets in equity securities
of medium and smaller capitalization companies (companies which generally have
market capitalizations less than $5 billion). However, the Investment Advisers
currently intend, under normal circumstances, to invest at least 80% of the
Portfolio's total assets in equity securities of companies with market
capitalizations generally between $100 million and $1 billion, except where
prevailing market conditions require a more defensive posture. There is no
assurance that the Portfolio will achieve its investment objective. The
permitted investments of the Portfolio are as follows:

Capital Appreciation Portfolio will invest primarily in common stock,
convertible preferred stock, and bonds and debentures convertible into common
stock of U.S.-based corporations of all sizes, industries and geographical
markets. IAI will analyze the fundamental values both of particular companies
and industries. Fundamental analysis considers a company's essential soundness
and future prospects, as well as overall industry outlook. The Portfolio may
also invest in foreign securities that IAI believes possess unusual values,
although they may involve greater risk.

Capital Appreciation Portfolio also may invest in options, and may sell
short securities it owns. The Portfolio may engage in repurchase agreements and
may buy and sell securities on a when-issued or delayed-delivery basis, and may
purchase warrants, interests in real estate investment trusts, forward currency
contracts, illiquid and restricted securities, and shares in other investment
companies.The Portfolio may, for temporary defensive purposes, invest without
limit in short-term securities including U.S. government obligations, commercial
paper, and certificates of deposit.

See "Investment Instruments, Transactions, Strategies and Risks" for a
further discussion of the Portfolio's investments.

4
<PAGE>
- --------------------------------------------------------------------------------
IS THE PORTFOLIO A SUITABLE INVESTMENT?; INVESTMENT RISKS
- --------------------------------------------------------------------------------

By itself, the Portfolio does not constitute a balanced investment plan.
The Portfolio emphasizes long-term capital appreciation by investing primarily
in equity securities of medium and smaller capitalization companies. Any income
received from securities held by the Portfolio will be incidental. An investment
in the Portfolio may involve greater risk than is inherent in other types of
investments since it seeks capital appreciation and the value of its investments
will generally fluctuate in response to stock market conditions. Investors
should realize that equity securities of small to medium-sized companies may
involve greater risk than is associated with investing in more established
companies. Further, investment in the securities of issuers in any foreign
country involves special risks and considerations not typically associated with
investing in U.S. issuers. The Portfolio's share price, yield and total return
will fluctuate. An investment in the Portfolio may be worth more or less than
the original cost when shares are redeemed.

Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general, are set forth in the section "Investment Instruments,
Transactions, Strategies And Risks " and in the Statement of Additional
Information.

INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:

(1) With respect to 75% of the Portfolio's assets, the Portfolio will
not purchase a security, other than U.S. government securities, if, as a
result; (a) more than 5% of its total assets would be invested in the
securities of any single issuer; or (b) the Portfolio would own more than
10% of the voting securities of any single issuer.

(2) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.

(3) (a) The Portfolio may borrow money solely for temporary or
emergency purposes, but not in an amount exceeding 33 1/3% of its total
assets; (b) the Portfolio may borrow money from banks, or by engaging in
reverse repurchase agreements; (c) the Portfolio will not purchase
securities when borrowings exceed 5% of its total assets. If the Portfolio
borrows money, its share price may be subject to greater fluctuation until
the borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.

(4) (a) The Portfolio may temporarily lend its portfolio securities to
broker-dealers and institutions, but only when the loans are fully
collateralized; and (b) loans, in the aggregate, will be limited to 33 1/3%
of the Portfolio's total assets.

Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, and limitations (1), (2),
(3)(a), and (4)(b) above. With the exception of the Portfolio's policies and
limitations regarding borrowings and investments in illiquid securities, these
limitations and the Portfolio's policies are considered at the time of purchase
of securities; the sale of securities is not required in the event of a
subsequent change in circumstances.

5
<PAGE>

CLASS I
- -------

WHO MAY INVEST?

HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?

HOW ARE INVESTMENTS MADE?

Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC
prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the section
"How Are Investments, Exchanges And Redemptions Made - Class I, II and III - How
Are Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received by CGFSC. The Portfolio requires advance notification
of all wire purchases. To secure same day acceptance of federal funds (monies
transferred from one bank to another through the Federal Reserve System with
same-day availability), an Institutional Investor must call CGFSC at
1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business Day
to advise it of the wire. The Trust may discontinue offering its shares in any
Class of a Portfolio without notice to shareholders.

Should an Institutional Investor or a beneficial owner of Class I shares
cease to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class.Any such
conversion will be effected on the basis of the relative NAVs of the two Classes
without the imposition of any sales load, fee or other charge. Institutional
Investors or beneficial owners will receive at least 30 days prior notice of any
proposed conversion.

HOW ARE REDEMPTIONS MADE?

6
<PAGE>

to the bank account designated with CGFSC. The Institutional Investor may change
the bank account designated to receive an amount redeemed at any time by sending
a letter of instruction with a signature guarantee to CGFSC at 73 Tremont
Street, Boston, Massachusetts, 02108.

ADDITIONAL INFORMATION

The Portfolio also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be refused
if, in IAI's opinion, they are of a size that would disrupt management of the
Portfolio.

In order to allow IAI to manage the Portfolio most effectively,
Institutional Investors are strongly urged to initiate all trades (investments,
exchanges and redemptions of shares) as early in the day as possible and to
notify CGFSC at least one day in advance of trades in excess of $1 million. In
making these trade requests, the name of the Institutional Investor and the
account number(s) must be supplied.

CLASS II AND III
- ----------------

WHO MAY INVEST?

INVESTMENT REQUIREMENTS

The minimum initial investment in Class II or III shares is $1,000.
Subsequent investments may be in any amount greater than $100. If you
participate in the Systematic Investing Program (see "Systematic Investing
Program" below) or the A Plus Card Program, (a consumer discount card program
provided by "A" Plus Strategic Alliances, Inc., a subsidiary of First
Tennessee), the minimum initial investment is $250, and subsequent investments
may be in any amount of $25 or greater. If you are an employee of First
Tennessee or any of its affiliates and you participate in the Systematic
Investing Program, the minimum initial investment is $50, and subsequent
investments may be in any amount of $25 or greater. If your balance in the
Portfolio falls below the applicable minimum investment requirement due to
redemption, you may be given 30 days' notice to reestablish the minimum balance.
If you do not reestablish the minimum balance, your account may be closed and
the proceeds mailed to you at the address on record. Shares will be redeemed on
the day the account is closed.

All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.

7
<PAGE>

You may initiate any transaction either directly or through your Investment
Professional. Please note that the Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions, if the
Portfolio or its agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly) or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.

HOW DO I SET UP AN ACCOUNT?

You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional (see "How Do I Invest Through
My Investment Professional" below). Shares will be purchased based on the NAV
next calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
time in order for you to receive that day's share price. CGFSC must receive
payment within three business days after an order is placed. Otherwise, the
purchase order may be canceled and you could be held liable for the resulting
fees and/or losses. An investor will earn dividends declared, if any, on the day
of purchase if the funds are received by CGFSC that day.

HOW DO I INVEST DIRECTLY?

Investments may be made in several ways:

BY MAIL: Make your check payable to First Funds: Capital Appreciation
Portfolio, and mail it, along with the application, to the address indicated on
the application. Your account will be credited on the business day that CGFSC
receives your application in good order.

Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*

Prior to sending wires, please be sure to call 1-800-442-1941, (option 2)
to receive a Wire Control Number to be included in the body of the wire (see
above).

Your bank may charge you a fee for this service.

HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?

8
<PAGE>

You may redeem shares in several ways:

BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

SYSTEMATIC INVESTING PROGRAM

SYSTEMATIC WITHDRAWAL PLAN

9
<PAGE>

must be in the amount of $100 or more per Portfolio per month. If Systematic
Withdrawal Plan redemptions exceed income dividends earned on your shares, your
account eventually may be exhausted. Please contact ALPS at 1-800-442-1941
(option 1) or your Investment Professional for more information.

ADDITIONAL INFORMATION

CLASS II
- --------

PUBLIC OFFERING PRICE

</TABLE>

In addition, you will not pay a sales load on the reinvestment of dividends
or distributions in the Portfolio or any other First Funds Portfolio, or in
connection with certain share exchanges as described under "How Are Investments,
Exchanges And Redemptions Made? - Class I, II, and III - How are Exchanges
Made?" Further, you generally will not pay a sales load on Class II shares of
the Portfolio which you buy using proceeds from the redemption of a First Funds
Portfolio which does not charge a front-end load, if you obtained such shares
through an exchange for Class II shares which you purchased with a sales load. A
sales load will apply to your purchase of Class II shares in the foregoing
situation only to the extent that the Portfolio's sales load exceeds the sales
load you paid in the prior purchase of the Class II shares.

10
<PAGE>

QUANTITY DISCOUNTS

If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.

- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and

- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.

A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.

OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "What Advisory And Other Fees Does The Portfolio Pay? -
Distribution Plan and Shareholder Servicing Plans."

CLASS III
- ---------

11
<PAGE>

CLASS I, II AND III
- -------------------

HOW ARE PORTFOLIO SHARES VALUED?

When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:

2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.

3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.

HOW ARE EXCHANGES MADE?

Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, First Tennessee and
IAI discourage frequent exchange activity by investors in response to short-term
market fluctuations. The Portfolio reserves the right to refuse any specific
purchase order, including certain purchases by exchange if, in IAI's opinion,
the Portfolio would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege upon 60 days notice and to suspend the offering of shares
in any Class without notice to shareholders. You or your Institutional Investor,
if you are invested in Class I will receive written confirmation of each
exchange transaction.

12
<PAGE>

STATEMENTS AND REPORTS

You, or if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the share
balance or the account registration. A statement with tax information will be
mailed by January 31 of each tax year and also will be filed with the IRS. At
least twice a year, you, or if Class I, the Institutional Investor, will receive
the Portfolio's financial statements. To reduce expenses, only one copy of the
Portfolio's reports (such as the Prospectus and Annual Report) will be mailed to
each investor or, if Class I, each Institutional Investor. Please write to ALPS
to request additional copies.

- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------

For additional performance information, contact your Investment
Professional or ALPS for a free Statement of Additional Information for the
Portfolio.

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

Higher commissions may be paid to firms that provide research services to
the extent permitted by law. The frequency of portfolio transactions - the
Portfolio's portfolio turnover rate - will vary from year to year depending on
market conditions. It is not anticipated that the Portfolio's turnover rate will
exceed 100% over the coming year.

13
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE EFFECT OF FEDERAL INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------

CAPITAL GAINS. A capital gain or loss may be realized when shares of the
Portfolio are redeemed or exchanged. For most types of accounts, the Portfolio
will report the proceeds of redemptions to each investor or, if ClassI, the
Institutional Investor, and the IRS annually. However, because the tax treatment
also depends on the purchase price and your personal tax position, regular
account statements should be used to determine the tax gain or loss.

OTHER TAX INFORMATION. The information above is only a summary of some of
the federal tax consequences generally affecting the Portfolio and its
shareholders, and no attempt has been made to discuss individual tax
consequences. In addition to federal tax, distributions may be subject to state
or local taxes. Institutional Investors and other shareholders should consult
their tax advisor for details and up-to-date information on the tax laws in your
state to determine whether the Portfolio is suitable given your particular tax
situation. It is not anticipated that the Portfolio's distributions will be
exempt from Tennessee personal income tax, except to the extent that any
distributions of income are attributable to interest on bonds or securities of
the U.S. government or any of its agencies or instrumentalities.

INVESTMENT ADVISORY AND MANAGEMENT AGREEMENTS. The Portfolio is obligated
to pay First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly
management fee at the annual rate of 0.15% of its average net assets for the
investment advisory services First Tennessee provides. First Tennessee has
voluntarily agreed to waive its entire management fees for the current fiscal
year. This voluntary waiver can be discontinued at any time.

Under its Investment Advisory and Management Agreement, First Tennessee
monitors and evaluates the performance of IAI, allocates Portfolio assets to be
managed by multiple, active investment advisers, recommends any changes in or
additional investment advisers when appropriate, coordinates the activities of
the Portfolio's investment advisers with its custodian, transfer agent,
Administrator and independent accountants, and monitors Portfolio purchase and
sale transactions for compliance purposes.

IAI serves as Adviser for the Portfolio pursuant to the authority granted
to it under its Investment Advisory and Management Agreement with the Trust on
behalf of the Portfolio. IAI is responsible for the day-to-day investment and
reinvestment of the Portfolio's assets in accordance with its investment
objective and policies. IAI is obligated to provide a continual program of
investment of Portfolio assets, to conduct investment research and credit
analysis concerning Portfolio investments, and to place orders for all purchases
and sales on investments on behalf of the Portfolio. As

14
<PAGE>

compensation for the services it provides, IAI is entitled to receive from the
Portfolio a monthly management fee at the annual rate of 0.70% for the first $50
million of the Portfolio's average net assets and .65% on average daily net
assets of the Portfolio in excess of $50 million.

IAI also furnishes investment advice to other concerns including other
investment companies, pension and profit sharing plans, portfolio of
foundations, religious, educational and charitable institutions, trusts,
municipalities and individuals, having total assets in excess of $16 billion.
IAI's ultimate corporate parent is Lloyds TSB Group plc, a publicly-held
financial services organization headquartered in London, England. Lloyds TSB
Group plc is one of the largest personal and corporate financial services groups
in the United Kingdom and is engaged in a wide range of activities including
commercial and retail banking. The address of IAI is 3700 First Bank Place, P.O.
Box 357, Minneapolis, Minnesota 55440.

ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver
Colorado, 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to the Portfolio. ALPS is entitled to receive from the Portfolio a monthly fee
at the annual rate of .15% of average net assets. Through March 31, 1998, ALPS
has voluntarily agreed to waive its administration fee for the Portfolio to
.075% of the Portfolio's average net assets up to $20,000,000, .1125% on the
next $5,000,000 and .15% thereafter.

First Tennessee serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in each Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to and receives from the Portfolio a monthly fee at the
annual rate of .05% of average net assets.

PRICING AND ACCOUNTING. CGFSC also serves as Fund Accountant and thereby
calculates the NAV and dividends of each Class and maintains the portfolio and
general accounting records.

DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant to
Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The Distribution Plan provides for payment of a fee to ALPS at the annual rate
of .75% of the average net assets of Class III. All or a portion of these fees
will in turn be paid to Investment Professionals as compensation for selling
shares of Class III and for providing ongoing sales support services. The
Trustees have also adopted Shareholder Servicing Plans on behalf of Class II and
III of the Portfolio, under which Service Organizations are paid at the annual
rate of .25% of each Class' average net assets, for shareholder services and
account maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend posting.
The Distribution Fees are expenses of Class III and the Shareholder Servicing
Fees are expenses of Class II and III in addition to the Management Fee and the
Administration and Co-Administration Fees, and will reduce the net income and
total return of both Classes.

- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------

The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate Classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or Class with respect to issues affecting that Portfolio or
Class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned

15
<PAGE>

and fractional votes for fractional shares owned. A Portfolio or Class votes
separately with respect to issues affecting only that Portfolio or Class.
Pursuant to the Declaration of Trust, the Trustees have the authority to issue
additional Classes of shares for the Portfolio.

PORTFOLIO MANAGEMENT

Martin Calihan has responsibility for the management of the Portfolio. Mr.
Calihan is a Vice President and has served as an equity analyst for IAI since
1992. Before joining IAI, Mr. Calihan was an equity analyst with Morgan Stanley
and Company from 1991 to 1992, and with State Street Research management from
1990 to 1991. Mr. Calihan has managed the Portfolio since its inception.

EQUITY SECURITIES may include common stocks, preferred stocks, convertible
securities, ADRs and warrants. Common stock purchased by the Portfolio is
evidence of ownership of a corporation. Owners typically are entitled to vote on
the selection of directors and other important matters as well as to receive
dividends on their holdings. In the event that a corporation is liquidated, the
claims of secured and unsecured creditors and owners of bonds and preferred
stock take precedence over the claims of those who own common stock. For the
most part, however, common stock has more potential for appreciation. Preferred
Stock is a Class of capital stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions.

FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory, or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. IAI considers these factors in making
foreign investments for the Portfolio.

The Portfolio may also enter into currency forward contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities. Although currency forward
contracts can be used to protect the Portfolio from adverse exchange rate
changes, they involve a risk of loss if IAI fails to predict foreign currency
values correctly or employs a strategy that does not correlate well with a
Portfolio's investments. A loss to the Portfolio may also result if the
counterparty to a transaction fails to perform as obligated. Please see
discussion under "Forwards" below.

FORWARDS. A forward represents a contract that obligates the
counterparty to buy, and the other to sell, a specific underlying asset at a
specific price, amount, and date in the future. Forwards are similar to
futures except for the fact that forwards are privately negotiated. The most
common type of forward contracts are foreign currency exchange contracts.

16
<PAGE>

the original contract and the closing of such contract is included in net
realized gain or loss on foreign currency transactions. Fluctuations in the
value of forward exchange currency contracts are recorded for financial
reporting purposes as unrealized gains or losses by the Portfolio.

ILLIQUID SECURITIES. Under guidelines established by the Board of
Trustees, IAI determines the liquidity of the Portfolio's investments. The
absence of a trading market can make it difficult to ascertain a market value
for illiquid investments. Disposing of illiquid investments or securities
subject to legal restrictions may involve time-consuming negotiation and legal
expenses. It may be difficult or impossible for the Portfolio to sell illiquid
or restricted securities promptly at an acceptable price. The Portfolio may
invest up to 15% of its net assets in illiquid investments.

Options can be volatile investments and involve certain risks. If IAI
applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolios
return. The Portfolio could also experience losses if the prices of its options
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. The use of
options may increase the volatility of the Portfolio and may involve the
investment of a small amount of cash relative to the risk assumed.

REPURCHASE AGREEMENTS are transactions by which a Portfolio agrees to
purchase a security subject to the seller's agreement to repurchase it at a
mutually agreed upon date and price. In the event of the bankruptcy of the
seller, a Portfolio could experience delays in recovering its cash. In the event
of the bankruptcy of the other party to a repurchase agreement or a securities
loan, the Portfolio could experience delays in recovering its cash or the
securities it lent. To the extent that, in the meantime, the value of the
obligations purchased had decreased, or the value of obligations lent had
increased, a Portfolio could experience a loss. In all cases, IAI must find the
creditworthiness of the other party to the transaction satisfactory.

U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued
by the United States and backed by its full faith and credit.

17
<PAGE>

<PAGE>

19
<PAGE>

CO-INVESTMENT ADVISER
---------------------

First Tennessee Bank National Association
Memphis, TN

INVESTMENT ADVISER
------------------

Investment Advisors, Inc.
Minneapolis, MN

OFFICERS
--------

Richard C. Rantzow, President
James V. Hyatt, Secretary
Jeremy O. May, Treasurer

TRUSTEES
--------

Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow

ADMINISTRATOR AND DISTRIBUTOR
-----------------------------

ALPS Mutual Funds Services, Inc.
Denver, CO

TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------

Chase Global Funds Services Company
Boston, MA

CUSTODIAN
---------

Chase Manhattan Bank, N.A.
New York, NY
<PAGE>

[LOGO]

FIRST FUNDS 370 17th Street
Suite 3100
BOND PORTFOLIO Denver, Colorado 80202

First Funds (the Trust) offers investors a convenient and economical means
of investing in a professionally managed fixed income mutual fund. The objective
of the Bond Portfolio (the Portfolio) is to achieve maximum total return through
high current income, consistent with reasonable risk, by investing primarily in
fixed income securities. The Portfolio's net asset value per share will
fluctuate in response to changes in the value of its investments.

A Statement of Additional Information (dated October 24, 1997) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus, the Annual Report and the
Statement of Additional Information are available free upon request from ALPS
Mutual Funds Services, Inc., (ALPS) the Portfolio's Distributor. The Annual
Report for the fiscal period ended June 30, 1997 for the Portfolio is
incorporated into the Statement of Additional Information by reference. Please
call ALPS at 1-800-442-1941 (option 1) for more information concerning each
Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY
STATE OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
IN SUCH STATE OR JURISDICTION.

<PAGE>

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

Page
----
Summary Of Portfolio Expenses . . . . . . . . . . . . . . . . . . . . . . 3
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
What Is The Investment Objective Of The Portfolio?. . . . . . . . . . . . 5
Is The Portfolio A Suitable Investment?; Investment Risks . . . . . . . . 6
What Are The Portfolio's Investment Policies And Limitations? . . . . . . 7
How Are Investments, Exchanges And Redemptions Made?. . . . . . . . . . . 7
How Is Performance Calculated?. . . . . . . . . . . . . . . . . . . . . . 14
Portfolio Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . 15
What Is The Effect Of Federal Income Tax On This Investment?. . . . . . . 15
What Advisory And Other Fees Does The Portfolio Pay?. . . . . . . . . . . 16
How Is The Portfolio Organized? . . . . . . . . . . . . . . . . . . . . . 17
Investment Instruments, Transactions, Strategies And Risks . . . . . . . 17
- --------------------------------------------------------------------------------

2
<PAGE>

- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------

The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear, directly or indirectly, by
investing in the Portfolio. This standard format was developed for use by all
mutual funds to help you make your investment decisions. The information below
is based upon the Portfolio's expenses for the fiscal year ended June 30, 1997.
This expense information should be considered along with other important
information such as the Portfolio's investment objective.

A. EXPENSE SUMMARY

BOND PORTFOLIO
-----------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------

Maximum Sales Load on Purchases
(as a percentage of offering price) None 3.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None

ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .15% .15% .15%
12b-1 Fees .00% .00% .75%

Other Expenses .34% .75% .73%
---- ---- ----

Total Portfolio Operating Expenses* .49% .90% 1.63%
---- ---- ----
---- ---- ----

*After expense waivers

ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its investment advisory fee down to
.15% of the Portfolio's average net assets; however, there is no guarantee that
the waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS, as
Administrator, is entitled to and charges .15% of the Portfolio's average net
assets for administration services. First Tennessee, as Co-Administrator, is
entitled to and charges .05% of the Portfolio's average net assets for
co-administration services. Other Expenses also include Shareholder Servicing
Fees of 0.25% with respect to Class II and Class III of the Portfolio.

If the waivers were not in effect, Management Fees would be .55% for the
current fiscal year for each Class. Total Portfolio Operating Expenses would be
as follows:

BOND PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------

Total Portfolio Operating Expenses .89% 1.30% 2.03%

There is no guarantee that any waivers will continue at their stated
levels.

3
<PAGE>

economic equivalent of the maximum 8.50% front-end sales charge permitted by the
National Association of Securities Dealers, Inc. (NASD) due to 12b-1 fees
applicable to Class III shares. Please see "What Advisory And Other Fees Does
The Portfolio Pay - Distribution Plan and Shareholder Servicing Plans for
further information.

B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Bond Portfolio assuming (1) 5% annual
return, (2) redemption at the end of each time period, (3) that operating
expenses (net of expense waivers) are the same as described above, and (4)
reinvestment of all dividends and distributions. THE RETURN OF 5% AND EXPENSES
SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED PERFORMANCE OR
PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:

BOND PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------

1 year $5 $46* $17
3 years $16 $65* $52
5 years $27 $86* $89
10 years $62 $144* $194

*Reflects imposition of maximum sales charge at the beginning of the period.

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

BOND PORTFOLIO

CLASS I
----------------------------------------------------------------------------
For the Year Ended June 30,
----------------------------------------------------------------------------
1997 1996 1995 1994**
---- ---- ---- ------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $9.73 $9.91 $9.41 $10.00
Income from investment operations: ----------------------------------------------------------------------------

Net investment income 0.61 0.60 0.57 0.45
Net realized and unrealized gain (loss) on 0.11 (0.18) 0.50 (0.57)
investments ---------------------------------------------------------------------------
Total from investment operations 0.72 0.42 1.07 (0.12)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Distributions:
Net investment income (0.61) (0.60) (0.57) (0.46)
Net realized gain - - - (0.01)
---------------------------------------------------------------------------
Total distributions (0.61) (0.60) (0.57) (0.47)
---------------------------------------------------------------------------
Net asset value, end of period $9.84 $9.73 $9.91 $9.41
---------------------------------------------------------------------------
---------------------------------------------------------------------------
TOTAL RETURN+ 7.58% 4.23% 11.87% (1.38)%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $123,184 $107,832 $90,574 $75,686
Ratio of expenses to average daily net assets (1) 0.49% 0.41% 0.35% 0.36%*
Ratio of net investment income to average net assets 6.20% 5.99% 6.07% 5.07%*
Portfolio turnover rate 56% 56% 23% 36%*

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.89% 0.91% 0.91% 0.96%*

</TABLE>

4
<PAGE>

BOND PORTFOLIO

CLASS II CLASS III
----------------------------- ---------------------------------------------
For the Year Ended June 30, For the Year Ended June 30,
----------------------------- ---------------------------------------------
1997 1996** 1997 1996 1995 1994**
---- ------ ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $9.71 $10.18 $9.71 $9.89 $9.40 $10.04
----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.57 0.29 0.49 0.49 0.43 0.21
Net realized and unrealized gain (loss) on
investments 0.10 (0.47) 0.11 (0.18) 0.49 (0.62)
----------------------------------------------------------------------------
Total from investment operations 0.67 (0.18) 0.60 0.31 0.92 (0.41)
----------------------------------------------------------------------------
Distributions:
Net investment income (0.57) (0.29) (0.49) (0.49) (0.43) (0.22)
Net realized gain - - - - - (0.01)
----------------------------------------------------------------------------
Total distributions (0.57) (0.29) (0.49) (0.49) (0.43) (0.23)
----------------------------------------------------------------------------
Net asset value, end of period $9.81 $9.71 $9.82 $9.71 $9.89 $9.40
----------------------------------------------------------------------------
----------------------------------------------------------------------------

TOTAL RETURN+ 7.12%*** (1.75)%# 6.37% 3.11% 10.12% (4.19)%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $841 $67 $2,553 $3,445 $1,916 $923
Ratio of expenses to average daily net assets(1) 0.90% 0.80%* 1.63% 1.49% 1.84% 1.82%*
Ratio of net investment income to average net assets 5.79% 5.61%* 5.07% 4.92% 4.58% 3.61%*
Portfolio turnover rate 56% 56% 56% 56% 23% 36%*

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 1.30% 1.30%* 2.03% 1.99% 3.35% 6.36%*

</TABLE>

* Annualized.
** Classes I, II and III commenced operations on August 2, 1993, December 20,
1995 and December 2, 1993, respectively.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.

First Tennessee, serves as Investment Adviser to the Portfolio and, with
the prior approval of the Board of Trustees (the Trustees), has engaged Highland
Capital Management Corp. (Highland), to act as Sub-Adviser to the Portfolio.
Subject to First Tennessee's supervision, Highland is responsible for the
day-to-day investment management of the Portfolio, including providing
investment research and credit analysis concerning Portfolio investments and
conducting a continuous program of investment of Portfolio assets in accordance
with the investment policies and objective of the Portfolio. For additional
information about the Portfolio's investment advisory arrangements, see "What
Advisory And Other Fees Does The Portfolio Pay? - Investment Advisory and
Management and Sub-Advisory Agreements."

The investment objective of the Portfolio is to achieve maximum total
return through high current income by investing at least 65% of its total assets
in fixed income securities. There is no assurance that the Portfolio will
achieve its investment objective. The permitted investments of the Portfolio are
as follows:

The Portfolio invests primarily in U.S. government obligations, investment
grade debt of U.S. corporations, mortgage-backed securities, (such as Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), and Federal Home Loan Mortgage Corporation (Freddie Mac) obligations,
and investment-grade asset-backed securities. Highland expects to invest the
Portfolio in investment-grade debt securities, which are considered to be those
rated Baa or higher by Moody's Investors Service, Inc. (Moody's) or BBB or
higher by Standard & Poor's Corporation (S&P). Investment-grade securities are
generally of medium to high quality. Accordingly, the Portfolio will not invest
in securities judged by Highland to be predominantly speculative or of poor
quality, although it may invest in securities rated in the lower end of the
investment-grade category (Baa/BBB), if Highland deems that such securities
present attractive investment opportunities. Securities rated Baa/BBB have
speculative characteristics and are more sensitive to economic changes and
changes in the financial condition of issuers. The Portfolio may also invest in
unrated securities judged to be of equivalent quality by Highland. Unrated
securities are not necessarily of lower quality than rated securities, but they
may not be attractive to as many buyers. The Portfolio relies more on Highland's
credit analysis when investing in debt securities that are unrated. In the event
the Portfolio owns a security whose rating is

5
<PAGE>

subsequently reduced below investment grade by Moody's or S&P, Highland will
determine whether the Portfolio should continue to hold such security but in no
event will the Portfolio's investments in such securities exceed 5% of its net
assets.

The Portfolio also may invest in foreign securities and make foreign
investments in foreign currencies. The Portfolio may buy and sell securities on
a when-issued or delayed-delivery basis, engage in dollar roll transactions,
invest in options, and purchase zero coupon bonds, illiquid and restricted
securities, and shares in other investment companies. The Portfolio may, for
temporary defensive and liquidity purposes, invest without limit in short-term
money market securities including, but not limited to, U.S. government
obligations, commercial paper, and certificates of deposit.

The Portfolio will invest primarily in intermediate to long-term bonds.
While the Portfolio's dollar-weighted average portfolio maturity may range from
5 to 15 years, Highland anticipates that this average maturity, under normal
circumstances, will fluctuate between 7 and 11 years. If Highland determines
that market conditions warrant a shorter or longer average maturity within the
range of 5 to 15 years, the Portfolio's investments will be adjusted
accordingly.

See "Investment Instruments, Transactions, Strategies And Risks" for a
further discussion of the Portfolio's investments.

By itself, the Portfolio does not constitute a balanced investment plan.
The Portfolio emphasizes maximizing total return through high current income by
investing primarily in debt securities. An increase in interest rates generally
will reduce the value of portfolio investments of the Portfolio and a decline in
interest rates will generally increase the value of its portfolio investments.
Short-term obligations (such as instruments with maturities of one year or less)
generally offer greater stability and are less sensitive to interest rate
changes. Long-term bonds of the type in which the Portfolio will invest offer
less stability and are more sensitive to interest rate changes, but generally
offer higher yields. Further, investment in the securities of issuers in any
foreign country involves special risks and considerations not typically
associated with investing in U.S. issuers. The Portfolio's share price, yield
and total return will fluctuate. An investment in the Bond Portfolio may be
worth more or less than the original cost when shares are redeemed.

In addition, the Portfolio may invest in instruments and securities
generally known as derivative investments. These investments may include the use
of forward currency contracts, put and call option contracts, zero coupon bonds
stripped fixed-income obligations and mortgage-backed and asset-backed
pass-through securities. Highland may not buy all of these instruments or use
all of these techniques unless it believes that doing so will help the Portfolio
achieve its investment objective. Use of these instruments and techniques can
alter the risk and return characteristics of the Portfolio. They may increase
the Portfolio's volatility and may involve the investment of small amounts of
cash relative to the magnitude of the risk assumed. This is called leverage.
They may also result in a loss of principal if Highland judges market conditions
incorrectly or employs a strategy that does not correlate well with the
Portfolio's investment strategy. With respect to mortgage-backed securities,
risks include a sensitivity to the rate of prepayments in that, although the
value of fixed-income securities generally increase during periods of falling
interest as a result of prepayments and other factors, this is not always the
case with respect to mortgage-backed securities. Asset-backed securities involve
the risk that such securities do not usually have the benefit of a complete
security interest in the related collateral. Positions in options involve the
risk that such options may fail as a hedging technique and that closing
transactions may not be effected where a liquid secondary market does not exist.

The Portfolio seeks to maximize total return over an interest rate cycle.
Highland believes that by lessening the effect of bond market declines,
investors should experience greater overall returns; accordingly, Highland may
address market risk through a strategy of adjusting the dollar-weighted average
maturity of the Portfolio to reflect changing economic and interest rate
environments. The timing of Portfolio transactions in response to anticipated
changes in interest rate trends is important to the successful application of
such strategies. Bond funds such as the Portfolio are generally subject to two
risk factors: (1) credit risk, and (2) interest rate risk. The Portfolio will
seek to manage credit risk by investing only in investment-grade securities as
described previously. In the event a security's credit rating is downgraded, its
value can be expected to decrease. Highland may elect to continue to hold such
securities. The Portfolio will seek to manage interest rate risk by limiting its
average maturity to 15 years or less.

Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies and Risks" and in the Statement of Additional
Information.

6
<PAGE>

INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:

(1) With respect to 75% of the Portfolio's assets, the Portfolio will
not purchase a security, other than U.S. government securities, if, as a
result, (a) more than 5% of its total assets would be invested in the
securities of any single issuer; or (b) the Portfolio would own more than
October 23, 199710% of the voting securities of any single issuer.

(2) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.

(3) (a) The Portfolio may borrow money solely for temporary or
emergency purposes, but not in an amountvexceeding 33 1/3% of its total
assets. (b) The Portfolio may borrow money from banks, or by engaging in
reverse repurchase agreements. (c) The Portfolio will not purchase
securities when borrowings exceed 5% of its total assets. If the Portfolio
borrows money, its share price may be subject to greater fluctuation until
the borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.

CLASS I
- -------

WHO MAY INVEST?

HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?

7
<PAGE>

HOW ARE INVESTMENTS MADE?

Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC
prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the section
"How Are Investments, Exchanges And Redemptions Made - Class I, II and III - How
Are Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received and accepted by CGFSC. The Portfolio requires advance
notification of all wire purchases. To secure same day acceptance of federal
funds (monies transferred from one bank to another through the Federal Reserve
System with same-day availability), an Institutional Investor must call CGFSC at
1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business Day
to advise it of the wire. The Trust may discontinue offering its shares in any
Class of a Portfolio without notice to shareholders.

HOW ARE REDEMPTIONS MADE?

Institutional Investors may redeem all or a portion of their account shares
on any Business Day. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will accrue dividends through the
day of redemption. If an account is closed, any accrued dividends will be paid
at the beginning of the following month.

Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. The Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.

ADDITIONAL INFORMATION

8
<PAGE>

CGFSC at least one day in advance of trades in excess of $1 million. In making
these trade requests, the name of the Institutional Investor and the account
number(s) must be supplied.

Transactions may be initiated by telephone. Please note that the Portfolio
and its agents will not be responsible for any losses resulting from
unauthorized telephone transactions if the Portfolio or its agents follow
reasonable procedures designed to verify the identity of the caller. These
procedures may include requesting additional information or using personalized
security codes. The Portfolio or its agents may also record calls, and an
Institutional Investor should verify the accuracy of confirmation statements
immediately after receipt. If an Institutional Investor does not want to be
able to initiate redemptions and exchanges by telephone, please call CGFSC for
instructions.

CLASS II AND III
- ----------------

WHO MAY INVEST?

INVESTMENT REQUIREMENTS

HOW DO I SET UP AN ACCOUNT?

HOW DO I INVEST DIRECTLY?

Investments may be made in several ways:

9
<PAGE>

BY MAIL: Make your check payable to First Funds: Bond Portfolio, and mail
it, along with the application, to the address indicated on the application.
Your account will be credited on the business day that CGFSC receives your
application in good order.

Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*

Prior to sending wires, please be sure to call 1-800-442-1941, (option 2)
to receive a Wire Control Number to be included in the body of the wire (see
above).

Your bank may charge you a fee for this service.

HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?

You may redeem shares in several ways:

10
<PAGE>

closed (or when trading is restricted) for any reason other than its customary
weekend or holiday closings, or under any emergency circumstances as determined
by the SEC to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed seven days. To
the extent that Portfolio securities are traded in other markets on days when
either the NYSE or the New York Federal Reserve is closed, the Portfolio's NAV
may be affected on days when investors do not have access to the Portfolio to
purchase or redeem shares.

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

SYSTEMATIC INVESTING PROGRAM

The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.

SYSTEMATIC WITHDRAWAL PLAN

ADDITIONAL INFORMATION

CLASS II
- --------

PUBLIC OFFERING PRICE

TOTAL SALES LOAD REALLOWANCE TO
FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------- ---------------------
AS A % OF OFFERING AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE AS A % OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $100,000 3.75 3.90 3.25
$100,000 to $249,999 3.00 3.09 2.65
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40

</TABLE>

11
<PAGE>

The reallowance to Service Organizations may be changed from time to time. ALPS,
at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.

QUANTITY DISCOUNTS

12
<PAGE>

you intend to invest. The reduced sales load applies only to new purchases. If
you do not invest the total amount within the period, you may pay the difference
between the higher sales charge rate that would have been applied to the
purchases you made and the reduced sales charge rate you have paid. Shares of
the Portfolio equal to 5% of the amount you intend to invest will be held in
escrow and, if you do not pay the difference within 20 days following the
mailing of a request, the Transfer Agent will redeem a sufficient amount of your
escrowed shares to pay the additional sales charge. After the terms of your
Letter of Intent are fulfilled, the Transfer Agent will release your escrowed
shares.

If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.

- purchases by your spouse or his, her or your joint account or for
the account of any minor children, and

- the aggregate investment of any trustee or other Institutional
Investor for you and/or your spouse or your minor children.

A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.

OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "What Advisory And Other Fees Does The Portfolio Pay? -
Distribution Plan and Shareholder Servicing Plans."

CLASS III
- ---------

CLASS I, II AND III
- -------------------

HOW ARE PORTFOLIO SHARES VALUED?

The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class-specific liabilities, and dividing the result by the
number of shares outstanding in the Class.

The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or if quotations are
not available, by a method that the Trustees believe accurately reflects fair
value. Foreign securities are valued on the basis of quotations from the
primary United States market in which they are traded or, if not traded on a
U.S. market, then their primary foreign market, and translated from foreign
market quotations into U.S. dollars using current exchange rates.

DISTRIBUTION OPTIONS: The Portfolio earns interest from bond, money
market, and other fixed-income investments. These are passed along as dividend
distributions. The Portfolio may realize capital gains if it sells securities
for a higher price than it paid for them. These are passed along as capital gain
distributions. Income dividends for the Portfolio are declared daily and paid
monthly.

When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:

13
<PAGE>

2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.

3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.

HOW ARE EXCHANGES MADE?

Class II shares of the First Funds Money Market Portfolios are not
currently available for investment. Investors in Class II shares wishing to
exchange into one of these Money Market Portfolios will receive Class III
shares.

Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, First Tennessee
discourages frequent exchange activity by investors in response to short-term
market fluctuations. The Portfolio reserves the right to refuse any specific
purchase order, including certain purchases by exchange if, in First Tennessee's
opinion, the Portfolio would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege upon 60 days notice and to suspend the offering of shares
in any Class without notice to shareholders. You or your Institutional Investor,
if you are invested in Class I, will receive written confirmation of each
exchange transaction.

Exchanges are generally not permitted from Class I to another Class. Should
a beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I , Class I shares held in an Institutional Account may be converted to
shares of another Class.

STATEMENTS AND REPORTS

You or, if Class I, the Institutional Investor will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor, will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.

- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------

From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. he YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its Portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.

14
<PAGE>

stated period of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical
annually compounded rate that would have produced the same cumulative total
return if performance had been constant over the entire period. Because average
annual returns tend to smooth out variations in performance, you should
recognize that they are not the same as actual year-by-year results. The yield
and total returns of the three classes of the Portfolio are calculated
separately due to separate expense structures as indicated in the "Summary Of
Portfolio Expenses"; the yields and total returns of Class II and Class III will
be lower than that of Class I.

For additional performance information, contact your Investment
Professional or ALPS for a free Annual Report and Statement of Additional
Information for the Portfolio.

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

Higher commissions may be paid to firms that provide research services to
the extent permitted by law. The frequency of Portfolio transactions - the
portfolio turnover rate - will vary from year to year depending on market
conditions. Bond Portfolio's portfolio turnover rate for the fiscal year ended
June 30, 1997 was 56%.

FEDERAL TAXES. Distributions from the Portfolio's taxable income and
short-term capital gains, if any, are taxed as dividends, and long-term capital
gain distributions, if any, are taxed as long-term capital gains. Distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in December and paid in
January are taxable as if paid on December 31. The Portfolio will send each
investor or, if Class I, each Institutional Investor, an IRS Form 1099-DIV by
January 31.

CAPITAL GAINS. A capital gain or loss may be realized when shares of the
Portfolio are redeemed or exchanged. For most types of accounts, the Portfolio
will report the proceeds of redemptions to each investor or, if Class I,the
Institutional Investor and the IRS annually. However, because the tax treatment
also depends on the purchase price and your personal tax position, regular
account statements should be used to determine the tax gain or loss.

"BUYING A DIVIDEND." On the record date for a distribution, the
Portfolio's share price is reduced by the amount of the distribution. If shares
are bought just before the record date (buying a dividend), the full price for
the shares will be paid, and a portion of the price will be received back as a
taxable distribution.

15
<PAGE>

INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Portfolio is obligated to pay
First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management
fee at the annual rate of .55% of its average net assets. First Tennessee has
voluntarily agreed to waive its advisory fees to .15% of the Portfolio's average
net assets. This voluntary waiver can be discontinued at any time.

Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees and the shareholders of the
Portfolio, engage one or more sub-advisers which may have full investment
discretion to make all determinations with respect to the investment and
reinvestment of all or any portion of the Portfolio's assets, subject to the
terms and conditions of the investment advisory agreement and the written
agreement with any such sub-adviser. In the event one or more sub-advisers is
appointed by First Tennessee, First Tennessee shall monitor and evaluate the
performance of such sub-advisers, allocate Portfolio assets to be managed by
such sub-advisers, recommend any changes in or additional sub-advisers when
appropriate and compensate each sub-adviser out of the investment advisory fee
received by First Tennessee from the Portfolio.

Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of First Tennessee and pursuant to the authority granted to it
under its Sub-Advisory Agreement with First Tennessee. On March 1, 1994,
Highland merged with and into First Tennessee Investment Management, Inc.
(FTIM), an affiliate of First Tennessee, and changed its name to Highland
Capital Management Corp. FTIM (now Highland) has been a wholly-owned
subsidiary of First Tennessee National Corporation since 1972. First
Tennessee and Highland have a history of investment management since 1929.
Highland has a total of $2.6 billion in assets under management as of
June 30, 1997. First Tennessee is obligated to pay Highland a monthly
sub-advisory fee at the annual rate of .33% of the Bond Portfolio's average
net assets. Highland is currently waiving some or all of its fees for the
Portfolio.

First Tennessee serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in the Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to and receives from the Portfolio a monthly fee at the
annual rate of .05% of average net assets.

TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company, a
division of Chase Manhattan Bank, N.A. ("CGFSC"), provides transfer agent and
related services for the Portfolio. Chase Manhattan Bank, N.A. is custodian of
the assets of the Trust.

PRICING AND ACCOUNTING. CGFSC also serves as Fund Accountant and thereby
calculates the NAV and dividends of each class and maintains the portfolio and
general accounting records.

16
<PAGE>

are paid at the annual rate of .25% of each Class' average net assets, for
shareholder services and account maintenance, including responding to
shareholder inquiries, directing shareholder communications, account balance
maintenance, and dividend posting. The Distribution Fees are expenses of Class
III and the Shareholder Servicing Fees are expenses of Class II and III in
addition to the Management Fee, and the Administration and Co-Administration
Fees, and will reduce the net income and total return of both Classes.

- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------

The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate Classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or class with respect to issues affecting that Portfolio or
Class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or Class votes separately with
respect to issues affecting only that Portfolio or Class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
classes of shares for the Portfolio.

PORTFOLIO MANAGEMENT

James R. Turner is one of the Portfolio Managers for the Bond Portfolio.
Mr. Turner managed the assets of the Portfolio's predecessor account from August
1986 until its conversion in August 1993 to a mutual fund. He also manages
pension and endowment funds. He is a Senior Vice President of Highland and is a
Chartered Financial Analyst. Mr. Turner is a graduate of the U.S. Military
Academy and received a Masters of Science in Industrial Engineering from
Stanford University.

Steven Wishnia, one of the Portfolio Managers for the Bond Portfolio, is a
Director and Chairman of the Board of Highland. He joined Highland in April,
1987. Mr. Wishnia is a graduate of Pace University.

ASSET-BACKED AND MORTGAGE SECURITIES purchased by the Portfolio may include
interests in pools of mortgages, loans (including consumer loans), receivables
or other assets. They may also include collateralized mortgage obligations
(CMOs) and stripped mortgage-backed securities. CMOs are pass-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence. Payment of principal and interest may be largely dependent upon the
cash flows generated by the assets backing the securities. The Portfolio may
purchase mortgage-backed securities issued by government and non-government
entities such as banks, mortgage lenders, or other financial institutions. A
mortgage-backed security may be an obligation of the issuer backed by a mortgage
or pool of mortgages or a direct interest in an underlying pool of mortgages.
Some mortgage-backed securities, such as CMOs, make payments of both principal
and interest at a variety of intervals; others make semiannual interest payments
at a predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Highland determines they are consistent with the
Portfolio's investment objective and policies.

17
<PAGE>

prepayment risk. Prepayment, which occurs when unscheduled or early payments are
made on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns. Some securities may have a
structure that makes their reaction to changing interest rates and other factors
difficult to predict and highly volatile.

COMMERCIAL PAPER purchased by the Portfolio are short-term obligations
issued by banks, broker-dealers, corporations and other entities for purposes
such as financing their current operations.

DOLLAR ROLL TRANSACTIONS. In order to enhance portfolio returns and manage
prepayment risks, the Portfolio may engage in dollar roll transactions with
respect to mortgage securities. In a dollar roll transaction, the Portfolio
sells a mortgage security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a substantially similar
(same type, coupon and maturity) security from the institution at a later date
at an agreed upon price. The mortgage securities that are repurchased will bear
the same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories. During the
period between the sale and repurchase, the Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in short-term instruments. The income from these
investments, together with any price difference at the time of sale, will
determine the net advantage to the Portfolio. When the Portfolio enters into a
dollar roll transaction, liquid assets of the Portfolio, in a dollar amount
sufficient to make payment for the obligations to be repurchased, are segregated
at the trade date. These securities are marked to market daily and are
maintained until the transaction is settled.

FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. Highland considers these factors in
making foreign investments for the Portfolio.

18
<PAGE>

OPTIONS CONTRACTS. An option is a contract that gives the owner the right,
but not the obligation, to either buy (call option) or sell (put option) an
underlying security or currency at a fixed price for a specified period of time.
The Portfolio may buy and sell put and call options contracts to manage its
exposure to changing interest rates and security prices. To the extent it
invests in securities denominated in foreign currencies, the Portfolio may also
buy and sell options contracts to manage exposure to currency exchange rates.
Some option strategies, including buying puts and writing calls, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including writing puts and buying calls, tend to increase market exposure.
Options may be combined with each other in order to adjust the risk and return
characteristics of the overall strategy. The Portfolio may enter into forward
contracts for settlement or hedging purposes. The Portfolio may invest in
options based on any type of security, index, or currency, including options
traded on foreign exchanges and options not traded on exchanges.

REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, the
Portfolio agrees to purchase a security subject to the seller's agreement to
repurchase it at a mutually agreed upon date and price. The Portfolio may also
make securities loans to broker-dealers and institutional investors. In the
event of the bankruptcy of the other party to a repurchase agreement or a
securities loan, the Portfolio could experience delays in recovering its cash or
the securities it lent. To the extent that, in the meantime, the value of the
obligations purchased had decreased, or the value of obligations lent had
increased, the Portfolio could experience a loss. In all cases, First Tennessee
must find the creditworthiness of the other party to the transaction
satisfactory.

U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued
by the United States and backed by its full faith and credit.

VARIABLE AND FLOATING RATE INSTRUMENTS purchased by the Bond Portfolio,
including certain participation interests in municipal obligations, have
interest rate adjustment formulas that help to stabilize their market values.
Many variable or floating rate instruments also carry demand features that
permit the Portfolio to sell them at par value plus accrued interest on short
notice. When determining its average weighted portfolio maturity, the Portfolio
will look to the interest readjustment date, rather than the maturity date, of
the instrument.

19
<PAGE>

not pay current income, their prices can be very volatile when interest rates
change. In calculating its daily dividend, the Portfolio takes into account as
income a portion of the difference between a zero coupon bond's purchase price
and its face value.

20
<PAGE>

21
<PAGE>

22
<PAGE>

<PAGE>

INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------

First Tennessee Bank National Association
Memphis, TN

SUB-ADVISER
-----------

Highland Capital Management Corp.
Memphis, TN

OFFICERS
--------

Richard C. Rantzow, President
Jeremy O. May, Treasurer
James V. Hyatt, Secretary

TRUSTEES
--------
\
Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow

ADMINISTRATOR AND DISTRIBUTOR
-----------------------------

ALPS Mutual Funds Services, Inc.
Denver, CO

TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------

Chase Global Funds Services Company
Boston, MA

CUSTODIAN
---------

Chase Manhattan Bank, N.A.
New York, NY
<PAGE>

[LOGO]

FIRST FUNDS 370 17th Street
Suite 3100
INTERMEDIATE BOND PORTFOLIO Denver, Colorado 80202

First Funds (the Trust) offers investors a convenient and economical means
of investing in a professionally managed fixed income mutual fund. The objective
of the Intermediate Bond Portfolio (the Portfolio) is to seek high current
income consistent with preservation of capital. Under normal circumstances, the
Portfolio will maintain a dollar-weighted average maturity of between three and
ten years. The Portfolio's net asset value per share will fluctuate in response
to changes in the value of its investments.

A Statement of Additional Information (dated October 24, 1997) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC) and
is incorporated herein by reference. This Prospectus and the Statement of
Additional Information are available free upon request from ALPS Mutual Funds
Services, Inc., (ALPS) the Portfolio's Distributor. Please call ALPS at
1-800-442-1941 (option 1) for more information concerning each class of shares.
If you are investing through a broker, other financial institution or adviser
(Investment Professional), please contact that institution directly.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY
STATE OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
IN SUCH STATE OR JURISDICTION.

<PAGE>

- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
Summary Of Portfolio Expenses . . . . . . . . . . . . . . . . . . . . . . 3
What Is The Investment Objective Of The Portfolio?. . . . . . . . . . . . 4
Is The Portfolio A Suitable Investment?; Investment Risks . . . . . . . . 5
What Are The Portfolio's Investment Policies And Limitations? . . . . . . 5
How Are Investments, Exchanges And Redemptions Made?. . . . . . . . . . . 6
How Is Performance Calculated?. . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . 14
What Is The Effect Of Federal Income Tax On This Investment?. . . . . . . 14
What Advisory And Other Fees Does The Portfolio Pay?. . . . . . . . . . . 14
How Is The Portfolio Organized? . . . . . . . . . . . . . . . . . . . . . 16
Investment Instruments, Transactions, Strategies And Risks . . . . . . . 16
- --------------------------------------------------------------------------------

2
<PAGE>

- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------

A. EXPENSE SUMMARY

INTERMEDIATE
BOND PORTFOLIO
-----------------------------

SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------

ANNUAL PORTFOLIO OPERATING EXPENSES (as a percentage of average net assets)
Management Fees* .00% .00% .00%
12b-1 Fees .00% .00% .75%
Other Expenses* .32% .74% .67%
---- ---- ----

Total Portfolio Operating Expenses* .32% .74% 1.42%
---- ---- -----
---- ---- -----

*After expense waivers

ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee has voluntarily agreed
to waive its entire investment advisory fee; however, there is no guarantee that
the waiver will continue. The Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS, as
Administrator, is entitled to .15% of the Portfolio's average net assets for
administration services. For the first six months of the Portfolio's operations,
ALPS has voluntarily agreed to waive its administration fee to .075 of the
Portfolio's average net assets up to $20,000,000, .1125% on the next $5,000,000
and .15% thereafter. First Tennessee, as Co-Administrator, is entitled to and
charges .05% of the Portfolio's average net assets for co-administration
services. Other Expenses also include Shareholder Servicing Fees of 0.25% with
respect to Class II and Class III of the Portfolio.

If the waivers were not in effect, Management Fees would be .50% for the
current fiscal year for each Class. Other Expenses (estimated) and Total
Portfolio Operating Expenses would be as follows:

INTERMEDIATE
BOND PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------

Other Expenses (estimated) .35% .77% .70%
Total Portfolio Operating Expenses .85% 1.28% 1.95%

There is no guarantee that any waivers will continue at their stated
levels.

3
<PAGE>

service to shareholders and/or maintenance of shareholder accounts. Long-term
shareholders may pay more than the economic equivalent of the maximum 8.50%
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (NASD) due to 12b-1 fees applicable to Class III shares. Please
see "What Advisory And Other Fees Does The Portfolio Pay - Distribution Plan and
Shareholder Servicing Plans" for further information.

B. EXAMPLE: You would pay the following expenses for every $1,000 investment
in each Class of shares of the Intermediate Bond Portfolio assuming (1) 5%
annual return, (2) redemption at the end of each time period, (3) that operating
expenses (net of expense waivers) are the same as described above, and (4)
reinvestment of all dividends and distributions. THE RETURN OF 5% AND EXPENSES
SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED PERFORMANCE OR
PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:

INTERMEDIATE
BOND PORTFOLIO
-----------------------------

CLASS I CLASS II CLASS III
------- -------- ---------

1 year $3 $45* $15
3 years $12 $62* $48

*Reflects imposition of maximum sales charge at the beginning of the period.

First Tennessee Bank National Association (First Tennessee) serves as
Investment Adviser to the Portfolio and, with prior approval of the Board of
Trustees (the Trustees), has engaged Highland Capital Management Corp.
(Highland), to act as Sub-Adviser to the Portfolio. Subject to First Tennessee's
supervision, Highland is responsible for the day-to-day investment management of
the Portfolio, including providing investment research and credit analysis
concerning Portfolio investments and conducting a continuous program of
investment of Portfolio assets in accordance with the investment policies and
objective of the Portfolio. For additional information about the Portfolio's
investment advisory arrangements, see "What Advisory And Other Fees Does The
Portfolio Pay? - Investment Advisory and Management Agreements" .

The investment objective of the Portfolio is to seek high current income
consistent with the preservation of capital. Although the Portfolio can invest
in securities of any maturity, under normal circumstances the Portfolio
maintains a dollar-weighted average maturity of between three and ten years.
There is no assurance that the Portfolio will achieve its investment objective.
The permitted investments of the Portfolio are as follows:

The Portfolio will invest primarily in U.S. government obligations;
investment grade debt of U.S. corporations; mortgage-backed securities, such as
Government National Mortgage Association, Federal National Mortgage Association,
and Federal Home Loan Mortgage Corporation obligations, and investment grade
asset-backed securities. The Sub-Adviser expects to invest the Portfolio in
investment grade debt securities, which are considered to be those rated Baa or
higher by Moody's Investors Service, Inc. (Moody's) or BBB or higher by Standard
& Poor's Corporation (S&P). Investment grade securities are generally of medium
to high quality. Accordingly, the Portfolio will not invest in securities judged
by the Sub-Adviser to be predominantly speculative or of poor quality, although
it may invest in securities rated in the lower end of the investment grade
category (Baa/BBB), if the Sub-Adviser deems that such securities present
attractive investment opportunities. Securities rated Baa/BBB have speculative
characteristics and may be more sensitive to economic changes in the financial
conditions of issuers. The Portfolio may also invest in unrated securities
judged to be of equivalent quality by Highland. Unrated securities are not
necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers. The Portfolio relies more on the Sub-Adviser's
credit analysis when investing in debt securities that are unrated. In the event
the Portfolio owns a security whose rating is subsequently reduced below
investment grade by Moody's or S&P, the Sub-Adviser will determine whether the
Portfolio should continue to hold such security, but in no event will the
Portfolio's investments in such securities exceed 5% or more of its net assets.

The Portfolio also may invest in foreign securities and make investments in
foreign securities. The Portfolio may buy or sell securities on a when-issued or
delayed-delivery basis, engage in dollar roll transactions, invest in options,
and purchase zero coupon bonds, illiquid and restricted securities, and shares
in other investment companies. The Portfolio may, for temporary defensive
purposes, invest without limit in short-term money market securities.

4
<PAGE>

The Portfolio will generally invest primarily in short to intermediate
bonds. While it may invest in obligations of any maturity, its dollar-weighted
average portfolio maturity will range between 3 and 6 years depending on the
interest rate and investment environment. If the Sub-Adviser determines that
market conditions warrant a shorter or longer average maturity within the range,
the Portfolio's investments will be adjusted accordingly.

See "Investment Instruments, Transactions, Strategies And Risks" for a
further discussion of the Portfolio's investments.

By itself, the Portfolio does not constitute a balanced investment plan.
The Portfolio emphasizes current income by investing primarily in
intermediate-term, fixed income securities. An increase in interest rates
generally will reduce the value of portfolio investments of the Portfolio and a
decline in interest rates will generally increase the value of its portfolio
investments. Short-term obligations (such as instruments with maturities of one
year or less) generally offer greater stability and are less sensitive to
interest rate changes. Intermediate-term bonds of the type in which the
Portfolio will invest offer less stability and are more sensitive to interest
rate changes, but generally offer higher yields. Further, investment in the
securities of issuers in any foreign country involves special risks and
considerations not typically associated with investing in U.S. issuers. The
Portfolio's share price, yield and total return will fluctuate. An investment in
the Intermediate Bond Portfolio may be worth more or less than the original cost
when shares are redeemed.

In addition, the Portfolio may invest in instruments and securities
generally known as derivative investments. These investments may include the use
of put and call option contracts, zero coupon bonds, stripped fixed-income
obligations and mortgage-backed and asset-backed pass-through securities.
Highland may not buy all of these instruments or use all of these techniques
unless it believes that doing so will help the Portfolio achieve its investment
objective. Use of these instruments and techniques can alter the risk and return
characteristics of the Portfolio. They may increase the Portfolio's volatility
and may involve the investment of small amounts of cash relative to the
magnitude of the risk assumed. This is called leverage. They may also result in
a loss of principal if Highland judges market conditions incorrectly or employs
a strategy that does not correlate well with the Portfolio's investment
strategy. With respect to mortgage-backed securities, risks include a
sensitivity to the rate of prepayments in that, although the value of
fixed-income securities generally increase during periods of falling interest as
a result of prepayments and other factors, this is not always the case with
respect to mortgage-backed securities. Asset-backed securities involve the risk
that such securities do not usually have the benefit of a complete security
interest in the related collateral. Positions in options involve the risk that
such options may fail as a hedging technique and that closing transactions may
not be effected where a liquid secondary market does not exist.

Highland believes that by lessening the effect of bond market declines,
investors should experience greater overall returns; accordingly, Highland may
address market risk through a strategy of adjusting the dollar-weighted average
maturity of the Portfolio to reflect changing economic and interest rate
environments. The timing of Portfolio transactions in response to anticipated
changes in interest rate trends is important to the successful application of
such strategies. Bond funds such as the Portfolio are generally subject to two
risk factors: (1) credit risk, and (2) interest rate risk. The Portfolio will
seek to manage credit risk by investing only in investment-grade securities as
described previously. In the event a security's credit rating is downgraded, its
value can be expected to decrease. Highland may elect to continue to hold such
securities. The Portfolio will seek to manage interest rate risk by limiting its
dollar-weighted average portfolio maturity to between 3 and 6 years.

Further information about the types of securities in which the Portfolio
may invest and their related risks, as well as the investment policies of the
Portfolio in general are set forth in the section "Investment Instruments,
Transactions, Strategies and Risks" and in the Statement of Additional
Information.

INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:

(1) With respect to 75% of the Portfolio's assets, the Portfolio will
not purchase a security, other than U.S. government securities, if, as a
result, (a) more than 5% of its total assets would be invested in the
securities of any single issuer; or (b) the Portfolio would own more than
10% of the voting securities of any single issuer.

5
<PAGE>

(2) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.

(3) (a) The Portfolio may borrow money solely for temporary or
emergency purposes, but not in an amount exceeding 33 1/3% of its total
assets. (b) The Portfolio may borrow money from banks, or by engaging in
reverse repurchase agreements. (c) The Portfolio will not purchase
securities when borrowings exceed 5% of its total assets. If the Portfolio
borrows money, its share price may be subject to greater fluctuation until
the borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.

CLASS I
- -------

WHO MAY INVEST?

HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?

HOW ARE INVESTMENTS MADE?

Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC
prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the section
"How Are Investments, Exchanges and Redemptions Made - Class I, II and III - How
Are Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received by CGFSC. The Portfolio requires advance notification
of all wire purchases. To secure same day acceptance of federal funds (monies
transferred from one bank to another through the Federal Reserve System with
same-day availability), an Institutional Investor must call CGFSC at
1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business Day
to advise it of the wire. The Trust may discontinue offering its shares in any
Class of a Portfolio without notice to shareholders.

6
<PAGE>

HOW ARE REDEMPTIONS MADE?

Institutional Investors may redeem all or a portion of their account shares
on any Business Day. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will accrue dividends through the
day of redemption. If an account is closed, any accrued dividends will be paid
at the beginning of the following month.

ADDITIONAL INFORMATION

Transactions may be initiated by telephone. Please note that the Portfolio
and its agents will not be responsible for any losses resulting from
unauthorized telephone transactions if the Portfolio or its agents follow
reasonable procedures designed to verify the identity of the caller. These
procedures may include requesting additional information or using personalized
security codes. The Portfolio or its agents may also record calls, and an
Institutional Investor should verify the accuracy of confirmation statements
immediately after receipt. If an Institutional Investor does not want to be
able to initiate redemptions and exchanges by telephone, please call CGFSC for
instructions.

7
<PAGE>

CLASS II AND III
- ----------------

WHO MAY INVEST?

INVESTMENT REQUIREMENTS

HOW DO I SET UP AN ACCOUNT?

You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional (see "How Do I Invest Through
My Investment Professional" below). Shares will be purchased based on the NAV
next calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
time in order for you to receive that day's share price. CGFSC must receive
payment within three business days after an order is placed. Otherwise, the
purchase order may be canceled and you could be held liable for the resulting
fees and/or losses. An investment will begin accruing dividends on the day
following purchase.

HOW DO I INVEST DIRECTLY?

When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108. Telephone
representatives are available at 1-800-442-1941 between the hours of 8:00 a.m.
to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time), Monday through
Friday.

Investments may be made in several ways:

BY MAIL: Make your check payable to First Funds: Intermediate Bond
Portfolio, and mail it, along with the application, to the address indicated on
the application. Your account will be credited on the business day that CGFSC
receives your application in good order.

8
<PAGE>

BY WIRE: Call 1-800-442-1941 (option 2) to set up your Portfolio account
to accommodate wire transactions. To initiate your wire transaction, call your
depository institution. Federal funds (monies transferred from one bank to
another through the Federal Reserve System with same-day availability) should be
wired to:

Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*

Prior to sending wires, please be sure to call 1-800-442-1941 (option 2) to
receive a Wire Control Number to be included in the body of the wire (see
above).

Your bank may charge you a fee for this service.

HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?

You may redeem all or a portion of your shares on any day that the
Portfolio is open for business. Shares will be redeemed at the NAV next
calculated after CGFSC has received the redemption request and will accrue
dividends through the day of redemption. If a Portfolio account is closed, any
accrued dividends will be paid at the beginning of the following month.

You may redeem shares in several ways:

BY MAIL: Write a "letter of instruction" with your name, the Portfolio's
name, your Portfolio account number, the dollar amount or number of shares to be
redeemed, and any additional requirements that apply to each particular account
. You will need the letter of instruction signed by all persons required to sign
for transactions, exactly as their names appear on the account application,
along with a signature guarantee as described below.

BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 4:00 p.m. Eastern time, proceeds of the redemption will be
wired as federal funds on the next Business Day to the bank account designated
with CGFSC. You may change the bank account designated to receive an amount
redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC at 73 Tremont Street, Boston, Massachusetts, 02108.

9
<PAGE>

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

SYSTEMATIC INVESTING PROGRAM

The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment is $50. You may change the amount of
your automatic investment, skip an investment, or stop the Systematic Investing
Program by calling CGFSC at 1-800-442-1941 (option 2) or your Investment
Professional at least three Business Days prior to your next scheduled
investment date.

SYSTEMATIC WITHDRAWAL PLAN

You can have monthly, quarterly or semi-annual checks sent from your
account to you, to a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share redemptions and must be
in the amount of $100 or more per Portfolio per transaction. If Systematic
Withdrawal Plan redemptions exceed income dividends earned on your shares, your
account eventually may be exhausted. Please contact ALPS at 1-800-442-1941
(option 1) or your Investment Professional for more information.

ADDITIONAL INFORMATION

Tax-Deferred Retirement Plans: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in the Portfolio under one of several tax-deferred plans. These plans
let you invest for retirement and defer the tax on your investment income.
Minimums may differ from those listed previously under "Investment
Requirements". Plans include Individual Retirement Accounts (IRAs), Rollover
IRAs, Keogh Plans, and Simplified Employee Pension Plans (SEP-IRAs).

CLASS II
- --------

PUBLIC OFFERING PRICE

The public offering price for Class II shares is the sum of the NAV plus a
sales load. As indicated below, a portion of this load may be reallowed to
Investment Professionals which are financial institutions which have entered
into an agreement with ALPS, the Portfolio's Distributor (Service
Organizations). You may calculate your sales load as follows:

REALLOWANCE TO
TOTAL SALES LOAD FOR CLASS II SHARES SERVICE ORGANIZATIONS
------------------------------------ ---------------------
AS A % OF OFFERING AS A % AS A % OF OFFERING
AMOUNT OF TRANSACTION PRICE PER SHARE OF NAV PRICE PER SHARE
<S> <C> <C> <C>
Less than $100,000 3.75 3.90 3.25
$100,000 to $249,999 3.00 3.09 2.65
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.50 1.52 1.25
$1,000,000 and over 0.50 0.50 0.40

</TABLE>

10
<PAGE>

First Funds; the spouse of a First Funds Trustee, officer or employee; a First
Funds Trustee acting as a custodian for a minor child or grandchild of a First
Funds Trustee, officer or employee; or the child or grandchild of a current or
former Trustee, officer or employee of First Funds who has reached the age of
majority; (d) by a charitable remainder trust or life income pool established
for the benefit of a charitable organization (as defined in Section 501(c)(3) of
the Internal Revenue Code); (e) for use in a financial institution or investment
adviser managed account for which a management or investment advisory fee is
charged; (f) with redemption proceeds from other mutual fund complexes on which
the investor has paid a front-end sales charge within the past 60 days upon
presentation of purchase verification information; or (g) through certain
promotions where the load is waived for investors.

QUANTITY DISCOUNTS

RIGHT OF ACCUMULATION. The sales charge schedule under the heading "How
Are Investments, Exchanges And Redemptions Made? - Public Offering Price" shows
that the sales load you will pay on Class II shares is reduced as your aggregate
investment increases. The Right of Accumulation allows you to combine certain
First Funds investments to determine your aggregate investment and the
applicable reduced sales load. You may combine the amount of your investment in
the Portfolio's Class II shares with the value of your investment in Class II of
any other First Funds Portfolio you own and on which you paid a sales load. If
you are a participant in a First Funds IRA or if you are a trustee or custodian
of another type of First Funds retirement plan, you may also include as part of
your aggregate investment any holdings through the IRA or in the plan even if a
load was not paid. If for example, you beneficially own Class II shares of a
First Funds Portfolio with an aggregate current value of $99,000 and you
subsequently purchase shares of the Portfolio having a current value of $1,000,
the load applicable to the subsequent purchase would be reduced to 3.00% of the
offering price. Similarly, each subsequent purchase of First Funds Class II
shares may be added to your aggregate investment at the time of purchase to
determine the applicable sales loads.

11
<PAGE>

full amount indicated at the sales load in effect at the time of signing, but
you must complete the intended purchase to obtain the reduced sales load. To
apply, sign the Letter of Intent form at the time you purchase Class II shares.
You will be entitled to the applicable sales load that is in effect at the date
you submit the Letter of Intent until you complete your intended purchase.

- purchases by your spouse or his, her or your joint account or for
the account of any minor children, and

- the aggregate investment of any trustee or other Institutional
Investor for you and/or your spouse or your minor children.

A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.

OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "What Advisory And Other Fees Does The Portfolio Pay? -
Distribution Plan and Shareholder Servicing Plans."

CLASS III

CLASS I, II AND III
- -------------------

HOW ARE PORTFOLIO SHARES VALUED?

The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of the Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to the
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class-specific liabilities, and dividing the result by the
number of shares outstanding in the Class.

The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or if quotations are
not available, by a method that the Trustees believe accurately reflects fair
value. Foreign securities are valued on the basis of quotations from the
primary United States market in which they are traded or, if not traded on a
U.S. market, then their primary foreign market, and translated from foreign
market quotations into U.S. dollars using current exchange rates.

DISTRIBUTION OPTIONS: The Portfolio earns interest from bond, money
market, and other fixed-income investments and dividends from its stocks. These
are passed along as dividend distributions. The Portfolio may realize capital
gains if it sells securities for a higher price than it paid for them. These are
passed along as capital gain distributions. Income dividends for the Total
Return Fixed Income Portfolio are declared daily and paid monthly.

When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are three available options:

2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.

3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will
be automatically reinvested, but you will be sent a check for any dividend
distribution.

HOW ARE EXCHANGES MADE?

12
<PAGE>

below, each Portfolio's shares may be exchanged for the same class shares of
other First Funds Portfolios. The redemption and purchase will be made at the
next determined NAV after the exchange request is received and accepted by
CGFSC. You may execute exchange transactions by calling CGFSC at 1-800-442-1941
(option 2) prior to 4:00 p.m. Eastern Time on any Business Day.

Each exchange may produce a gain or loss for tax purposes. In order to
protect the Portfolio's performance and its shareholders, First Tennessee
discourages frequent exchange activity in response to short-term market
fluctuations. The Portfolio reserves the right to refuse any specific purchase
order, including certain purchases by exchange if, in First Tennessee's opinion,
the Portfolio would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if the Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although the Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. The Portfolio reserves the right to modify or withdraw
the exchange privilege upon 60 days notice and to suspend the offering of shares
in any class without notice to shareholders. You or your Institutional Investor
will receive written confirmation of each exchange transaction.

Exchanges are generally not permitted from Class I to another Class. Should
a beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I , Class I shares held in an Institutional Account may be converted to
shares of another class.

STATEMENTS AND REPORTS

You or, if Class I, the Institutional Investor will receive a monthly
statement and a confirmation after every transaction that affects the share
balance or the account registration. A statement with tax information will be
mailed by January 31 of each tax year and also will be filed with the IRS. At
least twice a year, you or, if Class I, the Institutional Investor, will receive
the Portfolio's financial statements. To reduce expenses, only one copy of the
Portfolio's reports (such as the Prospectus and Annual Report) will be mailed to
each investor or, if Class I, each Institutional Investor. Please write to ALPS
at the address indicated on the previous page to request additional copies.

- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------

From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the interest income it earned from its
portfolio securities for a 30-day period (net of expenses), divides it by the
average number of shares entitled to receive dividends, and expresses the result
as an annualized percentage rate based on share price at the end of the 30-day
period. Yields do not reflect gains or losses from portfolio transactions.
Yields are calculated according to accounting methods that are standardized for
all mutual funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the Portfolio's yield may not equal its
distribution rate, the income paid to an account, or the income reported in
financial statements.

TOTAL RETURN for Class I, II or III of the Portfolio is based on the
overall dollar or percentage change in value of a hypothetical investment,
assuming dividends are reinvested. A CUMULATIVE TOTAL RETURN reflects
performance over a stated period of time. An AVERAGE ANNUAL TOTAL RETURN
reflects the hypothetical annually compounded rate that would have produced the
same cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in
performance, you should recognize that they are not the same as actual
year-by-year results. The yield and total returns of the three classes of the
Portfolio are calculated separately due to separate expense structures as
indicated in the "Summary Of Portfolio Expenses"; the yields and total returns
of Class II and Class III will be lower than that of Class I.

For additional performance information, contact your Investment
Professional or ALPS for a free Statement of Additional Information for the
Portfolio.

13
<PAGE>

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

FEDERAL TAXES. Distributions from the Portfolio's taxable income and
short-term capital gains, if any, are taxed as dividends, and long-term capital
gain distributions, if any, are taxed as long-term capital gains. Distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in December and paid in
January are taxable as if paid on December 31. The Portfolio will send each
investor or, if Class I, each Institutional Investor an IRS Form 1099-DIV by
January 31.

OTHER TAX INFORMATION. The information above is only a summary of some of
the federal tax consequences generally affecting the Portfolio and its
shareholders, and no attempt has been made to discuss individual tax
consequences. In addition to federal tax, distributions may be subject to state
or local taxes. Institutional Investors and other shareholders should consult
their tax advisor for details and up-to-date information on the tax laws in your
state to determine whether the Portfolio is suitable given your particular tax
situation. It is not anticipated that the Portfolio's distributions will be
exempt from Tennessee personal income tax, except to the extent that any
distributions of income are attributable to interest on bonds or securities of
the U.S. government or any of its agencies or instrumentalities.

INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Portfolio is obligated to pay
First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management
fee at the annual rate of .50% of its average net assets. First Tennessee has
voluntarily agreed to waive its entire advisory fee.This voluntary waiver can be
discontinued at any time.

14
<PAGE>

Portfolio's assets, subject to the terms and conditions of the Investment
Advisory and Management Agreement and the written agreement with any such
sub-adviser. In the event one or more sub-advisers is appointed by First
Tennessee, First Tennessee shall monitor and evaluate the performance of such
sub-advisers, allocate Portfolio assets to be managed by such sub-advisers,
recommend any changes in or additional sub-advisers when appropriate and
compensate each sub-adviser out of the investment advisory fee received by First
Tennessee from the Portfolio.

Highland serves as the Sub-Adviser for the Portfolio subject to the
supervision of First Tennessee and pursuant to the authority granted to it under
its Sub-Advisory Agreement with First Tennessee. On March 1, 1994, Highland
merged with and into First Tennessee Investment Management, Inc. (FTIM), an
affiliate of First Tennessee, and changed its name to Highland Capital
Management Corp. FTIM (now Highland), has been a wholly-owned subsidiary of
First Tennessee National Corporation since 1972. First Tennessee and Highland
have a history of investment management that dates back to 1929. Highland has a
total of $2.6 billion in assets under management as of June 30, 1997. First
Tennessee is obligated to pay Highland a monthly sub-advisory fee at the annual
rate of .30% of the Portfolio's average net assets. Highland is currently
waiving some or all of its fees for the Portfolio.

ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver
Colorado, 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to the Portfolio. ALPS is entitled to receive from the Portfolio a monthly fee
at the annual rate of .15% of average net assets. ALPS has voluntarily agreed to
waive its full administration fee for the first six months of the portfolio's
operation.

First Tennessee serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in the Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from the Portfolio a monthly fee at the annual
rate of .05% of average net assets.

As the Distributor, ALPS sells shares of each Portfolio as agent on behalf
of the Trust at no additional cost to the Trust. First Tennessee and its
affiliates do not participate in and are not responsible for selling as an agent
on behalf of the Trust, underwriting or distributing Trust shares. Consistent
with applicable law, affiliates of First Tennessee may receive commissions or
asset-based fees.

PRICING AND ACCOUNTING. CGFSC also serves as the Fund Accountant and
thereby calculates the NAV and dividends of each class and maintains the
portfolio and general accounting records.

DISTRIBUTION PLANS AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant to
Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to the Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
The Distribution Plan provides for payment of a fee to ALPS at the annual rate
of .75% of the average net assets of Class III. All or a portion of these fees
will in turn be paid to Investment Professionals as compensation for selling
shares of Class III and for providing ongoing sales support services. The
Trustees have also adopted Shareholder Servicing Plans on behalf of Class II and
III of the Portfolio, under which Service Organizations are paid at the annual
rate of .25% of each Class' average net assets, for shareholder services and
account maintenance, including responding to shareholder inquiries, directing
shareholder communications, account balance maintenance, and dividend posting.
The Distribution Fees are expenses of Class III and the Shareholder Servicing
Fees are expenses of Class II and III in addition to the Management Fee, and the
Administration Fee and Co-Administration Fees, and will reduce the net income
and total return of both Classes.

15
<PAGE>

- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------

The Portfolio is a diversified portfolio of First Funds, an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Portfolio consists of three separate classes. The Trustees
supervise the Trust's activities and review its contractual arrangements with
companies that provide the Trust with services. The Trust is not required to
hold annual shareholder meetings, although special meetings may be called for a
specific Portfolio or class with respect to issues affecting that Portfolio or
class, or the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving investment advisory
agreements. Shareholders receive one vote for each share owned and fractional
votes for fractional shares owned. A Portfolio or class votes separately with
respect to issues affecting only that Portfolio or class. Pursuant to the
Declaration of Trust, the Trustees have the authority to issue additional
classes of shares for the Portfolio.

Portfolio Management

James R. Turner is one of the Portfolio Managers for the Intermediate Bond
Portfolio. He is a Senior Vice President of Highland and is a Chartered
Financial Analyst. Mr. Turner is a graduate of the U.S. Military Academy and
received a Masters of Science in Industrial Engineering from Stanford
University.

Steven Wishnia, one of the Portfolio Managers for the Intermediate Bond
Portfolio, is a Director and Chairman of the Board of Highland. He joined
Highland in April, 1987. Mr. Wishnia is a graduate of Pace University.

The value of mortgage-backed securities may change due to changes in the
market's perception of issuers including their credit-worthiness. In addition,
regulatory or tax changes may adversely affect the mortgage securities market as
a whole. Non-government mortgage-backed securities may offer higher yields than
those issued by government entities, but also may be subject to greater price
changes than government issues. Mortgage-backed securities are subject to
prepayment risk. Prepayment, which occurs when unscheduled or early payments are
made on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns. Some securities may have a
structure that makes their reaction to changing interest rates and other factors
difficult to predict and highly volatile.

COMMERCIAL PAPER purchased by the Portfolio are short-term obligations
issued by banks, broker-dealers, corporations and other entities for purposes
such as financing their current operations.

16
<PAGE>

purchased in this way may change before the delivery date, which could increase
fluctuations in the Portfolio's share price, yield, and return. Ordinarily, the
Portfolio will not earn interest on obligations until they are delivered.

FOREIGN INVESTMENTS. The Portfolio may invest in foreign securities, which
may involve additional risks. Foreign securities and securities denominated in
or indexed to foreign currencies may be affected by the strength of foreign
currencies relative to the U.S. dollar, or by political, regulatory or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Foreign markets
may be less liquid or more volatile than U.S. markets, and may offer less
protection to investors. In addition to the political and economic factors that
can affect foreign securities, a governmental issuer may be unwilling to repay
principal and interest when due, and may require that the conditions for payment
be renegotiated. These factors could make foreign investments, especially those
in developing countries, more volatile. Highland considers these factors in
making foreign investments for the Portfolio.

ILLIQUID SECURITIES. Under guidelines established by the Board of
Trustees, Highland, under First Tennessee 's supervision, determines the
liquidity of the Portfolio's investments. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments or securities subject to legal restrictions
may involve time-consuming negotiation and legal expenses. It may be difficult
or impossible for the Portfolio to sell illiquid or restricted securities
promptly at an acceptable price. The Portfolio may invest up to 15% of its net
assets in illiquid investments.

17
<PAGE>

Options can be volatile investments and involve certain risks. If Highland
applies a hedge at an inappropriate time or judges market conditions
incorrectly, options strategies may result in a loss and lower the Portfolios
return. The Portfolio could also experience losses if the prices of its options
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. The use of
options may increase the volatility of the Portfolio and may involve the
investment of a small amount of cash relative to the risk assumed.

REPURCHASE AGREEMENTS are transactions by which a Portfolio agrees to
purchase a security subject to the seller's agreement to repurchase it at a
mutually agreed upon date and price. In the event of the bankruptcy of the
seller, a Portfolio could experience delays in recovering its cash. In the event
of the bankruptcy of the other party to a repurchase agreement or a securities
loan, the Portfolio could experience delays in recovering its cash or the
securities it lent. To the extent that, in the meantime, the value of the
obligations purchased had decreased, or the value of obligations lent had
increased, a Portfolio could experience a loss. In all cases, Highland must find
the creditworthiness of the other party to the transaction satisfactory.

U.S. TREASURY OBLIGATIONS purchased by the Portfolio are obligations issued
by the United States and backed by its full faith and credit.

VARIABLE AND FLOATING RATE INSTRUMENTS purchased by the Intermediate Bond
Portfolio, including certain participation interests in municipal obligations,
have interest rate adjustment formulas that help to stabilize their market
values. Many variable or floating rate instruments also carry demand features
that permit the Portfolio to sell them at par value plus accrued interest on
short notice. When determining its average weighted portfolio maturity, the
Portfolio will look to the interest readjustment date, rather than the maturity
date, of the instrument.

18
<PAGE>

19
<PAGE>

INVESTMENT ADVISER
------------------

First Tennessee Bank National Association
Memphis, TN

SUB-ADVISER
-----------

Highland Capital Management Corp.
Memphis, TN

OFFICERS
--------

Richard C. Rantzow, President
James V. Hyatt, Secretary
Jeremy O. May, Treasurer

TRUSTEES
--------

Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow

ADMINISTRATOR AND DISTRIBUTOR
-----------------------------

ALPS Mutual Funds Services, Inc.
Denver, CO

TRANSFER AND SHAREHOLDER SERVICING AGENT
----------------------------------------

Chase Global Funds Services Company
Boston, MA

CUSTODIAN
---------

Chase Manhattan Bank, N.A.
New York, NY

<PAGE>

[LOGO]

FIRST FUNDS 370 17th Street
Suite 3100
TENNESSEE TAX-FREE PORTFOLIO Denver, Colorado 80202

First Funds (the Trust) offers investors a convenient and economical means
of investing in a professionally managed mutual fund. The objective of the
Tennessee Tax-Free Portfolio (the Portfolio) is to seek a high level of current
income, which is exempt from federal and Tennessee personal income tax, by
investing in a portfolio consisting primarily of Tennessee tax-exempt
obligations. The Portfolio's net asset value per share will fluctuate in
response to changes in the value of its investments.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY
STATE OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
IN SUCH STATE OR JURISDICTION.

- ----------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
Summary Of Portfolio Expenses. . . . . . . . . . . . . . . . . . . . . .3
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . .5
What Is The Investment Objective Of The Portfolio? . . . . . . . . . . .6
Is The Portfolio A Suitable Investment?; Investment Risks. . . . . . . .6
What Are The Portfolio's Investment Policies And Limitations?. . . . . .7
How Are Investments, Exchanges And Redemptions Made? . . . . . . . . . .8
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . 15
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . 16
What Is The Effect Of Income Tax On This Investment? . . . . . . . . . 16
What Advisory And Other Fees Does The Portfolio Pay? . . . . . . . . . 17
How Is The Portfolio Organized?. . . . . . . . . . . . . . . . . . . . 18
Investment Instruments, Transactions, Strategies and Risks . . . . . . 18
- ----------------------------------------------------------------------------

2
<PAGE>

- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------

A. EXPENSE SUMMARY

TENNESSEE TAX-FREE
PORTFOLIO
----------------------------------

SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
Maximum Sales Load on Purchases
(as a percentage of offering price) None 3.75% None
Sales Load Imposed on Reinvested
Distributions None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None

ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .00% .00% .00%
12b-1 Fees* .00% .00% .25%
Other Expenses* .64% .64% .66%
---- ---- ----

Total Portfolio Operating Expenses* .64% .64% .91%
---- ---- ----
---- ---- ----

*After expense waivers and/or reimbursements.

ANNUAL PORTFOLIO OPERATING EXPENSES. The Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing the Portfolio's investments. First Tennessee, as Investment
Adviser, has voluntarily agreed to waive its entire investment advisory fee;
however, there is no guarantee that the waiver will continue. The Portfolio
incurs Other Expenses, including Administrative and Co-Administrative Fees, for
maintaining shareholder records, furnishing shareholder statements and reports,
and other services. ALPS, as Administrator, is entitled to and charges .15% of
the Portfolio's average net assets for administration services. ALPS has agreed
to voluntarily waive one half of the .50% 12b-1 fee applicable to Class III of
the Portfolio (see "What Advisory and Other Fees Does The Portfolio Pay -
Distribution Plan and Shareholder Servicing Plans") or .25% of that Class'
average net assets. ALPS reserves the right to modify or terminate this
assumption of 12b-1 expenses at any time. First Tennessee, as Co-Administrator,
is entitled to and charges .05% of the Portfolio's average net assets for
co-administration services.

If the waivers were not in effect, Management Fees would be .50% of
average net assets for each Class. In addition, the Board of Trustees has
limited payments of 12b-1 fees under the Distribution Plan to 0.50% (see "What
Advisory and Other Fees Does The Portfolio Pay - Distribution Plan and
Shareholder Servicing Plans"). Without this limitation, 12b-1 fees would be .75%
of average net assets for Class III for the current fiscal year. Absent these
waivers and limitations, Other Expenses and Total Portfolio Operating Expenses
would be as follows:

TENNESSEE TAX-FREE
PORTFOLIO
--------------------------------

CLASS I CLASS II CLASS III
------- -------- ---------

Other Expenses .64% .89% .91%
Total Portfolio Operating Expenses 1.14% 1.39% 2.16%

3
<PAGE>

There is no guarantee that any waivers or assumptions of expenses will
continue at their stated levels.

Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other
Expenses, are reflected in the Portfolio's share price and are not charged
directly to individual accounts. 12b-1 Fees are paid by Class III to ALPS for
services and expenses in connection with distribution. Shareholder Servicing
Fees are paid by Class II and III to Investment Professionals for services and
expenses incurred in connection with providing personal service to shareholders
and/or maintenance of shareholder accounts. Long-term shareholders may pay more
than the economic equivalent of the maximum 8.50% front-end sales charge
permitted by the National Association of Securities Dealers, Inc. (NASD) due to
12b-1 fees applicable to Class III shares. Please see "What Advisory And Other
Fees Does The Portfolio Pay - Distribution Plan and Shareholder Servicing Plans"
for further information.

B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Tennessee Tax-Free Portfolio assuming
(1) 5% annual return, (2) redemption at the end of each time period, (3) that
operating expenses (net of expense waivers) are the same as described above, and
(4) reinvestment of all dividends and distributions. THE RETURN OF 5% AND
EXPENSES SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED PERFORMANCE
OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY SIGNIFICANTLY:

TENNESSEE TAX-FREE
PORTFOLIO
---------------------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
1 year 7 $44* $9
3 years $21 $57* $29
5 years $36 $72* $51
10 years $80 $115* $112

*Reflects imposition of maximum sales charge at the beginning of the period.

4
<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

TENNESSEE TAX-FREE PORTFOLIO

CLASS I CLASS II CLASS III
-----------------------------------------------------------------------------------

For the Year For the Year For the Year
Ended June 30, Ended June 30, Ended June 30,
-----------------------------------------------------------------------------------
1997 1996** 1997 1996** 1997 1996**
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $9.71 $10.00 $9.73 $10.06 $9.72 $10.00
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.50 0.23 0.51 0.21 0.50 0.19
Net realized and unrealized gain (loss)
on investments 0.28 (0.29) 0.28 (0.33) 0.28 (0.28)
-----------------------------------------------------------------------------------
Total from investment operations 0.78 (0.06) 0.79 (0.12) 0.78 (0.09)
-----------------------------------------------------------------------------------
Distributions:
Net investment income (0.50) (0.23) (0.51) (0.21) (0.50) (0.19)
Net realized gain - - - - - -
-----------------------------------------------------------------------------------
Total distributions (0.50) (0.23) (0.51) (0.21) (0.50) (0.19)
-----------------------------------------------------------------------------------
Net asset value, end of period $9.99 $9.71 $10.01 $9.73 $10.00 $9.72
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------

TOTAL RETURN+ 8.26% (0.65)%# 8.37%*** (1.25)%# 8.20% (0.87)%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $8,935 $5,925 $5,941 $1,875 $5,750 $896
Ratio of expenses to average daily
net assets (1) 0.07% 0.50%* 0.12% 0.49%* 0.23% 0.98%*
Ratio of net investment income to
average net assets 5.09% 4.31%* 5.03% 4.32%* 4.93% 3.83%*
Portfolio turnover rate 122% 8%* 122% 8%* 122% 8%*

(1) During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 1.14% 1.42% 1.14% 1.42% 1.91% 1.91%

</TABLE>

* Annualized.
** Class I and III commenced operations on December 15, 1995. Class II
commenced operations on December 29, 1995.
*** Class II total return does not include the one time sales charge.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.

5
<PAGE>

The Tennessee Tax-Free Portfolio's investment objective is to provide a
high level of current income, which is exempt from federal and Tennessee
personal income tax, by investing in a Portfolio consisting primarily of
Tennessee tax-free obligations. There is no assurance that the Portfolio will
achieve its investment objective.

The Portfolio invests in securities rated at least investment grade by
Moody's Investors Services, Inc. (Moody's) or Standard & Poor's Corporation
(S&P), or another nationally recognized statistical rating service, or in
unrated securities deemed by First Tennessee to be of comparable quality, issued
by the State of Tennessee or any city, county, school district or any other
political agency or sub-division of the State of Tennessee. These may include
tax, revenue, or bond anticipation notes; tax-exempt commercial paper; general
obligation or revenue bonds (including municipal lease obligations and resource
recovery bonds); industrial development bonds; private activity securities;
standby commitments; and tender option bonds. It is a non-fundamental investment
policy of the Portfolio that under normal conditions, it will invest its assets
so that at least 65% of its income will be exempt from Tennessee personal income
tax, and it is a fundamental policy of the Portfolio that at least 80% of its
income will be exempt from federal income tax. As a non-fundamental investment
policy, the Portfolio will invest its assets on an ongoing basis to achieve as
fully as possible income that is tax-exempt for both Tennessee and federal
income tax purposes.

Municipal obligations are issued to raise money for various public
purposes, including general purpose financing for state and local governments as
well as financing for specific projects or public facilities. Municipal
obligations may be backed by the full taxing power of a municipality or by the
revenues from a specific project or the credit of a private organization. Some
municipal obligations are insured by private insurance companies, while others
may be supported by letters of credit furnished by domestic or foreign banks.

It is anticipated that the Portfolio normally will be invested in
intermediate-to-long term bonds, and its dollar-weighted average maturity
generally will be between 5 and 15 years, although it may invest in obligations
of any maturity. If First Tennessee determines that market conditions warrant a
shorter or longer average maturity within the range of 5 to 15 years, the
Portfolio's investments will be adjusted accordingly.

The Portfolio does not intend to invest in federally taxable obligations
under normal conditions; however, it may, for temporary defensive purposes,
invest in high quality taxable money market instruments, including U.S.
government obligations; U.S. Treasury bills, notes and bonds; commercial
paper; repurchase agreements; and reverse repurchase agreements. The
Portfolio may also buy and sell securities on a when-issued or delayed
delivery basis, and may purchase zero coupon bonds.

See "Investment Instruments, Transactions, Strategies And Risks" for a
further discussion of the Portfolio's investments.

By itself, the Portfolio does not constitute a balanced investment plan.
The Portfolio emphasizes both federal and Tennessee personal tax-free income.
Bond funds such as the Portfolio are generally subject to two risk factors: (1)
credit risk and (2) interest rate risk. The Portfolio will seek to manage credit
risk by investing only in securities as described previously in "What is the
Investment Objective of the Portfolio?" In the event a security's credit rating
is downgraded, its value can be expected to decrease. First Tennessee may elect
to continue to hold such securities. The Portfolio will seek to manage interest
rate risk by limiting its average maturity to 15 years or less. An increase in
interest rates will generally reduce the value of portfolio investments and a
decline in interest rates will generally increase the value of portfolio
investments. Shorter-term obligations (such as instruments with maturities of
one year or less) generally offer greater stability and are less sensitive to
interest rate changes. Longer-term bonds of the type in which the Portfolio will
invest offer less stability and are more sensitive to interest rate changes, but
generally offer higher yields. The Portfolio's share price, yield and total
return will fluctuate, and an investment may be worth more or less than the
original cost when shares are redeemed.

In general, the secondary market for Tennessee obligations is less liquid
than that for taxable debt obligations or for large issues of municipal
obligations that trade in a national market. There is, however, an established
resale market for Tennessee obligations in which the Portfolio may invest. These
considerations may have the effect of restricting the availability of such
obligations for the Portfolio to purchase, may affect the choice of securities
sold to meet redemption

6
<PAGE>

requests and may have the effect of limiting the ability of the Portfolio to
sell or dispose of such securities. Also, valuation of such obligations may be
more difficult.

SPECIAL FACTORS CONCERNING THE STATE OF TENNESSEE

Because the Portfolio will ordinarily invest 65% or more of its total
assets in Tennessee obligations, it is more susceptible to factors affecting
Tennessee issuers than is a comparable fund not concentrated in the obligations
located in a single state.

Tennessee contains four geographically separated cities and a number of
small towns spread throughout the state. The demography of the State is such
that its economic strength is concentrated in Nashville, Memphis, Knoxville, and
Chattanooga. The different geographic influences of these cities, strongly
affect the economic growth and diversity of surrounding counties. The state also
contains a number of emerging economic centers such as Johnson
City/Bristol/Kingsport (Tri-Cities), Jackson, and Cookeville. Most of the
remaining counties have more isolated and rural economies. Although rural, most
of these economies often include some diversified, small scale manufacturing
concerns which are often the cornerstone of local employment and personal
income.

Tennessee's industrialized economy is dominated by diverse manufacturing,
which includes automotive, fabricated metals, non-electrical machinery,
electronic equipment, chemicals and textiles. The State's industrial expansion
has left Tennessee vulnerable to national economic cycles and foreign
competition. Consequently, Tennessee has focused on developing growth in the
services sector. The State unemployment rate for August 1997, seasonally
adjusted, increased to 5.1% from 4.4% for August 1996, which is slightly higher
than the national average of 4.9% for August 1997. Per capita income has
steadily increased and in 1996 was 90% of the national average, up from 85% in
1990 and 83% in 1985.

TennCare, the State-provided healthcare plan, replaced Medicaid and insures
all qualified uninsured individuals in the State. This has caused a strain in
the past on the State's finances; however, the costs associated with the program
have stabilized in fiscal 1996.

Tennessee has revamped its education aid program, the Basic Education
Program. In 1993, it increased the State sales tax rate from 5.5% to 6%, with
the additional half percent dedicated to education. Funding under the Basic
Education Program continues to be phased in and is expected to be fully funded
by July 1, 1998. $125 million is estimated to be required during the next
fiscal year for this program.

Tennessee's financial operations are considerably different than most other
states because there is no state payroll income tax. This factor, together with
the State's reliance on the sales tax for approximately 60% of general fund
receipts, exposes total State tax collections to considerably more volatility
than would otherwise be the case and, in the event of an economic downswing,
could affect the State's ability to pay principal and interest in a timely
manner. The second largest revenue generator is the gasoline tax. The General
Fund balance, which was drawn down to $7.3 million in 1991, has since grown to
$128.6 million in fiscal year 1996. The State economy remains strong with
revenue growth of 9% in fiscal 1995. Estimated growth in the current year is
expected to be sufficient to meet increased expenditures. Although the State
continues to experience balanced financial operations, there can be no assurance
that Tennessee's relatively favorable economic performance will continue.

As of the date of this Prospectus, general obligations of the State of
Tennessee are currently rated "AA+," "Aaa" and "AAA" by S&P, Moody's and Fitch
Investors Service, respectively. There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
bond issues may not be adversely affected by changes in economic, political or
other conditions. There are no material state tax considerations for
shareholders of this Portfolio other than those set forth under the section
"What Is The Effect Of Federal Income Tax On This Investment?"

INVESTMENT LIMITATIONS. The Portfolio has adopted the following investment
limitations:

(1) The Portfolio will not invest 25% or more of its total assets in a
particular industry, other than U.S. government obligations.

7
<PAGE>

(2) (a) The Portfolio may borrow money solely for temporary or
emergency purposes, but not in an amount exceeding 33 1/3% of its total
assets. (b) The Portfolio may borrow money from banks or by engaging in
reverse repurchase agreements. (c) The Portfolio will not purchase
securities when borrowings exceed 5% of its total assets. If the Portfolio
borrows money, its share price may be subject to greater fluctuation until
the borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.

Unless otherwise noted, the Portfolio's policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of the Portfolio that require shareholder approval prior to
any changes are: the Portfolio's investment objective, the Portfolio's policy
that, under normal conditions, at least 80% of its income will be exempt from
federal income tax, and limitations (1) and (2)(a) above. With the exception of
the Portfolio's policies and limitations regarding borrowing and investments in
illiquid securities, these limitations and the Portfolio's policies are
considered at the time of purchase of securities; the sale of securities is not
required in the event of a subsequent change in circumstances.

Tennessee Tax-Free Portfolio is classified under the Investment Company Act
of 1940, as amended (1940 Act) as a "non-diversified" investment company, which
allows it to invest more than 5% of its assets in the securities of any issuer,
subject to satisfaction of certain tax requirements. Due to the relatively small
number of issuers of Tennessee obligations, the Portfolio is likely to invest a
greater percentage of its assets in the securities of a single issuer than is an
investment company which invests in a broad range of municipal obligations on a
national scale. The Portfolio is, therefore, more susceptible than a diversified
portfolio to any single adverse economic or political occurrence or development
affecting Tennessee issuers. The Portfolio will also be subject to an
incremental risk of loss if the issuer is unable to make interest or principal
payments or if the market value of such securities declines. It is also possible
that there will not be sufficient availability of suitable Tennessee tax-exempt
obligations for the Portfolio to achieve its objective of providing income
exempt from Tennessee personal income taxes.

The Portfolio may also invest 25% or more of its total assets in municipal
securities whose revenue sources are from similar types of projects, e.g.,
education, electric utilities, health care, housing, transportation, or water,
sewer, and gas utilities. There may be economic, business or political
developments or changes that affect all securities of a similar type.

First Tennessee defines the issuer of a security depending on its terms and
conditions. In identifying the issuer, First Tennessee will consider the entity
or entities responsible for payment of interest and repayment of principal and
the source of such payments; the way in which assets and revenues of an issuing
political subdivision are separated from those of other political entities; and
whether a governmental body is guaranteeing the security.

It is the current position of the SEC staff that the Portfolio may not
derive more than 20% of its income from municipal obligations that pay interest
that is a preference item for purposes of the federal alternative minimum tax
(AMT).

To the extent that the Portfolio invests in private activity obligations,
individuals who are subject to the AMT will be required to report a portion of
the Portfolio's dividends as a "tax preference item" in determining their
federal tax. Income distributions that are a tax preference item for purposes of
the federal AMT are considered to be exempt from federal income tax for purposes
of the Portfolio's fundamental policy that at least 80% of its income will be
federally tax-exempt.

From time to time, the Portfolio to the extent consistent with its
investment objective, policies and restrictions, may invest in securities of
cities, counties or municipalities with which First Tennessee or its affiliates
have lending relationships and may engage in agency brokerage transactions with
First Tennessee. Subject to the terms of the SEC exemptive order received by the
Portfolio on July 15, 1996 , the Portfolio may invest in securities underwritten
by First Tennessee and may engage in brokerage transactions with First Tennessee
acting as principal.

8
<PAGE>

CLASS I
- -------

WHO MAY INVEST?

HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?

HOW ARE INVESTMENTS MADE?

Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If an order is received by CGFSC
prior to 4:00 p.m. Eastern Time on any Business Day (as defined in the section
"How Are Investments, Exchanges And Redemptions Made - Class I, II and III - How
Are Portfolio Shares Valued?") and the funds are received by CGFSC that day, the
investment will earn dividends declared, if any, on the day of purchase.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the net asset value per share (NAV) calculated
after an order is received and accepted by CGFSC. The Portfolio requires advance
notification of all wire purchases. To secure same day acceptance of federal
funds (monies transferred from one bank to another through the Federal Reserve
System with same-day availability), an Institutional Investor must call CGFSC at
1-800-442-1941, (option 2) prior to 4:00 p.m. Eastern Time on any Business Day
to advise it of the wire. The Trust may discontinue offering its shares in any
Class of a Portfolio without notice to shareholders.

Should an Institutional Investor or a beneficial owner of Class I shares
cease to be eligible to participate in this Class, Class I shares held in an
Institutional Account may be converted to shares of another Class. Any such
conversion will be effected on the basis of the relative NAVs of the two classes
without the imposition of any sales load, fee or other charge. Institutional
Investors or beneficial owners will receive at least 30 days prior notice of any
proposed conversion.

HOW ARE REDEMPTIONS MADE?

Institutional Investors may redeem all or a portion of their account shares
on any Business Day. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request and will accrue dividends through the
day of redemption. If an account is closed, any accrued dividends will be paid
at the beginning of the following month.

Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 4:00
p.m. Eastern time on any Business Day, proceeds of the redemption will be wired
as federal funds on the next Business Day to the bank account designated with
CGFSC. An Institutional Investor may change the bank account designated to
receive an amount redeemed at any time by sending a letter of instruction with a
signature guarantee to CGFSC, 73 Tremont Street, Boston, Massachusetts, 02108.
Shares redeemed will earn dividends declared, if any, through the date of
redemption.

9
<PAGE>

Pursuant to the the 1940 Act, if making immediate payment of redemption
proceeds could adversely affect the Portfolio, payments may be made up to seven
days later. Also, when the New York Stock Exchange (NYSE) is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the SEC
to merit such action, the right of redemption may be suspended or the date of
payment postponed for a period of time that may exceed seven days. To the extent
Portfolio securities are traded in other markets on days when either the NYSE or
the Federal Reserve Bank of New York (New York Federal Reserve) is closed, the
Portfolio's NAV may be affected on days when investors do not have access to the
Portfolio to purchase or redeem shares.

If transactions by telephone cannot be executed (for example, during times
of unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, an Institutional Investor may either
withdraw its request for redemption, or it will receive payment based on the NAV
next determined after the termination of the suspension.

ADDITIONAL INFORMATION

CLASS II AND III
- ----------------

WHO MAY INVEST?

INVESTMENT REQUIREMENTS

All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances, stated above,
which reduce the minimum investment requirement). The Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled, and you could be liable for any
losses or fees incurred.

10
<PAGE>

calls, and you should verify the accuracy of your confirmation statements
immediately after you receive them. If you do not want to be able to redeem and
exchange by telephone, please check the box on your application (if you invest
directly) or, if you invest through an Investment Professional, please call your
Investment Professional for instructions.

HOW DO I SET UP AN ACCOUNT?

You may set up an account directly in the Portfolio or you may invest in
the Portfolio through your Investment Professional (see "How Do I Invest Through
My Investment Professional" below). Shares will be purchased based on the NAV
next calculated after CGFSC has received the request in proper form. If you are
investing through an Investment Professional, transactions that your Investment
Professional initiates should be transmitted to CGFSC before 4:00 p.m. Eastern
Time in order for you to receive that day's share price. CGFSC must receive
payment within three business days after an order is placed. Otherwise, the
purchase order may be canceled and you could be held liable for the resulting
fees and/or losses. An investment will begin accruing dividends on the day
following purchase.

HOW DO I INVEST DIRECTLY?

Investments may be made in several ways:

BY MAIL: Make your check payable to First Funds: Tennessee Tax-Free, and
mail it, along with the application, to the address indicated on the
application. Your account will be credited on the business day that CGFSC
receives your application in good order.

Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*

Prior to sending wires, please be sure to call 1-800-442-1941, (option 2)
to receive a Wire Control Number to be included in the body of the wire (see
above).

Your bank may charge you a fee for this service.

HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?

You may redeem shares in several ways:

11
<PAGE>

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

SYSTEMATIC INVESTING PROGRAM

The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941, (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.

SYSTEMATIC WITHDRAWAL PLAN

12
<PAGE>

CLASS II
- --------

PUBLIC OFFERING PRICE

</TABLE>

The reallowance to Service Organizations may be changed from time to time. ALPS,
at its expense, may provide additional non-cash promotional incentives to
eligible representatives of Service Organizations in the form of attendance at a
sales seminar at a resort. These incentives may be limited to certain eligible
representatives of Service Organizations who have sold significant numbers of
shares of any of the Portfolios of the Trust.

QUANTITY DISCOUNTS

13
<PAGE>

determine your aggregate investment and the applicable reduced sales load. You
may combine the amount of your investment in the Portfolio's Class II shares
with the value of your investment in Class II of any other First Funds Portfolio
you own and on which you paid a sales load. If you are a participant in a First
Funds IRA or if you are a trustee or custodian of another type of First Funds
retirement plan, you may also include as part of your aggregate investment any
holdings through the IRA or in the plan even if a load was not paid. If, for
example, you beneficially own Class II shares of a First Funds Portfolio with an
aggregate current value of $99,000 and you subsequently purchase shares of the
Portfolio having a current value of $1,000, the load applicable to the
subsequent purchase would be reduced to 3.50% of the offering price. Similarly,
each subsequent purchase of First Funds Class II shares may be added to your
aggregate investment at the time of purchase to determine the applicable sales
loads.

If your purchases qualify for a further sales load reduction in addition to
that indicated in the Letter of Intent, the sales load will be adjusted to
reflect your total purchases. Signing a Letter of Intent does not bind you to
purchase the full amount indicated at the sales load in effect at the time of
signing, but you must complete the intended purchase to obtain the reduced sales
load. To apply, sign the Letter of Intent form at the time you purchase Class
II shares. You will be entitled to the applicable sales load that is in effect
at the date you submit the Letter of Intent until you complete your intended
purchase.

- purchases by your spouse or his, her or your joint account or for the
account of any minor children, and

- the aggregate investment of any trustee or other Institutional Investor
for you and/or your spouse or your minor children.

A trustee or custodian of any qualified pension or profit sharing plan may
combine its aggregate purchases.

OTHER. Class II shares also incur Shareholder Servicing Fees. See
discussion under "What Advisory And Other Fees Does The Portfolio Pay? -
Distribution Plan and Shareholder Servicing Plans."

CLASS III

CLASS I, II AND III
- -------------------

HOW ARE PORTFOLIO SHARES VALUED?

The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class is calculated by adding that Class' pro rata share of the
value of all securities and other assets attributable to the Portfolio,
deducting that Class' pro rata share of Portfolio liabilities, further deducting
Class specific liabilities, and dividing the result by the number of shares
outstanding in that Class.

14
<PAGE>

The Portfolio's securities and other assets are valued primarily on the
basis of market quotations furnished by pricing services, or, if quotations are
not available, by a method that the Trustees believe accurately reflects fair
value.

DISTRIBUTION OPTIONS: The Portfolio earns interest from its bond, money
market, and other fixed-income investments. These are passed along as dividend
distributions. The Portfolio may realize capital gains if it sells securities
for a higher price than it paid for them. These are passed along as capital gain
distributions. Income dividends for the Tennessee Tax-Free Portfolio are
declared daily and paid monthly.

When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are two available options:

2. CASH OPTION. You will be sent a check for each dividend and capital
gain distribution, if any. Distribution checks will be mailed no later than
seven days after the last day of the month.

3. INCOME-EARNED OPTION. Your capital gain distributions, if any, will be
automatically reinvested, but you will be sent a check for any dividend
distribution.

HOW ARE EXCHANGES MADE?

STATEMENTS AND REPORTS

You or, if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
or, if Class I, the Institutional Investor, will receive the Portfolio's
financial statements. To reduce expenses, only one copy of the Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.

15
<PAGE>

- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------

From time to time the Portfolio may quote the yield of Class I, II or III
shares in advertisements or in reports or other communications with
shareholders. The YIELD is a way of showing the rate of income that the
Portfolio earns on its investments as the percentage of its share price. To
calculate yield, the Portfolio takes the net investment income it earned from
its Portfolio securities for a 30-day period, divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on share price at the end of the 30-day period.
Yields do not reflect gains or losses from portfolio transactions. Yields are
calculated according to accounting methods that are standardized for all mutual
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Portfolio's yield may not equal its distribution rate,
the income paid to an account, or the income reported in financial statements.

The Portfolio also may quote the TAX EQUIVALENT YIELD, which shows the
taxable yield an investor would have to earn, before taxes, to equal the
tax-free yield. A tax equivalent yield is calculated by dividing the tax-exempt
current yield by the result of one minus a combined federal and Tennessee tax
rate.

For additional performance information, contact your Investment
Professional or ALPS for a free Annual Report and Statement of Additional
Information for the Portfolio.

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

Municipal obligations and other fixed income securities are generally
traded in the over-the-counter market through broker-dealers. Broker-dealers are
utilized to conduct securities transactions for the Portfolio and are chosen
based upon professional ability and quality of service. In addition, the
Portfolio's investment advisers may consider a broker-dealer's sales of shares
of the Portfolio or recommendations to its customers that they purchase shares
of the Portfolio as a factor in the selection of broker-dealers to execute
transactions for the Portfolio. In placing business with such broker-dealers,
the advisers will seek the best execution of each transaction.

Higher commissions may be paid to firms that provide research services
to the extent permitted by law. The frequency of Portfolio transactions - the
portfolio turnover rate - will vary from year to year depending on market
conditions. The Portfolio's portfolio turnover rate for the fiscal year ended
June 30, 1997 was 122%.

- --------------------------------------------------------------------------------
WHAT IS THE EFFECT OF INCOME TAX ON THIS INVESTMENT?
- --------------------------------------------------------------------------------

The Portfolio intends to distribute substantially all of its net investment
income, and capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis. Any net capital gains realized are normally
distributed in December. Income dividends for the Portfolio are declared daily
and paid monthly.

FEDERAL TAXES. Distributions from the Portfolio's taxable income and
short-term capital gains, if any, are taxed as dividends, and long-term capital
gain distributions, if any, are taxed as long-term capital gains. Distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in December and paid in
January are taxable as if paid on December 31. The Portfolio will send each
investor or, if Class I, each Institutional Investor, an IRS Form 1099-DIV by
January 31.

Federally tax-free interest earned by the Portfolio is federally tax-free
when distributed as income dividends. If the Portfolio earns federally taxable
income from any of its investments, it will be distributed as a taxable
dividend. Gains

16
<PAGE>

from the sale of tax-free bonds results in a taxable capital gain distribution.
Short-term capital gains and a portion of the gain on bonds purchased at a
discount are taxed as dividends.

STATE TAXES. In the opinion of Fund counsel, Baker, Donelson, Bearman &
Caldwell, Memphis, Tennessee, distributions received from the Portfolio will not
be subject to Tennessee personal income taxes to the extent such distributions
are attributable to interest on bonds or securities of the U.S. government or
any of its agencies or instrumentalities, or on bonds or securities issued by
the State of Tennessee or any county, municipality or political subdivision of
Tennessee, including any agency, board, authority or commission thereof, without
regard to maturity.

CAPITAL GAINS. A capital gain or loss may be realized when shares of the
Portfolio are redeemed or exchanged. For most types of accounts, the Portfolio
will report the proceeds of redemptions to each investor or, if Class I, each
Institutional Investor and the IRS annually. However, because the tax treatment
also depends on the purchase price and the investor's personal tax position,
regular account statements should be used to determine the tax gain or loss.

"BUYING A DIVIDEND." On the record date for a capital gain distribution,
the Portfolio's share price is reduced by the amount of the distribution. If
shares are bought just before the record date ("buying a dividend"), the full
price for the shares will be paid, and a portion of the price may be received
back as a taxable distribution. Consult your tax advisor for more information.

OTHER TAX INFORMATION. The information above is only a summary of some of
the federal and Tennessee tax consequences generally affecting the Portfolio and
its shareholders, and no attempt has been made to discuss individual tax
consequences. You should consult your tax adviser for details and up-to-date
information on the tax laws in your state to determine whether the Portfolio is
suitable given a your particular tax situation.

When you sign an account application, you will be asked to certify that
your taxpayer identification number is correct and that you are not subject to
backup withholding for failing to report income to the IRS. If you do not comply
with IRS regulations, the IRS can require the Portfolio to withhold 31% of
distributions from your account.

INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, the Tennessee Tax-Free Portfolio
is obligated to pay First Tennessee a monthly management fee at the annual rate
of .50% of its average net assets. First Tennessee has voluntarily agreed to
waive its entire fee. This voluntary waiver can be discontinued at any time.

Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees and the shareholders of the
Portfolio, engage one or more sub-advisers which may have full investment
discretion to make all determinations with respect to the investment and
reinvestment of all or any portion of the Portfolio's assets, subject to the
terms and conditions of the investment advisory agreement and the written
agreement with any such sub-adviser. In the event one or more sub-advisers is
appointed by First Tennessee, First Tennessee shall monitor and evaluate the
performance of such sub-advisers, allocate Portfolio assets to be managed by
such sub-advisers, recommend any changes in or additional sub-advisers when
appropriate and compensate each sub-adviser out of the investment advisory fee
received by First Tennessee from the Portfolio.

ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver,
Colorado 80202, serves as the Administrator and Distributor for the Portfolio.
As Administrator, ALPS assists in the Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to each Portfolio. ALPS is entitled to and receives from the Portfolio a monthly
fee at the annual rate of .15% of average net assets. ALPS has agreed to
voluntarily assume one half of the .50% 12b-1 fee charged by Class III of the
Portfolio or .25% of that Class' average net assets. ALPS reserves the right to
modify or terminate this assumption of 12b-1 expense at any time.

17
<PAGE>

PRICING AND ACCOUNTING. CGFSC also serves as the Fund Accountant and
thereby calculates the NAV and dividends of each class and maintains the
portfolio and general accounting records.

DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLANS. The Trustees have
adopted a Distribution Plan on behalf of Class III of the Portfolio pursuant to
Rule 12b-1 (the Rule) under the 1940 Act, as amended. The NASD subjects
asset-based sales charges to its maximum sales charge rule. Fees paid pursuant
to the Portfolio's Distribution Plan will be limited by the restrictions imposed
by the NASD rule. The Distribution Plan provides for payment of a fee to ALPS at
the annual rate of up to .75% of the average net assets of Class III; however,
the Trustees have limited such fees to .50% of Class III's average net assets.
ALPS has agreed to voluntarily waive one half of the 0.50% 12b-1 fee applicable
to Class III of the Portfolio or 0.25% of that Class' average net assets. All or
a portion of these fees will in turn be paid to Investment Professionals as
compensation for selling shares of Class III and for providing ongoing sales
support services. The Trustees have also adopted Shareholder Servicing Plans on
behalf of Class II and Class III of the Portfolio under which Investment
Professionals may be paid at an annual rate of up to .25% of the average net
assets of each Class for shareholder services and account maintenance including
responding to shareholder inquiries, directing shareholder communications,
account balance maintenance and dividend posting. Shareholder Servicing Fees for
Class II or Class III have not currently been authorized by the Board of
Trustees although such fees may become effective at a future time. The
Distribution Fees are expenses of Class III, and the Shareholder Servicing Fees
would be expenses of Class II and III in addition to the Management Fee, and
Administration and Co-Administration Fees, and would reduce the net income and
total return of both Classes.

- --------------------------------------------------------------------------------
HOW IS THE PORTFOLIO ORGANIZED?
- --------------------------------------------------------------------------------

The Tennessee Tax-Free Portfolio is a non-diversified portfolio of First
Funds, an open-end management investment company organized as a Massachusetts
business trust by a Declaration of Trust dated March 6, 1992, as amended and
restated on September 4, 1992. The Portfolio consists of three separate Classes.
The Trustees supervise the Trust's activities and review its contractual
arrangements with companies that provide the Trust with services. The Trust is
not required to hold annual shareholder meetings, although special meetings may
be called for a specific Portfolio or class with respect to issues affecting
that Portfolio or Class, or the Trust as a whole, for purposes such as electing
or removing Trustees, changing fundamental policies or approving investment
advisory agreements. Shareholders receive one vote for each share owned and
fractional votes for fractional shares owned. A Portfolio or Class votes
separately with respect to issues affecting only that Portfolio or Class.
Pursuant to the Declaration of Trust, the Trustees have the authority to issue
additional Classes of shares for the Portfolio.

PORTFOLIO MANAGEMENT

Ralph W. Herbert, Vice President and Portfolio Manager, has eighteen years
experience in the financial services industry and specializes in fixed income
securities. Before joining First Tennessee in 1991, he was with Valley Fidelity
Bank and Trust Company (Valley), Knoxville, Tennessee, for three years. For the
two years prior to joining Valley, he was a municipal debt underwriter.

- --------------------------------------------------------------------------------
INVESTMENT INSTRUMENTS, TRANSACTIONS, STRATEGIES AND RISKS.
- --------------------------------------------------------------------------------

The following paragraphs provide a brief description of the securities in
which the Portfolio may invest and the transactions it may make. The Portfolio
is not limited by this discussion, however, and may purchase other types of
securities and may enter into other types of transactions if they are consistent
with the Portfolio's investment objective and policies.

18
<PAGE>

DELAYED DELIVERY TRANSACTIONS. The Portfolio may buy and sell obligations
on a when-issued or delayed delivery basis, with payment and delivery taking
place at a future date. The market value of obligations purchased in this way
may change before the delivery date, which could increase fluctuations in the
Portfolio's share price, yield, and return. Ordinarily, the Portfolio will not
earn interest on obligations until they are delivered.

DEMAND FEATURES AND STAND-BY COMMITMENTS. A demand feature is a put that
entitles the security holder to repayment of the principal amount of the
underlying security at any time or at specified intervals. A standby commitment
is a put that entitles the security holder to same-day settlement at amortized
cost plus accrued interest.

ILLIQUID INVESTMENTS. Under guidelines established by the Trustees, First
Tennessee determines the liquidity of the Portfolio's investments. The absence
of a trading market can make it difficult to ascertain a market value for
illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expense, and it may be difficult or
impossible for the Portfolio to sell them promptly at an acceptable price. The
Portfolio may invest up to 15% of its assets in illiquid investments and private
placements.

LETTERS OF CREDIT. Issuers or financial intermediaries who provide demand
features or standby commitments often support their ability to buy obligations
on demand by obtaining LETTERS OF CREDIT (LOCS) or other guarantees from
domestic or foreign banks. LOCs also may be used as credit supports for
municipal instruments. First Tennessee may rely upon its evaluation of a bank's
credit in determining whether to purchase an instrument supported by an LOC. In
evaluating a foreign bank's credit, First Tennessee will consider whether
adequate public information about the bank is available and whether the bank may
be subject to unfavorable political or economic developments, currency controls,
or other governmental restrictions that might affect the bank's ability to honor
its credit commitment.

MUNICIPAL LEASE OBLIGATIONS are issued by a state and local government or
authority to acquire land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the municipality's credit, and
their interest may become taxable if the lease is assigned. If funds are not
appropriated for the following year's lease payments, the lease may terminate,
with the possibility of significant loss to the Portfolio. CERTIFICATES OF
PARTICIPATION in municipal lease obligations or installment sales contracts
entitle the holder to a proportionate interest in the lease- purchase payments
made.

MUNICIPAL REFUNDING COLLATERALIZED MORTGAGE OBLIGATIONS (MR CMOs) are CMOs
originated from revenue bonds issued to fund low interest rate mortgages for
first time home buyers with low to moderate incomes. The security is considered
a "mortgage related security" for investment purposes; therefore, banks have no
investment limitations or restrictions for purchasing the security for their own
account. MR CMOs are attractive for investors seeking triple-A credit quality
with above average yield.

CMOS are pass-through securities collateralized by mortgages or
mortgage-backed securities. CMOs are issued in classes and series that have
different maturities and often are retired in sequence. Payment of principal and
interest may be largely dependent upon the cash flows generated by the assets
backing the securities.

MUNICIPAL SECURITIES include GENERAL OBLIGATION SECURITIES, which are
backed by the full taxing power of a municipality, and REVENUE SECURITIES, which
are backed by the revenues of a specific tax, project, or facility. INDUSTRIAL
REVENUE BONDS are a type of revenue bond backed by the credit and security of a
private issuer and may involve greater risk. PRIVATE ACTIVITY MUNICIPAL
SECURITIES, which may be subject to the federal alternative minimum tax, include
securities issued to finance housing projects, student loans, and privately
owned solid waste disposal and water and sewage treatment facilities. TAX AND
REVENUE ANTICIPATION NOTES are issued by municipalities in expectation of future
tax or other revenues and are payable from those specific taxes or revenues.
BOND ANTICIPATION NOTES normally provide interim financing in advance of an
issue of bonds or notes, the proceeds of which are used to repay the
anticipation notes.

TAX-EXEMPT COMMERCIAL PAPER are promissory notes issued by municipalities
to help finance short-term capital or operating needs.

RESOURCE RECOVERY BONDS are a type of revenue bond issued to build
facilities such as solid waste incinerators or waste-to-energy plants.
Typically, a private corporation will be involved, at least during the
construction phase, and the

19
<PAGE>

revenue stream will be secured by fees or rents paid by municipalities for use
of the facilities. The viability of a resource recovery project, environmental
protection regulations, and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.

REFUNDING CONTRACTS. The Portfolio may purchase securities on a
when-issued basis in connection with the refinancing of an issuer's outstanding
indebtedness. Refunding contracts require the issuer to sell and the Portfolio
to buy refunded municipal obligations at a stated price and yield on a
settlement date that may be several months or several years in the future.
Although the Portfolio may sell its rights under a refunding contract, these
contracts are relatively new and the secondary market for them may be less
liquid than the secondary market for other types of municipal securities.

U.S. GOVERNMENT OBLIGATIONS are debt obligations issued or guaranteed by
the U.S. Treasury or by an agency or instrumentality of the U.S. government. Not
all U.S. government obligations are backed by the full faith and credit of the
United States. For example, obligations issued by the Federal Farm Credit Bank
or by the Federal National Mortgage Association are supported by the agency's
right to borrow money from the U.S. Treasury under certain circumstances.
Obligations issued by the Federal Home Loan Bank are supported only by the
credit of the agency. There is no guarantee that the government will support
these types of obligations, and ,therefore, they involve more risk than other
government obligations.

U.S. TREASURY OBLIGATIONS are obligations issued by the United States and
backed by its full faith and credit.

VARIABLE AND FLOATING RATE INSTRUMENTS, including certain participation
interests in municipal obligations, have interest rate adjustment formulas that
help to stabilize their market values. Many variable or floating rate
instruments also carry demand features that permit the Portfolio to sell them at
par value plus accrued interest on short notice.

20
<PAGE>

21
<PAGE>

22
<PAGE>

23
<PAGE>

INVESTMENT ADVISER AND CO-ADMINISTRATOR

First Tennessee Bank National Association
Memphis, TN

OFFICERS

Richard C. Rantzow, President
Jeremy O. May, Treasurer
James V. Hyatt, Secretary

TRUSTEES

Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow

ADMINISTRATOR AND DISTRIBUTOR

ALPS Mutual Funds Services, Inc.
Denver, CO

TRANSFER AND SHAREHOLDER SERVICING AGENT

Chase Global Funds Services Company
Boston, MA

CUSTODIAN

Chase Manhattan Bank, N.A.
New York, NY

<PAGE>

[LOGO]

FIRST FUNDS

U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO 370 17th Street
MUNICIPAL MONEY MARKET PORTFOLIO Suite 3100
CASH RESERVE PORTFOLIO Denver, Colorado 80202

- --------------------------------------------------------------------------------
PROSPECTUS FOR CLASSES I, II AND III
October 24, 1997
- --------------------------------------------------------------------------------

First Funds (the Trust) offers investors a convenient and economical
means of investing in professionally managed money market mutual funds. The
objective of each Money Market Portfolio is to obtain as high a level of
current income as is consistent with the preservation of principal and
liquidity. Municipal Money Market Portfolio also seeks as high a level of
federally tax-exempt income as is consistent with this objective.

AN INVESTMENT IN EACH PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT EACH PORTFOLIO WILL
MAINTAIN A STABLE $1.00 SHARE PRICE.

This Prospectus is designed to provide you with information that you
should know before investing. Please read and retain this document for future
reference. This Prospectus offers Class I, II and III shares of each
Portfolio. Class I shares are designed exclusively for investment of monies
held in non-retail trust, advisory, agency, custodial or similar accounts
(Institutional Accounts). Class I shares may be purchased for Institutional
Accounts by financial institutions, business organizations, corporations,
municipalities, non-profit institutions and other entities serving in trust,
advisory, agency, custodial or similar capacities (each, an Institutional
Investor and collectively, Institutional Investors) that meet the investment
threshold for this Class of shares. Class II and III shares are designed for
individuals and other investors who seek mutual fund investment convenience
plus a lower investment minimum. These Classes offer investors differing
expense and sales load structures to choose between. See "Expense Summary."

A Statement of Additional Information (dated October 24, 1997) for the
Portfolio has been filed with the Securities and Exchange Commission (SEC)
and is incorporated herein by reference. This Prospectus, the Annual Report
and the Statement of Additional Information are available free upon request
from ALPS Mutual Funds Services, Inc., (ALPS) the Portfolio's Distributor.
The Annual Report for the fiscal period ended June 30, 1997 for the Portfolio
is incorporated into the Statement of Additional Information by reference.
Please call ALPS at 1-800-442-1941 (option 1) for more information concerning
each Class of shares. If you are investing through a broker, other financial
institution or adviser (Investment Professional), please contact that
institution directly.

MUTUAL FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR
GUARANTEED BY, FIRST TENNESSEE BANK NATIONAL ASSOCIATION OR ANY DEPOSITORY
INSTITUTION. SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FDIC, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY
STATE OR JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER IN SUCH STATE OR JURISDICTION.

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

<PAGE>

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

Summary Of Portfolio Expenses. . . . . . . . . . . . . . . . . . . . . . . .3
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
What Is The Investment Objective Of Each Portfolio?. . . . . . . . . . . . 7
Are The Portfolios Suitable Investments? Investment Risks. . . . . . . . . 9
What Are The Portfolios' Investment Policies And Limitations?. . . . . . . 9
How Are Investments, Exchanges And Redemptions Made? . . . . . . . . . . . 11
How Is Performance Calculated? . . . . . . . . . . . . . . . . . . . . . . 16
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 17
What Is The Effect Of Federal Income Tax On This Investment? . . . . . . . 17
What Advisory And Other Fees Do The Portfolios Pay?. . . . . . . . . . . . 18
How Are The Portfolios Organized?. . . . . . . . . . . . . . . . . . . . . 19
Investment Instruments, Transactions, Strategies and Risks . . . . . . . . 19
- --------------------------------------------------------------------------------

2
<PAGE>

- --------------------------------------------------------------------------------
SUMMARY OF PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------

The purpose of the table below is to assist you in understanding the
various costs and expenses that you would bear, directly or indirectly, by
investing in each Portfolio. This standard format was developed for use by all
mutual funds to help you make your investment decisions. The information for
Class I and Class III below is based upon each Class' expenses for the fiscal
year ended June 30, 1997. The information for Class II below is based upon the
expenses of Class III, adjusted for differing Distribution and Shareholder
Servicing Plans. This expense information should be considered along with other
important information, such as each Portfolio's investment objective. There are
no sales charges, exchange, or redemption fees.

A. EXPENSE SUMMARY
<TABLE>
<CAPTION>

U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
-------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .10% .10% .10% .10% .10% .10%
12b-1 Fees .00% .00% .25% .00% .00% .25%
Other Expenses* .27% .52% .27% .25% .55% .30%
---- ---- ---- ---- ---- ----
Total Portfolio
Operating Expenses* .37% .62% .62% .35% .65% .65%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
<CAPTION>

MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
-------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees* .10% .10% .10% .10% .10% .10%
12b-1 Fees .00% .00% .25% .00% .00% .25%
Other Expenses* .25% .52% .27% .30% .54% .29%
---- ---- ---- ---- ---- ----

Total Portfolio Operating Expenses* .35% .62% .62% .40% .64% .64%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>

*After expense waivers.

ANNUAL PORTFOLIO OPERATING EXPENSES. Each Portfolio is obligated to pay
Management Fees to First Tennessee Bank National Association (First Tennessee)
for managing each Portfolio's investments. First Tennessee, as Investment
Adviser, is entitled to receive .25% of each Portfolio's average net assets.
First Tennessee has voluntarily agreed to waive its investment advisory fee down
to .10% of each Portfolio's average net assets; however, there is no guarantee
that this waiver will continue. Each Portfolio incurs Other Expenses, including
Administration and Co-Administration Fees, for maintaining shareholder records,
furnishing shareholder statements and reports, and other services. ALPS Mutual
Funds Services, Inc. (ALPS), as Administrator, is entitled to and charges .075%
of each Portfolio's average net assets for administration services. First
Tennessee, as Co-Administrator, is entitled to .05% of each Portfolio's average
net assets for co-administration services. First Tennessee has voluntarily
agreed to waive this fee to .025%; however, there is no guarantee that this
waiver will continue. Other Expenses also include Shareholder Servicing Fees of
0.25% with respect to Class II of the Portfolio.

3
<PAGE>

If the waivers were not in effect, Management Fees would be .50% of
average net assets for each Class. In addition, the Board of Trustees has
limited payments of 12b-1 fees under the Distribution Plan to 0.25% (see "What
Advisory and Other Fees Does The Portfolio Pay - Distribution Plan and
Shareholder Servicing Plans"). Without this limitation, 12b-1 fees would be .45%
of average net assets for Class III for the current fiscal year. Absent these
waivers and limitations, Other Expenses and Total Portfolio Operating Expenses
would be as follows:

U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
----------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Other Expenses .30% .30% .30% .28% .33% .33%
Total Portfolio Operating Expenses .55% .80% 1.25% .53% .83% 1.28%
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
----------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Other Expenses .28% .30% .30% .33% .32% .32%
Total Portfolio Operating Expenses .53% .80% 1.25% .58% .82% 1.27%

</TABLE>

There is no guarantee that any waivers will continue at their stated levels.

Management Fees, 12b-1 Fees, Shareholder Servicing Fees, and Other
Expenses, are reflected in each Portfolio's yield and are not charged
directly to individual accounts. 12b-1 Fees are paid by each Class III
Portfolio to ALPS for services and expenses in connection with distribution.
Shareholder Servicing Fees are paid by Class II to Investment Professionals
for services and expenses incurred in connection with providing personal
service to shareholders, subaccounting and/or maintenance of shareholder
accounts. Long-term shareholders may pay more than the economic equivalent of
the maximum 8.50% front-end sales charge permitted by the National
Association of Securities Dealers, Inc. (NASD) due to 12b-1 fees applicable
to Class III shares. Please see "What Advisory And Other Fees Does the
Portfolio Pay - Distribution Plan and Shareholder Servicing Plan" for further
information.

B. EXAMPLE: You would pay the following expenses for every $1,000
investment in each Class of shares of the Money Market Portfolios assuming
(1) 5% annual return, (2) redemption at the end of each time period, (3) that
operating expenses (net of expense waivers) are the same as described above,
and (4) reinvestment of all dividends and distributions. THE RETURN OF 5% AND
EXPENSES SHOULD NOT BE CONSIDERED INDICATIVE OF ACTUAL OR EXPECTED
PERFORMANCE OR PORTFOLIO OPERATING EXPENSES, BOTH OF WHICH MAY VARY
SIGNIFICANTLY:

<TABLE>
<CAPTION>
U.S. TREASURY U.S. GOVERNMENT
MONEY MARKET PORTFOLIO MONEY MARKET PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 year $4 $6 $6 $4 $6 $6
3 years $12 $20 $20 $11 $21 $21
5 years $21 $35 $35 $20 $36 $36
10 years $47 $78 $78 $44 $81 $81
<CAPTION>
MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 year $4 $6 $6 $4 $7 $7
3 years $11 $20 $20 $13 $21 $21
5 years $20 $35 $35 $22 $36 $36
10 years $44 $78 $78 $51 $80 $80
</TABLE>

<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The tables that follow are included in the Annual Report for the Portfolios
dated June 30, 1997 and have been audited by Price Waterhouse LLP, independent
accountants. Their report on the financial statements and the financial
highlights for the Portfolios is included in the Annual Report. The financial
statements and financial highlights are incorporated by reference into the
Portfolios' Statement of Additional Information. The Annual Report contains
additional performance information and will be made available upon request and
without charge.

U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS III
------------------------------------------------- -------------------
For the Year For the Year
Ended June 30, Ended June 30,
------------------------------------------------- -------------------
1997 1996 1995 1994 1993** 1997 1996**
---- ---- ---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------------------
Income from investment operations:
Net investment income 0.050 0.052 0.050 0.030 0.018 0.047 0.044
----------------------------------------------------------------------

Distributions:
Net investment income (0.050) (0.052) (0.050) (0.030) (0.018) (0.047) (0.044)
----------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------------------
----------------------------------------------------------------------

TOTAL RETURN+ 5.09% 5.30% 5.10% 3.06% 1.76%# 4.84% 4.47%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $6,141 $75,703 $67,377 $100,868 $59,326 $61,135 $3,528
Ratio of expenses to average net assets(1) 0.37% 0.36% 0.36% 0.33% 0.39%* 0.62% 0.62%*
Ratio of net investment income to average
net assets 5.01% 5.19% 5.00% 3.04% 2.73%* 4.76% 4.93%*

(1) During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 0.55% 0.56% 0.63% 0.60% 0.65%* 0.80% 0.82%*

</TABLE>

* Annualized.
** Classes I and III commenced operations on November 12, 1992 and August 8,
1995, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.

<PAGE>

U.S. GOVERNMENT MONEY MARKET PORTFOLIO

CLASS I CLASS III
------------------------------------------------- -------------------
For the Year For the Year
Ended June 30, Ended June 30,
------------------------------------------------- -------------------
1997 1996 1995 1994 1993** 1997 1996**
---- ---- ---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------------------
Income from investment operations:
Net investment income 0.051 0.053 0.053 0.032 0.019 0.048 0.044
----------------------------------------------------------------------

Distributions:
Net investment income (0.051) (0.053) (0.053) (0.032) (0.019) (0.048) (0.044)
----------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------------------
----------------------------------------------------------------------

TOTAL RETURN+ 5.23% 5.37% 5.39% 3.23% 1.87%# 4.91% 4.49%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $94,541 $88,111 $88,057 $67,854 $94,903 $3,486 $228
Ratio of expenses to average net assets(1) 0.35% 0.33% 0.31% 0.28% 0.27%* 0.65% 0.65%*
Ratio of net investment income to average
net assets 5.11% 5.28% 5.27% 3.18% 2.98%* 4.81% 4.96%*

(1)During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 0.53% 0.53% 0.58% 0.55% 0.55%* 0.83% 0.85%*
</TABLE>

MUNICIPAL MONEY MARKET PORTFOLIO

CLASS I CLASS III
------------------------------------------------- -------------------
For the Year For the Year
Ended June 30, Ended June 30,
------------------------------------------------- -------------------
1997 1996 1995 1994 1993** 1997 1996**
---- ---- ---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------------------
Income from investment operations:
Net investment income 0.033 0.035 0.034 0.024 0.014 0.030 0.030
----------------------------------------------------------------------

Distributions:
Net investment income (0.033) (0.035) (0.034) (0.024) (0.014) (0.030) (0.030)
----------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------------------
----------------------------------------------------------------------

TOTAL RETURN+ 3.32% 3.52% 3.48% 2.40% 1.40%# 3.03% 3.03%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $45,988 $71,665 $94,078 $76,231 $74,362 $12,886 $2,905
Ratio of expenses to average net assets(1) 0.35% 0.32% 0.30% 0.28% 0.31%* 0.62% 0.58%*
Ratio of net investment income to
average net assets 3.25% 3.50% 3.44% 2.39% 2.26%* 2.98% 3.24%*

(1)During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 0.53% 0.52% 0.57% 0.55% 0.58%* 0.79% 0.78%*
</TABLE>

* Annualized.
** Classes I and III commenced operations on November 12, 1992 and July 28,
1995, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.

6
<PAGE>

CASH RESERVE PORTFOLIO

CLASS I CLASS III
---------------------------------------------- -------------------
For the Year For the Year
Ended June 30, Ended June 30,
---------------------------------------------- -------------------
1997 1996 1995** 1997 1996**
---- ---- ------ ----- ------
<S> <C> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------
Income from investment operations:
Net investment income 0.051 0.053 0.042 0.049 0.047
-------------------------------------------------------------------
Distributions:
Net investment income (0.051) (0.053) (0.042) (0.049) (0.047)
-------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------
-------------------------------------------------------------------

TOTAL RETURN+ 5.23% 5.39% 4.27%# 5.00% 4.78%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $14,241 $16,369 $15,460 $35,592 $24,190
Ratio of expenses to average net assets (1) 0.40% 0.42% 0.43%* 0.64% 0.62%*
Ratio of net investment income to average
net assets 5.13% 5.22% 5.48%* 4.88% 5.02%*

(1)During the period, various fees were
waived. The ratio of expenses to
average net assets had such waivers
not occurred is as follows. 0.57% 0.61% 0.70%* 0.82% 0.81%*
</TABLE>

* Annualized.
** Classes I and III commenced operations on September 26, 1994 and July 28,
1995, respectively.
+ Total return would have been lower had various fees not been waived during
the period.
# Total return for periods of less than one year are not annualized.

- --------------------------------------------------------------------------------
WHAT IS THE INVESTMENT OBJECTIVE OF EACH PORTFOLIO?
- --------------------------------------------------------------------------------

First Tennessee, serves as Investment Adviser to each Portfolio and, with
the prior approval of the Board of Trustees (the Trustees), has engaged PNC
Institutional Management Corporation (PIMC) to act as Sub-Adviser to each
Portfolio. Subject to First Tennessee's supervision, PIMC is responsible for the
day-to-day operations of the Portfolios, including providing investment research
and credit analysis concerning Portfolio investments and conducting a continuous
program of investment of Portfolio assets in accordance with the investment
policies and objectives of each Portfolio. For additional information about the
Portfolios' investment advisory arrangements, see "What Advisory and Other Fees
Do the Portfolios Pay? - Investment Advisory and Management and Sub-Advisory
Agreements."

The investment objective of each Money Market Portfolio is to obtain as
high a level of current income as is consistent with the preservation of
principal and liquidity within the prescribed standards for each Portfolio.
Municipal Money Market Portfolio also seeks as high a level of federally
tax-exempt income as is consistent with this objective. There is no assurance
that each Portfolio will achieve its investment objective. The permitted
investments of each Money Market Portfolio are as follows:

U.S. TREASURY MONEY MARKET PORTFOLIO may invest in U.S. Treasury bills,
notes, and bonds, and in other direct obligations of the U.S. Treasury. The
Portfolio also may engage in repurchase agreements and reverse repurchase
agreements backed by these instruments. As an operating policy, the Portfolio
intends to invest 100% of its total assets in these instruments. This operating
policy is not fundamental and may be changed upon 90 days' notice to
shareholders.

U.S. Treasury Money Market Portfolio is rated to reflect investment quality
by a nationally recognized statistical rating organization. These quality
ratings are based on, but not limited to, an analysis of the Portfolio's
operational policies, investment strategies and management. These rating
organizations also may undertake an ongoing analysis and assessment of these
criteria in order to continually update the Portfolio's rating. For additional
information please call the Distributor, ALPS Mutual Funds Services, Inc., at
1-800-442-1941 (option 1).

7
<PAGE>

U.S. GOVERNMENT MONEY MARKET PORTFOLIO may invest in instruments issued or
guaranteed as to principal and interest by the U.S. government or by any of its
agencies or instrumentalities. These instruments include, but are not limited
to, U.S. Treasury bills, notes, and bonds, and other obligations of the U.S.
government such as the Export-Import Bank of the U.S., the General Services
Administration, the Government National Mortgage Association, the Small Business
Administration and the Washington Metropolitan Area Transit Authority (U.S.
government obligations). U.S. Government Money Market Portfolio may also include
instruments which are backed only by the right of the issuer to borrow from the
U.S. Treasury or are backed only by the credit of the agency or instrumentality
issuing the obligations. Such instruments (e.g., those issued by the Federal
Home Loan Bank, Federal Farm Credit Bank, and Federal National Mortgage
Association) are not deemed direct obligations of the United States. The
Portfolio may invest in variable or floating rate instruments that have features
that give them interest rates, maturities, and prices similar to short-term
instruments.

The Portfolio invests at least 65% of its total assets in the instruments
described in the above paragraph.

The Portfolio may also engage in repurchase agreements and reverse
repurchase agreements, may buy and sell securities on a when-issued or
delayed-delivery basis, and may purchase restricted securities and illiquid
securities.

MUNICIPAL MONEY MARKET PORTFOLIO may invest in high-quality, short-term
municipal obligations but also may invest in high-quality, long-term fixed,
variable or floating rate instruments (including tender option bonds) that have
features that give them interest rates, maturities, and prices similar to
short-term instruments. Under normal conditions, at least 80% of the Portfolio's
income will be exempt from federal income tax. The Portfolio's investments in
municipal obligations may include tax, revenue, or bond anticipation notes;
tax-exempt commercial paper; general obligation or revenue bonds (including
municipal lease obligations and resource recovery bonds); standby commitments;
and zero coupon bonds. The Portfolio may buy and sell securities on a
when-issued or delayed-delivery basis, and may purchase restricted and illiquid
securities.

Municipal Money Market Portfolio does not intend to invest in federally
taxable obligations under normal conditions; however, it reserves the right, for
temporary defensive purposes, to invest without limitation in taxable money
market instruments, including U.S. government securities, commercial paper, and
repurchase agreements.

CASH RESERVE PORTFOLIO may invest in a broad range of high-quality,
short-term, U.S. dollar-denominated money market obligations. Such obligations
may include, but are not limited to, certificates of deposit, bankers'
acceptances, demand and time deposits, bank notes, corporate commercial paper,
bonds, variable and floating rate notes, and short-term obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities.

Cash Reserve Portfolio concentrates its investments in obligations issued
by the financial services industry. Money market instruments of companies in the
financial services industry include, but are not limited to, certificates of
deposit, commercial paper, bankers' acceptances, demand and time deposits, and
bank notes. These money market obligations are issued by domestic or foreign
banks, savings and loan associations, consumer and industrial finance companies,
securities brokerage companies and a variety of firms in the insurance field.
Financial service companies offering money market issues must have total assets
of $1 billion or more before their issues can be considered for investment.
Because the Portfolio concentrates more than 25% of its total assets in the
financial services industry, it will be exposed to greater risks associated with
that industry, such as government regulation, the availability and cost of
capital funds, and general economic conditions.

The Portfolio may also invest in U.S. dollar-denominated obligations of
foreign banks or foreign branches of U.S. banks where PIMC deems the instrument
to present minimal credit risks. Foreign banks offering money market issues must
also have total assets of $1 billion or more before their issues can be
considered for investment. Such investments may include Eurodollar Certificates
of Deposit (ECDs), which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the United
States; Eurodollar Time Deposits (ETDs), which are U.S. dollar-denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits (CTDs), which are essentially the same U.S. dollar-denominated
instruments as ETDs, except that they are issued by Canadian offices of major
Canadian banks; and Yankee Certificates of Deposit (Yankee CDs), which are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the United States. Investments in obligations

8
<PAGE>

issued by foreign banks and foreign branches of U.S. banks may involve risks
that are different from investments in obligations of domestic branches of U.S.
banks. These risks may include future unfavorable political and economic
developments, possible withholding taxes on interest income, seizure or
nationalization of foreign deposits, currency controls, interest limitations, or
other government restrictions which might affect the payment of principal or
interest on the securities held by the Portfolio. Additionally, these
institutions may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping requirements than
those applicable to domestic branches of U.S. banks.

The Portfolio may engage in repurchase agreements and reverse repurchase
agreements, may buy and sell securities on a when-issued or delayed-delivery
basis, and may purchase restricted and illiquid securities.

See "Investment Instruments, Transactions, Strategies and Risks" for a
further discussion of each Portfolio's investments.

- --------------------------------------------------------------------------------
ARE THE PORTFOLIOS SUITABLE INVESTMENTS?; INVESTMENT RISKS
- --------------------------------------------------------------------------------

Each Money Market Portfolio may be appropriate for investors who seek to
earn income at current money market rates while preserving the value of their
investment. The rate of income will vary from day to day, generally reflecting
current short-term interest rates. Each Portfolio individually may not
constitute a balanced investment plan. Each Portfolio's objective emphasizes
income with preservation of capital and liquidity, and not the higher yields or
capital appreciation that may be available from more aggressive investments.
However, because they emphasize stability, each Portfolio could be well-suited
for a portion of an investor's savings. Although no guarantee can be made, each
Money Market Portfolio seeks to maintain a stable $1.00 share price.

Further information relating to the types of securities in which each
Portfolio may invest and their related risks, as well as the investment policies
of each Portfolio in general are set forth in the section "Investment
Instruments, Transactions, Strategies And Risks" and in the Statement of
Additional Information.

The Portfolios attempt to maintain the value of their shares at a constant
$1.00 per share price, although there can be no assurance that the Portfolios
will always be able to do so. The Portfolios may not achieve as high a level of
current income as other funds that do not limit their investments to the high
quality securities in which the Portfolios invest.

Each Portfolio's ability to achieve its investment objective depends on the
quality and maturity of its investments. Although each Portfolio's policies are
designed to help maintain a stable share price of $1.00, all money market
instruments can change in value when interest rates or issuers' creditworthiness
change, or if an issuer or guarantor of a security fails to pay interest or
principal when due. If these changes in value were large enough, a Portfolio's
share price could fall below $1.00. In general, obligations with longer
maturities are more vulnerable to price changes, although they may provide
higher yields.

While each Portfolio invests in high quality obligations, note that
investments are not without risk. A Portfolio's ability to achieve its objective
depends on a number of factors, including the skills of First Tennessee and PIMC
in purchasing securities whose issuers can be expected to have the ability to
meet their obligations for the payment of interest and principal when due.

- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' INVESTMENT POLICIES AND LIMITATIONS?
- --------------------------------------------------------------------------------

MAINTAINING $1.00 NAV. The Trust uses its best efforts to maintain a
stable net asset value per share (NAV) of $1.00 for each Portfolio, and to value
its portfolio securities on the basis of the amortized cost valuation method,
pursuant to Rule 2a-7 under the Investment Company Act of 1940. This method is
based on acquisition cost and assumes a steady rate of amortization of premium
or discount from the date of purchase until maturity instead of looking at
actual changes in market values.

MATURITY. Each Portfolio must limit its investments to obligations with
remaining maturities of 397 days or less, as determined in accordance with the
rules of the SEC, and must maintain a dollar-weighted average maturity of 90
days or less.

9
<PAGE>

QUALITY. Pursuant to procedures adopted by the Trustees, each Portfolio
may purchase only high quality obligations that the Sub-Adviser believes present
minimal credit risks. To be considered high quality, a security must be a U.S.
government security; or rated in accordance with applicable rules in one of the
two highest rating categories for short-term obligations by at least two
nationally recognized rating services (or by one, if only one rating service has
rated the security); or, if unrated, judged to be of equivalent quality by PIMC.

High-quality securities are divided into"first tier" and "second tier"
securities. First tier securities have received the highest rating (e.g.,
Standard & Poor's A-1 rating) from at least two rating services (or one, if only
one has rated the security). Second tier securities have received ratings within
the two highest categories (e.g., Standard & Poor's A-1 or A-2) from at least
two rating services (or one, if only one has rated the security), but do not
qualify as first tier securities. If a security has been assigned different
ratings by different rating services, at least two rating services must have
assigned the higher rating in order for PIMC to determine eligibility on the
basis of that higher rating. Based on procedures adopted by the Trustees, PIMC,
under the supervision of First Tennessee, may determine that an unrated security
is of equivalent quality to a rated first or second tier security. Cash Reserve
Portfolio, as a non-fundamental policy, will limit its investments to first tier
securities.

INVESTMENT LIMITATIONS. Each Portfolio has adopted the following
investment limitations:

(1) Each Portfolio normally may not invest more than 5% of its total
assets in the securities (other than U.S. government securities) of any
single issuer. Under certain conditions, however, Cash Reserve Portfolio
may invest up to 25% of its total assets in the first tier securities of a
single issuer for up to three days.

(2) Each Portfolio will not purchase a security if, as a result, 25%
or more of its total assets would be invested in a particular industry,
other than U.S. government obligations; or (i) with respect to Municipal
Money Market Portfolio, other than tax-exempt obligations issued or
guaranteed by a U.S. territory or possession or a state or local
government, or a political subdivision thereof; or (ii) with respect to
Cash Reserve Portfolio, other than obligations issued by members of the
financial services industry.

(3) Each Portfolio (a) may borrow money for temporary or emergency
purposes or, with respect to U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio and Cash Reserve Portfolio, engage in
reverse repurchase agreements in a combined amount not to exceed 33 1/3% of
its total assets and (b) will not purchase any security while borrowings
(including reverse repurchase agreements) representing more than 5% of its
total assets are outstanding. If a Portfolio borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. To
this extent, purchasing securities when borrowings are outstanding may
involve an element of leverage.

(4) (a) Each Portfolio may temporarily lend its portfolio securities
to broker-dealers and institutions, but only when the loans are fully
collateralized. (b) Loans, in the aggregate, will be limited to 33 1/3% of
each Portfolio's total assets.

Unless otherwise noted, the Portfolios' policies and limitations are not
fundamental and may be changed by the Trustees without shareholder approval. The
fundamental policies of each Portfolio that require shareholder approval prior
to any changes are: each Portfolio's investment objective; Municipal Money
Market Portfolio's policy that, under normal conditions, at least 80% of its
income will be exempt from federal income tax; and investment limitation (1),
with respect to 75% of each Portfolio's assets, and limitations (2), (3)(a) and
(4)(b) above. With the exception of the Portfolio's policies and limitations
regarding borrowing and investments in illiquid securities, these limitations
and each Portfolio's policies are considered at the time of purchase of
securities; the sale of securities is not required in the event of a subsequent
change in circumstances.

Municipal Money Market Portfolio may invest all or a portion of its assets
in municipal obligations whose interest is a tax preference item for purposes of
the federal alternative minimum tax (AMT). If an individual is subject to the
AMT, a portion of the income may not be exempt from federal income tax. Income
distributions that are a tax preference item for purposes of the federal AMT are
considered to be exempt from federal income tax for purposes of the 80% policy
noted above. See "What Is The Effect Of Federal Income Tax On This Investment?"
on page 18 for further information. Municipal Money Market Portfolio may
purchase other types of tax-exempt instruments that become available in the
future as long as First Tennessee and PIMC believe that their character is
consistent with the Portfolio's quality and maturity standards.

Municipal Money Market Portfolio and Cash Reserve Portfolio each may invest
up to 25% of their total assets in a particular industry. Therefore,
developments affecting a single issuer or industry, or securities financing
similar types of projects, could have a significant effect on the Portfolios'
performance. Municipal Money Market Portfolio may invest any portion of its
assets in industrial revenue bonds (IRBs) backed by private issuers, and may
invest up to 25% of its

10
<PAGE>

total assets in IRBs related to a single industry. Municipal Money Market
Portfolio may also invest 25% or more of its total assets in securities whose
revenue sources are from similar types of projects, e.g., education, electric
utilities, health care, housing, transportation, or water, sewer, and gas
utilities. There may be economic, business or political developments or changes
that affect all securities of a similar type.

PIMC defines the issuer of a security depending on its terms and
conditions. In identifying the issuer, PIMC will consider the entity or entities
responsible for payment of interest and repayment of principal and the source of
such payments; the way in which assets and revenues of an issuing political
subdivision are separated from those of other political entities; and whether a
governmental body is guaranteeing the security.

The investment policies and limitations set forth above are supplemented by
the investment policies and limitations in the Statement of Additional
Information. No assurance can be made that each Portfolio will achieve its
objective, but it will follow the investment style described in this Prospectus.

From time to time, each Portfolio, to the extent consistent with its
investment objective, policies, and restrictions, may invest in securities of
companies with which First Tennessee, PIMC or their affiliates have lending
relationships.

CLASS I
- -------

WHO MAY INVEST?

HOW IS AN INSTITUTIONAL ACCOUNT ESTABLISHED?

An initial investment must be preceded by or made in conjunction with the
establishment of an Institutional Account with an Institutional Investor.
Establishment of an Institutional Account may require that documents and
applications be completed and signed before the investment can be implemented.
The Institutional Investor may require that certain documents be provided prior
to making a redemption from any Portfolio. Institutional Investors may charge
fees in addition to those described herein. Fee schedules for Institutional
Accounts are available upon request from the Institutional Investor and are
detailed in the agreements by which each client opens an account with an
Institutional Investor.

HOW ARE INVESTMENTS MADE?

Each Institutional Investor will transmit orders to the Transfer Agent,
Chase Global Funds Services Company (CGFSC). If investment instructions are
received by CGFSC prior to 2:00 p.m. Eastern Time on any Business Day (as
defined in the section "How Are Investments, Exchanges And Redemptions Made -
Class I, II and III - How Are Portfolio Shares Valued?")and the funds are
received by CGFSC that day, you will earn that day's dividend accrual.
Institutional Investors will wire funds through the Federal Reserve System.
Purchases will be processed at the NAV calculated after an order is received and
accepted by CGFSC. Each Portfolio requires advance notification of all wire
purchases. To secure same day acceptance of federal funds (monies transferred
from one bank to another through the Federal Reserve System with same-day
availability), an Institutional Investor must call CGFSC at 1-800-442-1941
(option 2) prior to 2:00 p.m. Eastern Time on any Business Day, defined below,
to advise it of the wire. The Trust may discontinue offering its shares in any
Class of a Portfolio without notice to shareholders

MINIMUM INVESTMENT AND ACCOUNT BALANCE. The minimum initial investment for
each Institutional Investor is $750,000 per Portfolio. Institutional Investors
may satisfy the minimum investment by aggregating their Institutional Accounts
within each Portfolio. Subsequent investments may be in any amount. If an
Institutional Investor's Class I account falls below $375,000 due to redemption,
a Portfolio may close the account. An Institutional Investor may be notified if
the minimum balance is not being maintained and will be allowed 30 days to make
additional investments before its account is closed. Shares will be redeemed at
the NAV on the day the account is closed, and proceeds will be sent to the
address of record.

11
<PAGE>

effected on the basis of the relative NAVs of the two classes without the
imposition of any sales load, fee or other charge. Institutional Investors or
beneficial owners will receive at least 30 days prior notice of any proposed
conversion.

HOW ARE REDEMPTIONS MADE?

Institutional Investors may redeem all or a portion of their account shares
on any Business Day. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request. If an account is closed, any accrued
dividends will be paid at the beginning of the following month.

Institutional Investors may make redemptions by wire provided they have
established a wire account with CGFSC. Please call 1-800-442-1941 (option 2) to
advise CGFSC of the wire. If telephone instructions are received before 2:00
p.m. Eastern Time on any Business Day, proceeds of the redemption will be wired
as federal funds on the same day to the bank account designated with CGFSC. An
Institutional Investor may change the bank account designated to receive an
amount redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC, 73 Tremont Street, Boston, Massachusetts, 02108. Shares
redeemed will receive the accrued dividends through the day prior to redemption.

Pursuant to the Investment Company Act of 1940, as amended (1940 Act),
if making immediate payment of redemption proceeds could adversely affect a
Portfolio, payments may be made up to seven days later. Also, when the New
York Stock Exchange (NYSE) is closed (or when trading is restricted) for any
reason other than customary weekend or holiday closings, or under any
emergency circumstances as determined by the SEC to merit such action, the
right of redemption may be suspended or the date of payment postponed for a
period of time that may exceed seven days. To the extent Portfolio securities
are traded in other markets on days when either the NYSE or the or the
Federal Reserve Bank of New York (New York Federal Reserve) is closed, each
Portfolio's NAV may be affected on days when investors do not have access to
the Portfolios to purchase or redeem shares.

If transactions by telephone cannot be executed (for example, during times
of unusual market activity), orders may be placed by mail to CGFSC. In case of
suspension of the right of redemption, an Institutional Investor may either
withdraw its request for redemption or it will receive payment based on the NAV
next determined after the termination of the suspension.

ADDITIONAL INFORMATION

Each Portfolio also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be refused
if, in First Tennessee's opinion, they are of a size that would disrupt
management of a Portfolio.

In order to allow First Tennessee to manage each Portfolio most
effectively, Institutional Investors are strongly urged to initiate all trades
(investments, exchanges and redemptions of shares) as early in the day as
possible and to notify CGFSC at least one day in advance of trades in excess of
$1 million. In making these trade requests, the name of the Institutional
Investor and the account number(s) must be supplied.

Transactions may be initiated by telephone. Please note that each Portfolio
and its agents will not be responsible for any losses resulting from
unauthorized telephone transactions if such Portfolios or agents follow
reasonable procedures designed to verify the identity of the caller. These
procedures may include requesting additional information or using personalized
security codes. Each Portfolio or its agents may also record calls and an
Institutional Investor should verify the accuracy of confirmation statements
immediately after receipt. If an Institutional Investor does not want to be able
to initiate redemptions and exchanges by telephone, please call CGFSC for
instructions.

CLASS II AND III
- ----------------

WHO MAY INVEST?

Class II and III shares are designed for individuals and other investors
who seek mutual fund investment convenience plus a lower investment minimum.
These Classes offer investors differing expense structures to choose from. See
"Summary of Portfolio Expenses." Class II shares of the First Funds Money Market
Portfolios are not currently available for investment.

INVESTMENT REQUIREMENTS

12
<PAGE>

Systematic Investing Program, the minimum initial investment is $50, and
subsequent investments may be in any amount of $25 or greater. If your balance
in the Portfolio falls below the applicable minimum investment requirement due
to redemption, you may be given 30 days' notice to reestablish the minimum
balance. If you do not reestablish the minimum balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed on the day the account is closed.

All purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $100, and the minimum investment
requirement still applies (excluding the specific circumstances stated above
which reduce the minimum investment requirement). Each Portfolio reserves the
right to limit the number of checks processed at one time. If your check does
not clear, your purchase will be canceled and you could be liable for any losses
or fees incurred.

You may initiate any transaction either directly or through your Investment
Professional. Please note that each Portfolio and its agents will not be
responsible for any losses resulting from unauthorized transactions if such
Portfolios or agents follow reasonable procedures designed to verify the
identity of the caller. These procedures may include requesting additional
information or using personalized security codes. Your Investment Professional
may also record calls, and you should verify the accuracy of your confirmation
statements immediately after you receive them. If you do not want to be able to
redeem and exchange by telephone, please check the box on your application (if
you invest directly), or, if you invest through an Investment Professional,
please call your Investment Professional for instructions.

HOW DO I SET UP AN ACCOUNT?

You may set up an account directly in each Portfolio or you may invest in
each Portfolio through your Investment Professional (see "How Do I Invest
Through My Investment Professional" below). Shares will be purchased based on
the NAV next calculated after CGFSC has received the request in proper form. If
you are investing through an Investment Professional, investment instructions
that your Investment Professional initiates should be transmitted to CGFSC
before 2:00 p.m. Eastern Time and the funds must be received by CGFSC that day
in order for you to receive that day's dividend accrual.

HOW DO I INVEST DIRECTLY?

When opening a new account directly, you must complete and sign an account
application and send it to CGFSC, 73 Tremont Street, Boston, MA 02108.
Telephone representatives are available at 1-800-442-1941 between the hours of
8:00 a.m. to 4:00 p.m. Central Time (9:00 a.m. to 5:00 p.m. Eastern Time),
Monday through Friday.

Investments may be made in several ways:

BY MAIL: Make your check payable to First Funds: [name of Portfolio], and
mail it, along with the application, to the address indicated on the
application. Your account will be credited on the Business Day that CGFSC
receives your application in good order.

BY WIRE: Call 1-800-442-1941 (option 2) to set up your Portfolio account
to accommodate wire transactions. To initiate your wire transaction, call your
depository institution. If you call CGFSC before 2:00 p.m. Eastern Time and your
wire is received that day, you will earn that day's dividend accrual. Federal
funds (monies transferred from one bank to another through the Federal Reserve
System with same-day availability) should be wired to:

Chase Manhattan Bank, N.A.
ABA #021000021
First Funds
Credit DDA #910-2-733335
(Account Registration)
(Account Number)
(Wire Control Number) *See Below*

13
<PAGE>

Prior to sending wires, please be sure to call 1-800-442-1941 (option 2) to
receive a Wire Control Number to be included in the body of the wire (see
above).

Your bank may charge you a fee for this service.

HOW DO I REDEEM SHARES WHEN INVESTING DIRECTLY?

You may redeem all or a portion of your shares on any day that a Portfolio
is open for business. Shares will be redeemed at the NAV next calculated after
CGFSC has received the redemption request in proper form. If a Portfolio account
is closed, any accrued dividends will be paid at the beginning of the following
month.

You may redeem shares in several ways:

A signature guarantee is designed to protect you, the Portfolios and their
agents from fraud. Your written request requires a signature guarantee if you
wish to redeem more than $1,000 worth of shares; if your Portfolio account
registration has changed within the last 30 days; if the check is not being
mailed to the address on your account; if the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
First Funds account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public.

BY WIRE: You may make redemptions by wire provided you have established a
Portfolio account to accommodate wire transactions. If telephone instructions
are received before 2:00 p.m. Eastern Time, proceeds of the redemption for each
Portfolio will be wired as federal funds on the same day to the bank account
designated with CGFSC. You may change the bank account designated to receive an
amount redeemed at any time by sending a letter of instruction with a signature
guarantee to CGFSC, 73 Tremont Street, Boston, Massachusetts, 02108.

BY CHECK: You may request on your Account Application or by written
request to the Trust that a Portfolio provide you with Redemption Checks
("Checks") which you can write on your account. In order to establish the
checkwriting option, you must manually sign a signature card. Corporations,
trusts and other organizations should call or write the Portfolio's Distributor
before submitting signature cards as additional documents may be required to
establish the checkwriting service. The Trust will send checks only to the
registered owner(s) of the account and only to the address listed in the Trust's
records. You may make checks payable to the order of any person in the amount of
$250 or more. When a Check is presented to the Transfer Agent for payment, the
Transfer Agent, as your agent, will cause a Portfolio to redeem a sufficient
number of your shares to cover the amount of the Check. Shares earn dividends
through the day prior to the day that the redemption is processed. There is no
charge to you for the use of the Checks; however, the Transfer Agent will impose
a charge for stopping payment of a Check upon request, or if the Transfer Agent
cannot honor a Check due to insufficient funds or other valid reasons. A
Portfolio cannot guarantee a stop payment order on a Check. You must submit any
request to reverse a stop payment order in writing.

You may not write a Check to redeem shares which you purchase by check
until your check clears. If the amount of the Check is greater than the value of
the shares in your account, the Check will be returned marked "insufficient
funds." Checks written on amounts subject to the hold described above will be
returned marked "uncollected." If your check does not clear, you will be
responsible for any loss the Portfolio or its service providers incur.

Checkwriting is not available for participants in retirement plan accounts,
to shareholders who hold shares in certificate form or to shareholders who are
subject to Internal Revenue Service (IRS) backup withholding. You may not use a
Check to close an account. The Trust may terminate or alter the checkwriting
service at any time.

ADDITIONAL REDEMPTION REQUIREMENTS: Each Portfolio may hold payment on
redemptions until it is reasonably satisfied that investments made by check have
been collected, which can take up to seven days. Also, when the NYSE is closed
(or when trading is restricted) for any reason other than its customary weekend
or holiday closings, or under any emergency circumstances as determined by the
SEC to merit such action, the right of redemption may be suspended or

14
<PAGE>

the date of payment postponed for a period of time that may exceed seven days.
To the extent that Portfolio securities are traded in other markets on days when
either the NYSE or the New York Federal Reserve is closed, each Portfolio's NAV
may be affected on days when investors do not have access to the Portfolios to
purchase or redeem shares.

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

If you are investing through your Investment Professional, you may be
required to set up a brokerage or agency account. Please call your Investment
Professional for information on establishing an account. If you are purchasing
shares of any Portfolio through a program of services offered or administered by
your Investment Professional, you should read the program materials in
conjunction with this Prospectus. Certain features of such programs may impose
additional requirements and charges for the services rendered. Your Investment
Professional may offer any or all of the services mentioned in this section, and
is responsible for initiating all initial purchase transactions. Please contact
your Investment Professional for information on these services.

SYSTEMATIC INVESTING PROGRAM

The Systematic Investing Program offers a simple way to maintain a regular
investment program. You may arrange automatic transfers (minimum $25 per
transaction) from your bank account to your First Funds account on a periodic
basis. When you participate in this program, the minimum initial investment in
each Portfolio is $250. If you are an employee of First Tennessee or any of its
affiliates, the minimum initial investment in the Portfolio is $50. You may
change the amount of your automatic investment, skip an investment, or stop the
Systematic Investing Program by calling CGFSC at 1-800-442-1941 (option 2) or
your Investment Professional at least three Business Days prior to your next
scheduled investment date.

SYSTEMATIC WITHDRAWAL PLAN

ADDITIONAL INFORMATION

TAX-DEFERRED RETIREMENT PLANS: Retirement plans can offer significant tax
savings to individuals. Please call ALPS at 1-800-442-1941 (option 1) or your
Investment Professional for more information on the plans and their benefits,
provisions and fees. CGFSC or your Investment Professional can set up your new
account in any of the Portfolios (with the exception of Municipal Money Market
Portfolio) under one of several tax-deferred plans. These plans let you invest
for retirement and defer the tax on your investment income. Minimums may differ
from those listed previously under "Investment Requirements". Plans include
Individual Retirement Accounts (IRAs), Rollover IRAs, Keogh Plans, and
Simplified Employee Pension Plans (SEP-IRAs).

ADDITIONAL FEES: Class II shares incur Shareholder Servicing Fees and
Class III shares incur Distribution Fees. See discussion under "What Advisory
And Other Fees Do The Portfolios Pay? - Distribution Plans and Shareholder
Servicing Plans."

CLASS I, II AND III
- -------------------

HOW ARE PORTFOLIO SHARES VALUED?

The term "net asset value per share," or NAV, means the worth of one share.
The NAV of each Class of each Portfolio is calculated by adding that Class' pro
rata share of the value of all securities and other assets attributable to a
Portfolio, deducting that Class' pro rata share of Portfolio liabilities,
further deducting Class specific liabilities, and dividing the result by the
number of shares outstanding in that Class.

Each Portfolio is open for business each day that both the NYSE and the New
York Federal Reserve are open (a Business Day). The NAV is calculated twice
daily, at 2:00 p.m. Eastern Time, and at the close of each Portfolio's Business
Day, which coincides with the close of regular trading of the NYSE (normally
4:00 p.m. Eastern Time).

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<PAGE>

Assets in each Portfolio are valued based upon the amortized cost method.
Although each Portfolio seeks to maintain a NAV of $1.00, there can be no
assurance that this NAV will not vary.

DISTRIBUTION OPTIONS: Each Portfolio earns interest from its investments.
These are passed along as dividend distributions. Income dividends on the
Portfolios are declared daily and paid monthly.

When you fill out your account application, you can specify how you want to
receive your distributions. Currently, there are two available options:

1. REINVESTMENT OPTION. Your dividend distributions will be automatically
reinvested in additional shares of a Portfolio. Reinvestment of distributions
will be made at that day's NAV. If you do not indicate a choice on your
application, you will be assigned this option.

2. CASH OPTION. You will be sent a check for income distributions.
Distribution checks will be mailed no later than seven days after the last day
of the month.

HOW ARE EXCHANGES MADE?

An exchange is the redemption of shares of one Portfolio and the purchase
of shares of another. The exchange privilege is a convenient way to sell and buy
shares of other Portfolios registered in an investor's state. Except as noted
below, the Portfolio's shares may be exchanged for the same Class of shares of
other First Funds Portfolios. The redemption and purchase will be made at the
next determined NAV after the exchange request is received in proper form and
accepted by CGFSC. You may execute exchange transactions by calling CGFSC at
1-800-442-1941 (option 2) prior to 4:00 p.m. Eastern Time on any Business Day.
Class II shares of the First Funds Money Market Portfolios are not currently
available for investment. Investors in Class II shares of other First Funds
Portfolios wishing to exchange into one of the Money Market Portfolios will
receive Class III shares.

Each exchange may produce a gain or loss for tax purposes. In order to
protect each Portfolio's performance and its shareholders, First Tennessee
discourages frequent exchange activity by investors in response to short-term
market fluctuations. Each Portfolio reserves the right to refuse any specific
purchase order, including certain purchases by exchange if, in First Tennessee's
opinion, a Portfolio would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise be affected adversely.
Exchanges or purchase orders may be restricted or refused if a Portfolio
receives or anticipates individual or simultaneous orders affecting significant
portions of the Portfolio's assets. Although a Portfolio will attempt to give
prior notice whenever it is reasonably able to do so, it may impose these
restrictions at any time. Each Portfolio reserves the right to modify or
withdraw the exchange privilege upon 60 days notice and to suspend the offering
of shares in any Class without notice to shareholders. You or your Institutional
Investor, if you are invested in Class I, will receive written confirmation of
each exchange transaction.

Exchanges are generally not permitted from Class I to another Class. Should
a beneficial owner of Class I shares cease to be eligible to purchase shares of
Class I, Class I shares held in a Institutional Account may be converted to
shares of another Class.

STATEMENTS AND REPORTS

You or, if Class I, the Institutional Investor, will receive a monthly
statement and a confirmation after every transaction that affects the account
registration. A statement with tax information will be mailed by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you,
or if Class I, the Institutional Investor, will receive the Portfolios'
financial statements. To reduce expenses, only one copy of each Portfolio's
reports (such as the Prospectus and Annual Report) will be mailed to each
investor or, if Class I, each Institutional Investor. Please write to ALPS to
request additional copies.

- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------

From time to time each Portfolio may quote the CURRENT YIELD and EFFECTIVE
YIELD of Class I, II or III shares in advertisements or in reports or other
communications with shareholders. Both yield figures are based on historical
earnings and are not intended to indicate future performance. CURRENT YIELD
refers to the income generated by an investment over a seven-day period
expressed as an annual percentage rate. Since money market funds seek to
maintain

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<PAGE>

a stable $1.00 share price, current yields are the most common illustration of
money market fund performance. The effective yield is calculated similarly, but
assumes that the income earned from the investment is reinvested. The EFFECTIVE
YIELD will be slightly higher than the current yield because of the compounding
effect on this assumed reinvestment. In addition to the current yield, yields
may be quoted in advertising based on any historical seven-day period.

Municipal Money Market Portfolio also may quote the TAX EQUIVALENT YIELD
for Class I, II or III shares, which shows the taxable yield an investor would
have to earn, before taxes, to equal the tax-free yield. A tax equivalent yield
is calculated by dividing the tax-exempt current yield by the result of one
minus a stated federal tax rate.

The yield of the three Classes of each Portfolio are calculated separately
due to separate expense structures as indicated in the "Summary Of Portfolio
Expenses"; the yields of Class II and Class III will be lower than that of Class
I. For additional performance information, contact your Investment Professional
or ALPS for a free Annual Report and Statement of Additional Information for
these Portfolios.

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

Money market obligations are generally traded in the over-the-counter
market through broker-dealers. A broker-dealer is a securities firm or bank
which makes a market for securities by offering to buy at one price and sell at
a slightly higher price. The difference between the prices is known as a spread.
The selection of such broker-dealers is generally made based upon the price,
quality of execution services and research provided.

As a money market fund, each Portfolio does not pay commissions, as
securities purchased and sold by each Portfolio will be traded on a net basis
(i.e., without commission) through principals acting for their own account and
not as agents for the issuer or otherwise involve transactions directly with the
issuer of the instrument.

Each Portfolio intends to distribute substantially all of its net
investment income and capital gains, if any, to shareholders within each
calendar year as well as on a fiscal year basis. Income dividends are declared
daily and paid monthly.

FEDERAL TAXES. Dividends derived from net investment income for U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio and Cash
Reserve Portfolio, and short-term capital gains, if any, are taxable as ordinary
income. Distributions are taxable when they are paid, whether taken in cash or
reinvested in additional shares, except that distributions declared in December
and paid in January are taxable as if paid on December 31. Each Portfolio will
send each investor, or if Class I, each Institutional Investor, an IRS Form
1099-DIV by January 31.

Federally tax-free interest earned by Municipal Money Market Portfolio is
federally tax-free when distributed as income dividends. If the Portfolio earns
federally taxable income from any of its investments, it will be distributed as
a taxable dividend. Gains on the sale of tax-free bonds result in a taxable
distribution. Short-term capital gains and a portion of the gain on bonds
purchased at a discount are taxed as dividends. The Portfolio may invest up to
100% of its assets in municipal obligations whose interest is subject to the
federal alternative minimum tax (AMT) for individuals (private activity
obligations). To the extent that the Portfolio invests in private activity
obligations, individuals who are subject to the AMT will be required to report a
portion of the Portfolio's dividends as a "tax preference item" in determining
their federal income tax.

STATE AND LOCAL TAXES. Mutual fund dividends from U.S. government
securities generally are free from state and local income taxes. Income
dividends distributed by the Portfolios attributable to interest on bonds or
securities of the U.S. government or any of its agencies or instrumentalities
will generally be exempt from Tennessee personal income tax. However, particular
states may limit this benefit, and some types of securities, such as repurchase
agreements and some agency-backed securities, may not qualify for the benefit.
Ginnie Mae securities and other mortgage-backed securities are notable
exceptions to this limitation, and will qualify for the benefit in most states.
Some states may impose intangible property taxes.

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<PAGE>

should consult your tax adviser for details and up-to-date information on the
tax laws in your state to determine whether a Portfolio is suitable to your
particular tax situation.

When you sign an account application, you will be asked to certify that the
taxpayer identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you do not comply with
IRS regulations, the IRS can require each Portfolio to withhold 31% of taxable
distributions from your account.

- --------------------------------------------------------------------------------
WHAT ADVISORY AND OTHER FEES DO THE PORTFOLIOS PAY?
- --------------------------------------------------------------------------------

INVESTMENT ADVISORY AND MANAGEMENT AND SUB-ADVISORY AGREEMENTS. For
managing its investment and business affairs, each Portfolio is obligated to pay
First Tennessee, 4990 Poplar Avenue, Memphis, Tennessee, a monthly management
fee at the annual rate of .25% of aggregate average net assets of all Money
Market Portfolios of the Trust managed by First Tennessee through $1 billion,
and .22% on amounts greater than $1 billion. First Tennessee has voluntarily
agreed to waive its fees to .10% of each Money Market Portfolio's average net
assets. This voluntary waiver can be discontinued at any time.

Under the Investment Advisory and Management Agreement, First Tennessee
may, with the prior approval of the Trustees and the shareholders of the
Portfolio, engage one or more sub-advisers which may have full investment
discretion to make all determinations with respect to the investment and
reinvestment of all or any portion of a Portfolio's assets, subject to the terms
and conditions of the Investment Advisory and Management Agreement and the
written agreement with any such sub-adviser. In the event one or more
sub-advisers is appointed by First Tennessee, First Tennessee shall monitor and
evaluate the performance of such sub-advisers, allocate Portfolio assets to be
managed by such sub-advisers, recommend any changes in or additional
sub-advisers when appropriate and compensate each sub-adviser out of the
investment advisory fee received by First Tennessee from each Portfolio.

First Tennessee has experience as an investment adviser to individual,
corporate and institutional advisory clients, pension plans and collective
investment funds, with approximately $15.6 billion in assets under
administration (including non-discretionary accounts) and $6.1 billion in assets
under management as of June 30, 1997, as well as experience in supervising
sub-advisers.

PIMC, 400 Bellevue Parkway, Wilmington, Delaware, serves as the Sub-Adviser
for each Portfolio subject to the supervision of First Tennessee, pursuant to
the authority granted to it under its Sub-Advisory Agreement with First
Tennessee. PIMC is a wholly-owned subsidiary of PNC Bank National Association
(PNC Bank). PIMC was organized in 1973 to perform advisory services for
investment companies. PNC Bank and its predecessors have been in the business of
managing the investments of fiduciary and other accounts since 1847. PNC Bank is
a wholly-owned, indirect subsidiary of PNC Bank Corp., a multi-bank holding
company. PIMC advises or manages approximately 42 investment company portfolios
with total assets of approximately $32 billion as of September 30, 1997. PIMC is
paid by First Tennessee a monthly sub-advisory fee at the annual rate of .08% of
aggregate average net assets of all of the First Funds Money Market Portfolios
advised by PIMC through $500 million, .06% of the next $500 million, and .05% on
assets greater than $1 billion.

ADMINISTRATOR AND DISTRIBUTOR. ALPS, 370 17th Street, Suite 3100, Denver,
Colorado 80202, serves as the Administrator and Distributor for each Portfolio.
As Administrator, ALPS assists in each Portfolio's administration and operation,
including but not limited to, providing office space and various legal and
operational services in connection with the regulatory requirements applicable
to each Portfolio. ALPS is entitled to and receives from each Portfolio a
monthly fee at the annual rate of .075% of average net assets.

First Tennessee serves as the Co-Administrator for each Portfolio. As the
Co-Administrator, First Tennessee assists in each Portfolio's operation,
including but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from each Portfolio a monthly fee at the annual
rate of .05% of average net assets. First Tennessee is voluntarily waiving this
fee to .025%; however, there is no guarantee that this waiver will continue.

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<PAGE>

TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company (CGFSC),
a division of Chase Manhattan Bank, N.A. provides transfer agent and related
services for each Portfolio. Chase Manhattan Bank, N.A. is custodian of each
Portfolio's assets.

PRICING AND ACCOUNTING. CGFSC also serves as the Fund Accountant and
thereby calculates the NAV and dividends of each Class and maintains the
Portfolio and general accounting records.

DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN. The Trustees have
adopted a Distribution Plan on behalf of Class III of each Portfolio pursuant to
Rule 12b-1 (the Rule) under the 1940 Act. The NASD subjects asset-based sales
charges to its maximum sales charge rule. Fees paid pursuant to each Portfolio's
Distribution Plan will be limited by the restrictions imposed by the NASD rule.
Each Distribution Plan provides for payment of a fee to ALPS at the annual rate
of up to .45% of the average net assets of Class III; however, the Trustees have
limited such fees to .25% of Class III's average net assets. All or a portion of
these fees will in turn be paid to Investment Professionals as compensation for
selling shares of Class III and for providing ongoing sales support services.
The Trustees have also adopted Shareholder Servicing Plans on behalf of Class II
of each Portfolio under which Investment Professionals are paid at the annual
rate of up to .25% of the average net assets of Class II for shareholder
services and account maintenance, including responding to shareholder inquiries,
directing shareholder communications, account balance maintenance, and dividend
posting. The Distribution Fees and the Shareholder Servicing Fees are expenses
of Class III and Class II, respectively, in addition to the Management Fee, and
Administration and Co-Administration Fees, and will reduce the net income and
total return of both Classes.

- --------------------------------------------------------------------------------
HOW ARE THE PORTFOLIOS ORGANIZED?
- --------------------------------------------------------------------------------

U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio, and Cash Reserve Portfolio are
diversified portfolios of First Funds, an open-end management investment company
organized as a Massachusetts business trust by a Declaration of Trust dated
March 6, 1992, as amended and restated on September 4, 1992. Each Portfolio
consists of three separate Classes. The Trustees supervise the Trust's
activities and review its contractual arrangements with companies that provide
the Trust with services. The Trust is not required to hold annual shareholder
meetings, although special meetings may be called for a specific Portfolio or
Class with respect to issues affecting that Portfolio or Class, or the Trust as
a whole, for purposes such as electing or removing Trustees, changing
fundamental policies or approving investment advisory agreements. Shareholders
receive one vote for each share owned and fractional votes for fractional shares
owned. A Portfolio or Class votes separately with respect to issues affecting
only that Portfolio or Class.

Pursuant to the Declaration of Trust, the Trustees have the authority to
issue additional Classes of shares for each Portfolio of the Trust.

The following paragraphs provide a brief description of the securities in
which each Portfolio may invest and the transactions each may make. Each
Portfolio is not limited by this discussion, however, and may purchase other
types of securities and may enter into other types of transactions if they are
consistent with each Portfolio's investment objective and policies.

ASSET-BACKED SECURITIES purchased by each Portfolio may include pools of
mortgages, loans, receivables or other assets. Payment of principal and interest
may be largely dependent upon the cash flows generated by the assets backing the
securities.

BANKERS' ACCEPTANCES purchased by Cash Reserve Portfolio are negotiable
obligations of a bank to pay a draft which has been drawn on it by a customer.
These obligations are backed by large banks and also usually are backed by goods
in international trade.

CERTIFICATES OF DEPOSIT purchased by Cash Reserve Portfolio are negotiable
certificates that represent a commercial bank's obligations to repay funds
deposited with it and earn rates of interest over given periods.

COMMERCIAL PAPER purchased by Cash Reserve Portfolio are short-term
obligations issued by banks, broker-dealers, corporations and other entities for
purposes such as financing their current operations.

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<PAGE>

CORPORATE OBLIGATIONS purchased by Municipal Money Market Portfolio and
Cash Reserve Portfolio are bonds and notes issued by corporations and other
business organizations to finance their credit needs.

DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may buy and sell obligations
on a when-issued or delayed-delivery basis, with payment and delivery taking
place at a future date. The market value of obligations purchased in this way
may change before the delivery date, which could affect the market value of a
Portfolio's assets. Ordinarily, each Portfolio will not earn interest on
obligations until they are delivered.

DEMAND FEATURES AND STANDBY COMMITMENTS. A demand feature purchased by
Municipal Money Market Portfolio is a put that entitles the security holder to
repayment of the principal amount of the underlying security at any time or at
specified intervals not exceeding 397 days on no more than 30 days' notice. A
standby commitment is a put that entitles the security holder to same-day
settlement at amortized cost plus accrued interest.

ILLIQUID SECURITIES. Under guidelines established by the Trustees, PIMC,
under the supervision of First Tennessee, determines the liquidity of the
Portfolios' investments. The absence of a trading market can make it difficult
to ascertain a market value for illiquid investments. Disposing of illiquid
investments or securities subject to legal restrictions may involve
time-consuming negotiation and legal expenses. It may be difficult or impossible
for the Portfolio to sell illiquid or restricted securities promptly at an
acceptable price. Each Portfolio may invest up to 15% of its assets in illiquid
investments.

LETTERS OF CREDIT. Issuers or financial intermediaries who provide demand
features or standby commitments often support their ability to buy obligations
on demand by obtaining letters of credit (LOCs) or other guarantees from
domestic or foreign banks. LOCs also may be used as credit supports for
municipal instruments purchased by Municipal Money Market Portfolio. PIMC may
rely upon its evaluation of a bank's credit in determining whether to purchase
an instrument supported by an LOC. In evaluating a foreign bank's credit, PIMC,
under the supervision of First Tennessee, will consider whether adequate public
information about the bank is available and whether the bank may be subject to
unfavorable political or economic developments, currency controls, or other
governmental restrictions that might affect the bank's ability to honor its
credit commitment.

MONEY MARKET refers to the marketplace where short-term, high grade debt
obligations are traded, including U.S. government obligations, commercial paper,
certificates of deposit, bankers' acceptances, time deposits and short-term
corporate obligations. Money market instruments may carry fixed rates of return
or have variable or floating interest rates.

MUNICIPAL LEASE OBLIGATIONS purchased by Municipal Money Market Portfolio
are issued by a state or local government or authority to acquire land and a
wide variety of equipment and facilities. These obligations typically are not
fully backed by the municipality's credit, and their interest may become taxable
if the lease is assigned. If funds are not appropriated for the following year's
lease payments, the lease may terminate, with the possibility of significant
loss to the Portfolio. Certificates of Participation in municipal lease
obligations or installment sales contracts entitle the holder to a proportionate
interest in the lease-purchase payments made.

MUNICIPAL SECURITIES purchased by Municipal Money Market Portfolio include
GENERAL OBLIGATION SECURITIES, which are backed by the full taxing power of a
municipality, and REVENUE SECURITIES, which are backed by the revenues of a
specific tax, project, or facility. INDUSTRIAL REVENUE BONDS are a type of
revenue bond backed by the credit and security of a private issuer and may
involve greater risk. PRIVATE ACTIVITY MUNICIPAL SECURITIES, which may be
subject to the federal AMT, include securities issued to finance housing
projects, student loans, and privately owned solid waste disposal and water and
sewage treatment facilities. TAX AND REVENUE ANTICIPATION NOTES are issued by
municipalities in expectation of future tax or other revenues, and are payable
from those specific taxes or revenues. BOND ANTICIPATION NOTES normally provide
interim financing in advance of an issue of bonds or notes, the proceeds of
which are used to repay the anticipation notes. TAX-EXEMPT COMMERCIAL PAPER are
promissory notes issued by municipalities to help finance short-term capital or
operating needs.

RESOURCE RECOVERY BONDS purchased by Municipal Money Market Portfolio are a
type of revenue bond issued to build facilities such as solid waste incinerators
or waste-to-energy plants. Typically, a private corporation will be

20
<PAGE>

involved, at least during the construction phase, and the revenue stream will be
secured by fees or rents paid by municipalities for use of the facilities. The
viability of a resource recovery project, environmental protection regulations,
and project operator tax incentives may affect the value and credit quality of
resource recovery bonds.

REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
Portfolio temporarily transfers possession of a portfolio security to another
party, such as a bank or broker-dealer, in return for cash. At the same time,
each Portfolio agrees to repurchase the instrument at an agreed upon price and
time. Each Portfolio expects that it will engage in reverse repurchase
agreements for temporary purposes such as to fund redemptions, or with respect
to U.S. Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
and Cash Reserve Portfolio, when each is able to invest the cash so acquired at
a rate higher than the cost of the agreement, which would increase income earned
by these Portfolios. Reverse repurchase agreements may increase the risk of
fluctuation in the market value of a Portfolio's assets or in each Portfolio's
yield. Engaging in reverse repurchase agreements may involve an element of
leverage, and each Portfolio will not purchase a security while borrowings
(including reverse repurchase agreements) representing more than 5% of its total
assets are outstanding. Each Portfolio may engage in reverse repurchase
agreements only with those parties whose creditworthiness has been reviewed and
found satisfactory by PIMC consistent with each Portfolio's objective and
policies.

SECURITIES LENDING. Each Portfolio may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows each
Portfolio to retain ownership of the securities loaned and, at the same time, to
earn additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by PIMC to be of
good standing. Furthermore, they will only be made if, in PIMC's judgment, the
consideration to be earned from such loans would justify the risk.

PIMC understands that it is the current view of the SEC Staff that a
Portfolio may engage in loan transactions only under the following conditions:
(1) the Portfolio must receive 100% collateral in the form of cash or cash
equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Portfolio must be able to terminate the
loan at any time; (4) the Portfolio must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any dividends,
interest,or other distributions on the securities loaned and to any increase in
market value; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) the Board of Trustees must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower. Cash received through loan
transactions may be invested in any security in which a Portfolio is authorized
to invest.

STRIPPED GOVERNMENT SECURITIES. Stripped securities are created by
separating the income and principal components of a debt instrument and selling
them separately. Each Portfolio may purchase U.S. Treasury STRIPS (Separate
Trading of Registered Interest and Principal of Securities) that are created
when the coupon payments and the principal payment are stripped from an
outstanding Treasury bond by the Federal Reserve Bank. Bonds issued by the
Resolution Funding Corporation (REFCORP) can also be stripped in this fashion.
REFCORP STRIPS are eligible investments for U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio and Cash Reserve Portfolio.

Cash Reserve Portfolio and Municipal Money Market Portfolio may purchase
privately stripped government securities, which are created when a dealer
deposits a Treasury security or federal agency security with a custodian for
safekeeping and then sells the coupon payments and principal payments that will
be generated by this security. Proprietary receipts, such as Certificates of
Accrual on Treasury Securities (CATS), Treasury Investment Growth Receipts
(TIGRs), and generic Treasury Receipts (TRs), are stripped U.S. Treasury
securities that are separated into their component parts through trusts created
by their broker sponsors. Bonds issued by the Financing Corporation (FICO) can
also be stripped in this fashion.

Because of the SEC's views on privately stripped government securities,
Cash Reserve Portfolio must evaluate them as it would non-government securities
pursuant to regulatory guidelines applicable to all money market funds.
Accordingly, Cash Reserve Portfolio currently intends to purchase only those
privately stripped government securities

21
<PAGE>

that have either received the highest rating from two nationally recognized
rating services (or one, if only one has rated the security), or, if unrated,
been judged to be of equivalent quality by PIMC.

TIME DEPOSITS purchased by Cash Reserve Portfolio are non-negotiable
deposits in a banking institution earning a specified interest rate over a given
period of time.

U.S. GOVERNMENT OBLIGATIONS are debt obligations issued or guaranteed by
the U.S. Treasury or by an agency or instrumentality of the U.S. government. Not
all U.S. government obligations are backed by the full faith and credit of the
United States. For example, obligations issued by the Federal Farm Credit Bank
or by the Federal National Mortgage Association are supported by the agency's
right to borrow money from the U.S. Treasury under certain circumstances.
Obligations issued by the Federal Home Loan Bank are supported only by the
credit of the agency. There is no guarantee that the government will support
these types of obligations, and therefore they involve more risk than other
government obligations.

U.S. TREASURY OBLIGATIONS are obligations issued by the United States and
backed by its full faith and credit.

VARIABLE AND FLOATING RATE INSTRUMENTS for Municipal Money Market
Portfolio, including certain participation interests in municipal obligations,
have interest rate adjustment formulas that help to stabilize their market
values. Many variable or floating rate instruments also carry demand features
that permit the Portfolio to sell them at par value plus accrued interest on
short notice. When determining the maturity of a variable or floating rate
instrument, the Portfolio may look to the date the demand feature can be
exercised, or to the date the interest rate is readjusted, rather than to the
final maturity of the instrument.

VARIABLE AND FLOATING RATE Instruments for U.S. Government Money Market
Portfolio and Cash Reserve Portfolio, including notes purchased directly from
issuers, bear variable or floating interest rates and may carry rights that
permit holders to demand full payment from the issuers or certain financial
intermediaries. Floating rate securities have interest rates that change
whenever there is a change in a designated market-based interest 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.

ZERO COUPON BONDS purchased by each Portfolio do not make regular interest
payments; instead they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change. In
calculating its daily dividend, each Portfolio takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.

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23
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INVESTMENT ADVISER AND CO-ADMINISTRATOR

First Tennessee Bank National Association
Memphis, TN

SUB-ADVISER

PNC Institutional Management Corporation
Wilmington, DE

OFFICERS

Richard C. Rantzow, President
Jeremy O. May, Treasurer
James V. Hyatt, Secretary

TRUSTEES

Thomas M. Batchelor
John A. DeCell
L.R. Jalenak, Jr.
Larry W. Papasan
Richard C. Rantzow

GENERAL DISTRIBUTOR

ALPS Mutual Funds Services, Inc.
Denver, CO

TRANSFER AND SHAREHOLDER SERVICING AGENT

Chase Global Funds Services Company
Boston, MA

CUSTODIAN

Chase Manhattan Bank, N.A.
New York, NY

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<PAGE>
FIRST FUNDS
GROWTH & INCOME PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 24, 1997

This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of First Funds: Growth & Income, Capital
Appreciation, Bond and Intermediate Bond Portfolios dated October 24 , 1997 .
Please retain this Statement for future reference. The financial statements and
financial highlights of the Growth & Income and Bond Portfolios are included in
the Annual Report for the fiscal year ended June 30, 1997 and are incorporated
herein by reference. The Capital Appreciation and Intermediate Bond Portfolios
had not commenced operations as of June 30, 1997 and therefore are not included
in the Annual Report. To obtain additional free copies of this Statement, the
Annual Report or the Prospectuses for each Portfolio, please call the
Distributor at 1-800-442-1941, option 1 or write to the Distributor at 370 17th
Street, Suite 3100, Denver CO 80202.

TABLE OF CONTENTS PAGE

Investment Restrictions and Limitations. . . . . . . . . .2
Investment Instruments . . . . . . . . . . . . . . . . . 3
Portfolio Transactions . . . . . . . . . . . . . . . . . .8
Valuation of Portfolio Securities. . . . . . . . . . . . .9
Performance. . . . . . . . . . . . . . . . . . . . . . . 10
Additional Purchase and Redemption Information . . . . . 12
Distributions and Taxes. . . . . . . . . . . . . . . . . 13
Trustees and Officers. . . . . . . . . . . . . . . . . . 13
Investment Advisory Agreements . . . . . . . . . . . . . 15
Administration Agreements and Other Contracts. . . . . . 15
Description of the Trust . . . . . . . . . . . . . . . . 18
Financial Statements . . . . . . . . . . . . . . . . . . 19
Appendix . . . . . . . . . . . . . . . . . . . . . . . . 20

INVESTMENT ADVISER (Growth & Income, Bond and Intermediate Bond Portfolios)
First Tennessee Bank National Association (First Tennessee)

SUB-ADVISER (Growth & Income, Bond and Intermediate BondPortfolios)
Highland Capital Management Corp. (Highland or the Sub-Adviser)

CO-INVESTMENT ADVISERS (Capital Appreciation Portfolio)
First Tennessee Bank National Association (First Tennessee)
Investment Advisers, Inc. (IAI)

ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. (ALPS or the Administrator and Distributor)

CO-ADMINISTRATOR
First Tennessee Bank National Association (First Tennessee or the
Co-Administrator)

TRANSFER AGENT & SHAREHOLDER SERVICING AGENT
Chase Global Funds Services Company (CGFSC or the Transfer Agent)

CUSTODIAN
Chase Manhattan Bank, N.A. (Chase or the Custodian)

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INVESTMENT RESTRICTIONS AND LIMITATIONS

The following policies and limitations supplement those set forth in the
Portfolios' Prospectuses. Unless otherwise noted, whenever an investment policy
or limitation states a maximum percentage of a Portfolio's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of a Portfolio's acquisition of such security
or other asset. Accordingly, any subsequent change in values, net assets, or
other circumstances will not be considered when determining whether the
investment complies with a Portfolio's investment policies and limitations. With
respect to illiquid securities, any investment in such securities that exceeds
15% of a Portfolio's net assets will be reduced promptly to meet such
limitation.

Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940) of that Portfolio. However, except for the
fundamental investment limitations set forth below, the investment policies and
limitations described in this Statement of Additional Information are not
fundamental and may be changed without shareholder approval.

INVESTMENT LIMITATIONS OF THE GROWTH & INCOME, CAPITAL APPRECIATION, BOND AND
INTERMEDIATE BOND PORTFOLIOS

THE FOLLOWING ARE THE FUNDAMENTAL LIMITATIONS FOR EACH PORTFOLIO, SET FORTH IN
THEIR ENTIRETY. EACH PORTFOLIO MAY NOT:

(1) with respect to 75% of a Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as
a result, (a) more than 5% of a Portfolio's total assets would be
invested in the securities of that issuer; or (b) such a Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;

(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;

(3) borrow money, except that each Portfolio may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount
not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;

(4) underwrite securities issued by others, except to the extent that each
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;

(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of such a Portfolio's
total assets would be invested in the securities of companies whose
principal business activities are in the same industry;

(6) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio
from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);

(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
a Portfolio from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities); or

(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limit
does not apply to purchases of debt securities or to repurchase
agreements.

(9) Each Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end or closed-end management investment company with
substantially the same fundamental investment objectives, policies, and
limitations as the Portfolio.

THE FOLLOWING LIMITATIONS OF EACH PORTFOLIO ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.

(i) Each Portfolio does not currently intend during the coming year to
purchase securities on margin, except that each Portfolio may obtain
such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.

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(ii) Each Portfolio may borrow money only (a) from a bank or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation 3). The Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.

(iii) Each Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 15% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.

(iv) Each Portfolio does not currently intend during the coming year to
purchase or sell futures contracts. This limitation does not apply to
securities that incorporate features similar to futures contracts.

(v) Each Portfolio does not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt
securities.

(vi) Each Portfolio does not currently intend during the coming year to
invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objectives, policies, and limitations as the Portfolio.

INVESTMENT INSTRUMENTS

First Tennessee Bank National Association (First Tennessee), serves as
Investment Adviser to the Growth & Income, Bond and Intermediate Bond Portfolios
and, with the prior approval of the Board of Trustees (the Trustees), has
engaged Highland Capital Management Corp. (the Sub-Adviser) to act as
Sub-Adviser to these Portfolios. First Tennessee and Investment Advisers, Inc.
(IAI) act as Co-Advisers to the Capital Appreciation Portfolio. The activities
of the Sub-Adviser and IAI include providing investment research and credit
analysis concerning Portfolio investments and conducting a continuous program of
investment of Portfolio assets in accordance with the investment policies and
objectives of each Portfolio.

DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by each Portfolio to purchase or sell specific securities at a predetermined
price and/or yield, with payment and delivery taking place after the customary
settlement period for that type of security (and more than seven days in the
future). Typically, no interest accrues to the purchaser until the security is
delivered. Each Portfolio may receive fees for entering into delayed delivery
transactions.

When purchasing securities on a delayed-delivery basis, each Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with such
Portfolio's other investments. If a Portfolio remains substantially fully
invested at a time when delayed-delivery purchases are outstanding, the
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, a Portfolio will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a Portfolio has sold a security on a
delayed-delivery basis, a Portfolio does not participate in further gains or
losses with respect to the security. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
securities, such Portfolio could miss a favorable price or yield opportunity, or
could suffer a loss.

Each Portfolio may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.

FOREIGN INVESTMENTS. Foreign investments purchased by each Portfolio can
involve significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in or indexed to foreign
currencies, and of dividends and interest from such securities, can change
significantly when foreign currencies strengthen or weaken to the U.S.
dollar. Foreign securities markets generally have less trading volume and
less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and
disclosure standards comparable to those applicable to U.S. companies, and it
may be more difficult to obtain reliable information regarding an issuer's
financial condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions, and custodial
costs, are generally higher than for U.S. investments.

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Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal
rights in foreign countries.

Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restriction on U.S. investment
or on the ability to repatriate assets or convert currency into U.S. dollars, or
other government intervention. There may be a greater possibility of default by
foreign governments or foreign government-sponsored enterprises. Investments in
foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
There is no assurance that a Portfolio's investment adviser will be able to
anticipate or counter these potential events.

The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.

Each Portfolio may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.

American Depository Receipts and European Depository Receipts (ADRs and EDRs)
are certificates evidencing ownership of shares of a foreign-based corporation
held in trust by a bank or similar financial institution. Designed for use in
U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies.

FOREIGN CURRENCY TRANSACTIONS. The Portfolios may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward contracts
to purchase or sell foreign currencies at a future date and price. The
Portfolios will convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers generally do not charge a fee for conversion, they do
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the fund at one rate, while offering a lesser rate of
exchange should the portfolio desire to resell that currency to the dealer.
Forward contracts are generally traded in an interbank market conducted
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.

Each Portfolio may use currency forward contracts for any purpose consistent
with its investment objective. The following discussion summarizes the
principal currency management strategies involving forward contracts that
could be used by the Portfolio. The Portfolios may also use swap agreements,
indexed securities, and options and futures contracts relating to foreign
currencies for the same purposes.

When a Portfolio agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount
of U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, the Portfolio will be able to protect itself against an
adverse change in foreign currency values between the date the security is
purchased or sold and the date on which payment is made or received. This
technique is sometimes referred to as a "settlement hedge" or "transaction
hedge." The Portfolio may also enter into forward contracts to purchase or
sell a foreign currency in anticipation of future purchases or sales of
securities denominated in foreign currency, even if the specific investments
have not yet been selected by the the Portfolio's investment adviser.

A Portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
a Portfolio owned securities denominated in pounds sterling, it could enter
into a forward contract to sell pounds sterling in return for U.S. dollars to
hedge against possible declines in the pound's value. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. A Portfolio could also hedge the position by selling
another currency expected to perform similarly to the pound sterling - for
example, by entering into a forward contract to sell Deutsche marks or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively
as a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency

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used to hedge does not perform similarly to the currency in which the hedged
securities are denominated. A Portfolio may enter into forward contracts to
shift its investment exposure from one currency into another. This may
include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. For example, if a
Portfolio held investments denominated in Deutsche marks, such Portfolio
could enter into forward contracts to sell Deutsche marks and purchase Swiss
Francs. This type of strategy, sometimes known as a "cross hedge," will tend
to reduce or eliminate exposure to the currency that is sold, and increase
exposure to the currency that is purchased, much as if the Portfolio had sold
a security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause the Portfolio to assume the
risk of fluctuations in the value of the currency it purchases.

Under certain conditions, Securities and Exchange Commission (SEC) guidelines
require mutual funds to set aside cash or other appropriate liquid assets in a
segregated custodial account to cover currency forward contracts. As required
by SEC guidelines, the Portfolios will segregate assets to cover currency
forward contracts, if any, whose purpose is essentially speculative. The
Portfolios will not segregate assets to cover forward contracts entered into
for hedging purposes, including settlement hedges, position hedges, and proxy
hedges.

Successful use of forward currency contracts will depend on an investment
adviser's skill in analyzing and predicting currency values. Forward contracts
may substantially change a Portfolio's investment exposure to changes in
currency exchange rates, and could result in losses to a Portfolio if
currencies do not perform as the investment adviser anticipates. For example,
if a currency's value rose at a time when the investment adviser had hedged a
Portfolio by selling that currency in exchange for dollars, a Portfolio would
be unable to participate in the currency's appreciation. If the investment
adviser hedges currency exposure through proxy hedges, a Portfolio could
realize currency losses from the hedge and the security position at the same
time if the two currencies do not move in tandem. Similarly, if the investment
adviser increases a Portfolio's exposure to a foreign currency, and that
currency's value declines, the Portfolio will realize a loss. There is no
assurance that an investment adviser's use of forward currency contracts will
be advantageous to a Portfolio or that it will hedge at an appropriate time.
The policies described in this section are non-fundamental policies of each
Portfolio.

ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued. Under guidelines established by the Trustees, the Sub-Adviser, under
the supervision of First Tennessee, and IAI determines the liquidity of each
respective Portfolio's investments and, through reports from the Sub-Adviser and
IAI, the Trustees monitor investments in illiquid instruments. In determining
the liquidity of each Portfolio's investments, the Sub-Adviser and IAI may
consider various factors including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset each Portfolio's rights and
obligations relating to the investment). Investments currently considered by
each Portfolio to be illiquid include repurchase agreements not entitling the
holder to payment of principal and interest within seven days, over-the-counter
options, and some restricted securities determined by the Sub-Adviser or IAI to
be illiquid. However, with respect to over-the-counter options that each
Portfolio writes, all or a portion of the value of the underlying instrument may
be illiquid depending on the assets held to cover the option and the nature and
terms of any agreement each Portfolio may have to close out the option before
expiration. In the absence of market quotations, illiquid investments are
priced at fair value as determined in good faith by the Trustees. If through a
change in values, net assets or other circumstances, each Portfolio was in a
position where more than 15% of its net assets were invested in illiquid
securities, the Trustees would seek to take appropriate steps to protect
liquidity.

REAL ESTATE INVESTMENT TRUSTS. The Growth & Income and Capital Appreciation
Portfolio (Equity Portfolios) may purchase interests in real estate investment
trusts. Real estate industry companies include, among others, equity real
estate investment trusts, which own properties, and mortgage real estate
investment trusts, which make construction, development, and long-term mortgage
loans. Equity real estate investment trusts may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage real
estate investment trusts may be affected by the quality of credit extended.
Equity and mortgage real estate investment trusts are dependent upon management
skill, are not diversified, and are subject to the risks of financing projects.
Such trusts are also subject to heavy cash flow dependency, defaults by
borrowers, self liquidation, and the possibilities of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code and failing to
maintain exemption from the Investment Company Act of 1940 (the 1940 Act).

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is in effect secured by the underlying security having a value at least equal to
the amount of the agreed upon resale price. Each Portfolio may enter into a
repurchase agreement with respect to any security in which it is authorized to
invest. While it presently does not appear possible to eliminate all risks from
the transactions (particularly the possibility of a decline in the market value
of the underlying securities, as well as delay and costs to each Portfolio in
connection with bankruptcy proceedings), it is the policy of each Portfolio to
limit repurchase agreements to those parties whose creditworthiness has been
reviewed and found satisfactory by the Sub-Adviser or IAI, as the case may be.

REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a Portfolio
sells a portfolio security to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, each Portfolio
will maintain appropriate high grade liquid assets in a segregated custodial
account to cover its obligation under the agreement. Each Portfolio will enter
into reverse repurchase agreements only with parties whose creditworthiness has
been found satisfactory by the Sub-Adviser or IAI, as the case may be. Such
transactions may increase fluctuations in the market values of each Portfolio's
assets and may be viewed as a form of leverage.

RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, each Portfolio may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time each Portfolio may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, each Portfolio might obtain a less favorable
price than prevailed when it decided to seek registration of the security.

SECURITIES LENDING. Each Portfolio may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the
Portfolios to retain ownership of the securities loaned and, at the same time,
to earn additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by the Sub-Adviser
or IAI to be of good standing. Furthermore, they will only be made if, in the
Sub-Adviser's or IAI's judgment, the consideration to be earned from such loans
would justify the risk.

First Tennessee, Highland and IAI understand that it is the current view of the
SEC that each Portfolio may engage in loan transactions only under the following
conditions: (1) each Portfolio must receive 100% collateral in the form of cash
or cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2)
the borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, each Portfolio must be able to terminate
the loan at any time; (4) each Portfolio must receive reasonable interest on the
loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to any
increase in market value; (5) each Portfolio may pay only reasonable custodian
fees in connection with the loan; and (6) the Trustees must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower.

Cash received through loan transactions may be invested in any security in which
the Portfolios are authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).

VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOS/FRDOS) are obligations that
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 obligations provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value for
the VRDO or FRDO that approximates its par value. The Bond and Intermediate
Bond Portfolios (the Bond Portfolios) may invest in fixed-rate bonds that are
subject to third party puts and in participation interests in such bonds held by
a bank in trust or otherwise. These bonds and participation interests have
tender options or demand features that permit these Portfolios to tender (or
put) their bonds to an institution at periodic intervals and to receive the
principal amount thereof. These Portfolios consider variable rate instruments
structured in this way (Participating VRDOs) to be essentially equivalent to
other VRDOs they purchase.

WARRANTS. The Equity Portfolios may invest in warrants which entitle the holder
to buy equity securities at a specific price during a specific period of time.
Warrants may be considered more speculative than certain other types of
investments in that they do not entitle a holder to dividends or voting rights
with respect to the securities which may be purchased, nor do they represent any
rights in the assets of the issuing company. The value of a warrant may be more
volatile than the value of the securities underlying the warrants. Also, the
value of the warrant does not necessarily change with the value

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of the underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. Warrants may be allowed to expire if
the Sub-Adviser or IAI deems it undesirable to exercise or sell.

LIMITATIONS ON OPTIONS TRANSACTIONS. Each Portfolio will not: (a) purchase put
options or write call options if, as a result, more than 25% of a Portfolio's
total assets would be hedged with options under normal conditions; (b) write put
options if, as a result, a Portfolio's total obligations upon settlement or
exercise of written put options would exceed 25% each of their total assets; or
(c) purchase call options if, as a result, the current value of option premiums
for call options purchased by each Portfolio would exceed 5% of total assets.
These limitations do not apply to options attached to or acquired or traded
together with their underlying securities, and do not apply to securities that
incorporate features similar to options.

PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a Portfolio
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 Portfolio pays
the current market price for the option (known as the option premium). Options
have various types of underlying instruments, including specific securities and
indexes of securities prices. A Portfolio may terminate its position in a put
option it has purchased by allowing them to expire or by exercising the option.
If the option is allowed to expire, a Portfolio will lose the entire premium it
paid. If a Portfolio exercises the option, it completes the sale of the
underlying instrument at the strike price. A Portfolio 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 Portfolio 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 Portfolio 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. The Portfolios may seek to terminate their positions in
put options they write before exercise by closing out the options in the
secondary market at their current price. If the secondary market is not liquid
for a put option a Portfolio has written, however, the Portfolio must continue
to be prepared to pay the strike price while the option is outstanding,
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 the premium received for writing the option should mitigate the effects
of the decline.

Writing a call option obligates each Portfolio 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 some ability to participate in security price increases.

COMBINED POSITIONS. Each Portfolio may purchase and write options in
combination with each other, or in combination with forward contracts, to adjust
the risk and return characteristics of the overall position. For example, the
Portfolios 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 options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.

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CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options contracts, it is likely that the standardized contracts
available will not match the Portfolios' current or anticipated investments
exactly. Each Portfolio may invest in options contracts based on securities
with different issuers, maturities, or other characteristics from the securities
in which each typically invests.

Options prices can also diverge from the prices of their underlying instruments,
even if the underlying instruments match the Portfolios' investments well.
Options 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 markets and the securities markets,
from structural differences in how options and securities are traded, or from
imposition of daily price fluctuation limits or trading halts. The Portfolios
may purchase or sell options 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 the Portfolios' options 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. There is no assurance a liquid secondary market will
exist for any particular options 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. On volatile trading days
when the price fluctuation limit is reached or a trading halt is imposed, it may
be impossible for the Portfolios 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 the
Portfolios to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Portfolios' access to
other assets held to cover its options 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 options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Portfolios 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.

ASSET COVERAGE FOR OPTIONS POSITIONS. The Portfolios will comply with
guidelines established by the SEC with respect to coverage of options strategies
by mutual funds and, if the guidelines so require, will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the option 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 the
Portfolios' assets could impede portfolio management or the Portfolios' ability
to meet redemption requests or other current obligations.

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of securities are placed on behalf of the
respective Portfolios by First Tennessee, the Sub-Adviser and IAI (collectively,
the Advisers) pursuant to authority contained in each Portfolio's Investment
Advisory Agreement, Sub-Advisory Agreement or Co-Advisory Agreement, as the case
may be. The Advisers are also responsible for the placement of transaction
orders for other investment companies and accounts for which they or their
affiliates act as investment adviser. In selecting broker-dealers, subject to
applicable limitations of the federal securities laws, the Advisers consider
various relevant factors, including, but not limited to, the broker's execution
capability; the broker's perceived financial stability; the broker's
responsiveness to the Advisers' transaction requests; and the broker's clearance
and settlement capability. Commissions for foreign investments traded on
foreign exchanges will generally be higher than for U.S. investments and may not
be subject to negotiation.

Each Portfolio may execute portfolio transactions with broker-dealers who
provide research and execution services to the Portfolios or other accounts over
which the Advisers or their affiliates exercise investment discretion. Such
services may include research-related computer hardware and software; and
furnishing analyses and reports concerning issuers, industries, and economic
factors and trends.

The receipt of research from broker-dealers that execute transactions on behalf
of each Portfolio may be useful to the Advisers in rendering investment
management services to each Portfolio and/or its other clients, and conversely,
such information provided by broker-dealers who have executed transaction orders
on behalf of other clients may be useful to

8
<PAGE>

the Advisers in carrying out its obligations to each Portfolio. The receipt of
such research has not reduced the Advisers' normal independent research
activities; however, it enables the Advisers to avoid the additional expenses
that could be incurred if they tried to develop comparable information through
their own efforts.

Subject to applicable limitations of the federal securities laws, broker-dealers
may receive commissions for agency transactions that are higher than the
commission of other broker-dealers in recognition of their research and
execution services. In order to cause each Portfolio to pay such higher
commissions, the Advisers must determine in good faith that such commissions are
reasonable in relation to the value of the brokerage and research services
provided by such executing broker-dealers viewed in terms of a particular
transaction or the Advisers' overall responsibilities to each Portfolio and its
other clients. In reaching this determination, the Advisers will not attempt to
place a specific dollar value on the brokerage and research services provided or
to determine what portion of the compensation should be related to those
services.

The Advisers are authorized to use research services provided by and to place
portfolio transactions, to the extent permitted by law, with brokerage firms
that have provided assistance in the distribution of shares of each Portfolio.

The Trustees periodically review the Advisers' performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of each Portfolio and review the commissions paid by each Portfolio over
representative periods of time to determine if they are reasonable in relation
to the benefits to each Portfolio.

For the fiscal years ended June 30, 1997 and 1996, the portfolio turnover rates
were 25% and 41% for the Growth & Income Portfolio, and 56% and 56% for the Bond
Portfolio. The Growth & Income Portfolio paid brokerage commissions in the
amounts of $147,563, $276,190 and $146,176 during the fiscal years ended June
30, 1997, 1996 and 1995, respectively. During the fiscal years ended June 30,
1997, 1996 and 1995, no brokerage commissions were paid by the Growth & Income
Portfolio to an affiliated broker of the Trust. No brokerage commissions were
paid by the Bond Portfolio during the last three fiscal years. The Capital
Appreciation and Intermediate Bond Portfolios had not commenced operations as of
June 30, 1997.

From time to time the Trustees will review whether the recapture for the benefit
of each Portfolio of some portion of the brokerage commissions or similar fees
paid by each Portfolio on portfolio transactions is legally permissible and
advisable. Each Portfolio seeks to recapture soliciting broker-dealer fees on
the tender of portfolio securities, but at present no other recapture
arrangements are in effect. The Trustees intend to continue to review whether
recapture opportunities are available and are legally permissible and, if so, to
determine, in the exercise of their business judgment, whether it would be
advisable for each Portfolio to seek such recapture.

When two or more Portfolios are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance with a
formula considered by the Trustees and each Portfolio's respective investment
adviser to be equitable to each Portfolio. In some cases this system could have
a detrimental effect on the price or value of the security as far as each
Portfolio is concerned. In other cases, however, the ability of each Portfolio
to participate in volume transactions will produce better executions for each
Portfolio. It is the current opinion of the Trustees that the desirability of
retaining the Portfolios' investment advisers outweighs any disadvantages to the
Portfolios that may be said to exist from exposure to simultaneous transactions.

VALUATION OF PORTFOLIO SECURITIES

Securities owned by each Portfolio are appraised by various methods depending
on the market or exchange on which they trade. Securities traded on the New
York Stock Exchange (NYSE) or the American Stock Exchange are appraised at
the last sale price, or if no sale has occurred, at the closing bid price.
Securities traded on other exchanges are appraised as nearly as possible in
the same manner. Securities and other assets for which exchange quotations
are not readily available are valued on the basis of closing over-the-counter
bid prices, if available, or at their fair value as determined in good faith
under consistently applied procedures under the general supervision of the
Trustees. Short-term securities maturing in 60 days are valued either at
amortized cost or at original cost plus accrued interest, both of which
approximate current value. Convertible securities and fixed-income securities
are valued primarily by a pricing service that uses a vendor security
valuation matrix which incorporates both dealer-supplied valuations and
electronic data processing techniques. This two-fold approach is believed to
more accurately reflect fair value because it takes into account appropriate
factors such as institutional trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data, without exclusive reliance upon quoted, exchange, or
over-the-counter prices.

Use of pricing services has been approved by the Trustees. Securities and
other assets for which there is no readily available market are valued in
good faith by a committee appointed by the Trustees. The procedures set
forth above need not be used to determine the value of the securities owned
by a Portfolio if, in the opinion of a committee appointed by the Trustees.
The procedures set forth above need not be used to determine the value of the
securities owned by a Portfolio if, in the opinion of a committee appointed
by the

9
<PAGE>

Trustees, some other method (e.g., closing over-the-counter bid prices in the
case of debt instruments traded on an exchange) would more accurately reflect
the fair market value of such securities.

Generally, the valuation of foreign and domestic equity securities, as well as
corporate bonds, U.S. government securities, money market instruments, and
repurchase agreements, is substantially completed each day at the close of the
NYSE. The values of any such securities held by the Portfolios are determined
as of such time for the purpose of computing the Portfolios' net asset values
per share (NAV). Foreign security prices are furnished by independent brokers
or quotation services which express the value of securities in their local
currency. Chase Global Funds Services Company, the Transfer Agent, gathers all
exchange rates daily at the close of the NYSE using the last quoted price on
the local currency and then translates the value of foreign securities from
their local currency into U.S. dollars. Any changes in the value of forward
contracts due to exchange rate fluctuations and days to maturity are included in
the calculation of the net asset value. If an extraordinary event that is
expected to materially affect the value of a portfolio security occurs after the
close of an exchange on which that security is traded, then the security will be
valued as determined in good faith.

PERFORMANCE

For each Class of the Portfolios, YIELDS used in advertising are computed by
dividing interest income for a given 30-day or one-month period, net of
expenses, by the average number of shares entitled to receive dividends during
the period, dividing this figure by the NAV at the end of the period and
annualizing the result (assuming compounding of income) in order to arrive at an
annual percentage rate. Income is calculated for purposes of yield quotations
in accordance with standardized methods applicable to all bond funds. In
general, interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from income on a
daily basis, and is increased with respect to bonds trading at a discount by
adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.

Income calculated for the purposes of determining yields differs from income as
determined for other accounting purposes. Because of the different accounting
methods used, and because of the compounding of income assumed in yield
calculations, yield may not equal its distribution rate, the income paid to an
account, or income reported in financial statements.

Yield information may be useful in reviewing performance and in providing a
basis for comparison with other investment alternatives. Yield will fluctuate,
unlike investments that pay a fixed interest rate over a stated period of time.
Investors should give consideration to the quality and maturity of portfolio
securities of the respective investment companies when comparing investments.

Investors should recognize that in periods of declining interest rates, yield
will tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates, yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money from the continuous sale
of its shares will likely be invested in instruments producing lower yields than
the balance of the holdings, thereby reducing the current yield. In periods of
rising interest rates, the opposite can be expected to occur. As of June 30,
1997, the 30-day yields for Class I, II and III of Bond Portfolio were 6.62%,
6.09% and 5.45%, respectively. The Intermediate Bond and Capital Appreciation
Portfolios had not commenced operations as of June 30, 1997.

TOTAL RETURNS for each Class of each Portfolio quoted in advertising reflect all
aspects of return, including the effect of reinvesting dividends and capital
gain distributions (if any), and any change in NAV over the period. AVERAGE
ANNUAL TOTAL RETURNS are calculated by determining the growth or decline in
value of a hypothetical historical investment over a stated period, and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative total return of 100% over ten years would
produce an average annual total return of 7.18%, which is the steady annual rate
of return that would equal 100% growth on a compounded basis in ten years.
While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that performance is not
constant over time, but changes from year to year, and that average annual total
returns represent averaged figures as opposed to the actual year-to-year
performance. Average annual returns covering periods of less than one year are
calculated by determining total return for the period, extending that return for
a full year (assuming that performance remains constant over the year), and
quoting the result as an annual return. The following table shows total returns
as of June 30, 1997 for each Class of the Growth & Income and Bond Portfolios
(the Capital Appreciation and Intermediate Bond Portfolios had not commenced
operations as June 30, 1997):

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<PAGE>

Class I Average Class II Average Class III Average
Annual Total Return Annual Total Return Annual Total Return
------------------- ------------------- -------------------
One Since One Since One Since
Year Inception Year Inception Year Inception
---- --------- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>

Growth & Income Portfolio 28.83% 21.15% 21.11% 19.21% 27.44% 19.86%
Bond Portfolio 7.58% 5.58% 3.08% 4.32% 6.37% 4.33%

</TABLE>

CUMULATIVE TOTAL RETURNS reflect the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments, or a series of redemptions, over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Where applicable,
sales loads may or may not be included.

Each Portfolio may compare the performance of each of its Classes or the
performance of securities in which it or each of its Classes may invest to other
mutual funds, especially to those with similar investment objectives. These
comparisons may be based on data published by IBC USA (Publications), Inc. of
Ashland, MA or by Lipper Analytical Services, Inc. (Lipper, sometimes referred
to as Lipper Analytical Services), an independent service located in Summit, New
Jersey that monitors the performance of mutual funds. Lipper generally ranks
funds on the basis of total return, assuming reinvestment of distributions, but
does not take sales charges or redemption fees into consideration, and is
prepared without regard to tax consequences. Lipper may also rank funds based
on yield. In addition to the mutual fund rankings, the Portfolio's performance
may be compared to mutual fund performance indices prepared by Lipper. The BOND
FUND REPORT AVERAGES' which is reported in the BOND FUND REPORT, covers taxable
bond funds. When evaluating comparisons to money market funds, investors should
consider the relevant differences in investment objectives and policies.
Specifically, money market funds invest in short-term, high-quality instruments
and seek to maintain a stable $1.00 share price. The Bond Portfolios, however,
invest in longer-term instruments and their share price changes daily in
response to a variety of factors. Investors should give consideration to the
quality and maturity of the portfolio securities of the respective investment
companies when comparing investment alternatives.

MOVING AVERAGES. The Portfolios may illustrate performance using moving
averages. A long-term moving average is the average of each week's adjusted
closing NAV for a specified period. A short-term moving average is the average
of each day's adjusted closing NAV for a specified period. Moving Average
Activity Indicators combine adjusted closing NAVs from the last business day of
each week with moving averages for a specified period to produce indicators
showing when an NAV has crossed, stayed above, or stayed below its moving
average.

NET ASSET VALUE. Charts and graphs using the Portfolios' net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted NAV includes any distributions paid by the Portfolio
and reflects all elements of its return. Unless otherwise indicated, the
Portfolio's adjusted NAVs are not adjusted for sales charges, if any.

From time to time, each Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Portfolios may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance.

Each Portfolio may be compared in advertising to certificates of deposits (CDs)
or other investments issued by banks. Mutual funds differ from bank investments
in several respects. For example, the Portfolios may offer greater liquidity or
higher potential returns than CDs, and the Portfolio does not guarantee your
principal or your return.

Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical returns
of the capital markets in the United States, including common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the return of
different indices.

Growth & Income Portfolio may compare its performance to that of the Standard &
Poor's Composite Index of 500 stocks (S&P 500), a widely recognized, unmanaged
index of the combined performance of the stocks of 500 American companies. The
Capital Appreciation Portfolio may compare its performance to that of the S&P
500, the Standard & Poor's 400 Midcap Index, the Russell 2000 Index or the
Russell 2500 Growth Index. The Bond Portfolio may compare its performance to
that

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<PAGE>

of the Lehman Brothers Government Bond Index, an index comprised of all public
obligations of the U.S. Treasury, U.S. government agencies, quasi-federal
corporations, and corporate debt guaranteed by the U.S. government, and the
Lehman Brothers Corporate Bond Index, an index comprised of all public,
fixed-rate, non-convertible investment-grade domestic corporate debt. Issues
included in this index are rated at least Baa by Moody's or BBB by S&P, or in
the case of non-rated bonds, BBB by Fitch Investors Service. The Government
Bond Index and the Corporate Bond Index are combined to form the
Government/Corporate Bond Index.The Intermediate Bond Portfolio may compare its
performance to that of the Lehman Brothers Government/Corporate Intermediate
Bond Index, which consists of the Government/Corporate Bond Index securities
with maturities less than ten years. Each Portfolio may also quote mutual fund
rating services in its advertising materials, including data from a mutual fund
rating service which rates mutual funds on the basis of risk adjusted
performance. Because the fees for Class II and Class III are higher than the
fees for Class I, yields and returns for those classes will be lower than for
Class I.

Each Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, the
investor invests a fixed dollar amount at periodic intervals, thereby purchasing
fewer shares when prices are high and more shares when prices are low. While
such a strategy does not assure a profit nor guard against loss in a declining
market, the investor's average cost per share can be lower than if fixed numbers
of shares had been purchased at those intervals. In evaluating such a plan,
investors should consider their ability to continue purchasing shares through
periods of low price levels.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

The following holiday closings have been scheduled: Veterans' Day, Thanksgiving
Day, Christmas Day, New Year's Day, Dr. Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, and Columbus Day.
Although First Tennessee expects the same holiday schedule to be observed in the
future, the New York Stock Exchange and the Federal Reserve Bank of New York
(New York Federal Reserve) may modify their holiday schedules at any time.

If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing each
Portfolio's NAV. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and will incur any costs
of sale, as well as the associated inconveniences.

Pursuant to Rule 11a-3 under the 1940 Act, each Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying each
Portfolio's exchange privilege. Under Rule 11a-3, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange, or (ii) under extraordinary
circumstances, a Portfolio temporarily suspends the offering of shares as
permitted under the 1940 Act or by the SEC or because it is unable to invest
amounts effectively in accordance with its investment objective and policies.
This exchange limit may be modified for accounts in certain institutional
retirement plans to conform to plan exchange limits and Department of Labor
Regulations.

ADDITIONAL CLASS II AND CLASS III INFORMATION

SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in Class
II and Class III with Systematic Investing by completing the appropriate section
on the account application and attaching a voided personal check. If the bank
account is jointly owned, make sure that all owners sign. Investments may be
made monthly by automatically deducting $25 or more from your checking account.
This monthly purchase amount may be changed at any time. There is a $250
minimum initial investment requirement for this option. For employees of First
Tennessee Bank National Association or any of its affiliates, who participate in
the Systematic Investing Program, the minimum initial investment requirement is
$50. Accounts will be drafted on or about the first business day of every
month. Systematic Investing may be canceled at any time without payment of a
cancellation fee. Investors will receive a confirmation from their securities
broker or financial institution (Investment Professional), or from the Transfer
Agent for every transaction, and a debit entry will appear on your bank
statement.

SYSTEMATIC WITHDRAWAL PLAN. Investors can have monthly, quarterly or
semi-annual checks sent from their account to you, to a person named by them, or
to their bank checking account. The Systematic Withdrawal Plan payments are
drawn from share redemptions and must be in the amount of $100 or more per
Portfolio per transaction. If Systematic Withdrawal Plan redemptions exceed
income dividends earned on shares, an account eventually may be exhausted.
Contact the Investment Professional for more information.

12
<PAGE>

DISTRIBUTIONS AND TAXES

DIVIDENDS. A portion of the income distributed by the Equity Portfolios may
qualify for the dividends-received deduction available to corporate
shareholders to the extent that the Portfolios' income is derived from
qualifying dividends. Because the Portfolios may also earn other types of
income, such as interest, income from securities loans, non-qualifying
dividends and short-term capital gains, the percentage of dividends from each
Portfolio that qualifies for the deduction will generally be less than 100%.
Each Portfolio will notify corporate shareholders annually of the percentage
of portfolio dividends which qualify for the dividends received deduction.
Because the income earned by the Bond Portfolios is primarily derived from
interest, dividends from each such Portfolio generally will not qualify for
the dividends-received deduction available to corporations. A portion of
each Portfolio's dividends derived from certain U.S. government obligations
may be exempt from state and local taxation. Gains (losses) attributable to
foreign currency fluctuations are generally taxable as ordinary income and
therefore increase (decrease) dividend distributions. Each Portfolio will
send each shareholder a notice in January describing the tax status of
dividends and capital gain distributions for the prior year.

CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains realized by each Portfolio
on the sale of securities, if any, and distributed to shareholders are federally
taxable as long-term capital gains regardless of the length of time that
shareholders have held their shares. If a shareholder receives a long-term
capital gain distribution on shares of each Portfolio, and such shares are held
less than six months and are sold at a loss, the portion of the loss equal to
the amount of the long-term capital gain distribution will be considered a
long-term loss for tax purposes.

Short-term capital gains distributed by each Portfolio, if any, are taxable to
shareholders as dividends, not as capital gains. Distributions from short-term
capital gains do not qualify for the dividends received deduction.

FOREIGN TAXES. Foreign governments may withhold taxes on dividends and interest
paid with respect to foreign securities. Because each Portfolio does not
currently anticipate that securities of foreign corporations will constitute
more than 50% of each Portfolio's total assets at the end of its fiscal year,
shareholders should not expect to claim a foreign tax credit or deduction on
their federal income tax returns with respect to foreign taxes withheld.

TAX STATUS OF THE TRUST. Each Portfolio has qualified and intends to qualify as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the Code), so that each Portfolio will not be liable for
federal income or excise taxes on net investment income or capital gains to the
extent that these are distributed to shareholders in accordance with applicable
provisions of the Code. In order to qualify as a regulated investment company
and avoid being subject to federal income or excise taxes, each Portfolio
intends to distribute substantially all of its net investment income and net
realized capital gains within each calendar year as well as on a fiscal year
basis. Each Portfolio also intends to comply with other tax rules applicable to
regulated investment companies, including a requirement that capital gains from
the sale of securities held for less than three months must constitute less than
30% of each Portfolio's gross income for each fiscal year.

Gains from some forward currency contracts and options are included in this 30%
calculation, which may limit each Portfolio's investments in such instruments.
If the Portfolios purchase shares in certain foreign investment entities, called
passive foreign investment companies (PFICs), they may be subject to U.S.
federal income tax on a portion of any excess distribution or gain from the
disposition of such shares. Interest charges may also be imposed on the
Portfolios with respect to deferred taxes arising from such distributions or
gains.

OTHER TAX INFORMATION. The information above is only a summary of some of the
tax consequences generally affecting each Portfolio and its shareholders, and no
attempt has been made to discuss individual tax consequences. In addition to
federal income taxes, shareholders may be subject to state and local taxes on
distributions received from each Portfolio. Investors should consult their tax
advisors to determine whether each Portfolio is suitable to their particular tax
situation.

Federal income tax will be withheld at a 20% rate on any eligible rollover
distributions that are not transferred directly to another qualified plan or
IRA. Actual income tax may be higher or lower and will be due when tax forms
for the year are filed. Taxes will not be withheld in cases of direct rollover
into an IRA or another qualified plan.

TRUSTEES AND OFFICERS

The Trustees and executive officers of the Trust are listed below. Each Trustee
or officer that is an "interested person" (as defined in the 1940 Act) by virtue
of his affiliation with First Tennessee or ALPS, is indicated by an asterisk
(*).

13
<PAGE>

THOMAS M. BATCHELOR, Trustee, 4325 Woodcrest Drive, Memphis, TN, who presently
operates a management consultant business on a limited basis, retired after
owning and operating two General Insurance Companies agencies for over thirty
years. He was one of the founders and served as a director of First American
State Bank in Memphis, TN (now part of United American Bank of Memphis). He
currently serves as Chairman, Memphis Union Mission, TN, as well as a charity
and a non-profit foundation.

JOHN A. DECELL, Trustee, 5178 Wheelis Dr., Suite 2, Memphis, TN is Proprietor,
DeCell & Company (real estate and business consulting), and President of Capital
Advisers, Inc. (real estate consulting and asset management).

*L. R. JALENAK, JR., Trustee, 6094 Apple Tree Drive, Suite 11, Memphis, TN was
Chairman of the Board (1990 - 1993 (retired)), Cleo Inc. (manufacturer of
gift-related products), a Gibson Greetings Company. Mr. Jalenak is also a
Director of Perrigo Company (1988 - present), Lufkin Industries (1990 -
present), Dyersburg Corporation (1990 - present), was President and CEO (until
1990) of Cleo Inc., and was a Director of Gibson Greetings, Inc. from 1983 to
1991.

LARRY W. PAPASAN, Trustee, 5114 Winton Place, Memphis, TN is President of Smith
& Nephew, Inc. (orthopedic implants). Mr. Papasan is a former Director of
First American National Bank of Memphis and The West Tennessee Board of First
American National Bank (1988 - 1991) and was President of Memphis Light Gas and
Water Division of the City of Memphis (1984 - 1991). Mr. Papasan is also a
member of the Board of the Plough Foundation, a non-profit trust.

*RICHARD C. RANTZOW, President and Trustee, 5790 Shelby Avenue, Memphis, TN is
Vice President/Director, Ron Miller Associates, Inc. (manufacturer). Mr.
Rantzow was Managing Partner (until 1990) of the Memphis office of Ernst &
Young.

*JEREMY O. MAY, Treasurer, is a Fund Controller at ALPS Mutual Funds Services,
Inc. (ALPS), the Administrator and Distributor. Prior to joining ALPS, Mr. May
was an auditor with Deloitte & Touche LLP in their Denver office.

*JAMES V. HYATT, Secretary, is General Counsel of ALPS . Prior to joining ALPS,
Mr. Hyatt served as Senior Legal Counsel for Fidelity Investments and Clerk for
Fidelity Management Trust Company.

The Trustees of the Trust each receive from the Trust an annual fee of $4,000
and a fee in the amount of $1,250 for attending each regularly scheduled
quarterly meeting of the Trustees and $500 for each unscheduled meeting. The
Trustees were compensated as follows for their services provided during the
Trust's fiscal year ended June 30, 1997:

- ------------------------------------------------------------------------------------
Pension Or Aggregate
Retirement Estimated Compensation
Aggregate Benefits Annual From The Trust
Compensation Accrued As Benefits and Fund
From the Part of Fund Upon Complex Paid
Trust Expenses Retirement to Trustees
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Batchelor
Trustee $10,000 $0 $0 $10,000
- ------------------------------------------------------------------------------------
John A. DeCell
Trustee $10,000 $0 $0 $10,000
- ------------------------------------------------------------------------------------
L.R. Jalenak, Jr.
Trustee $10,000 $0 $0 $10,000
- ------------------------------------------------------------------------------------
Larry W. Papasan,
Trustee $8,750 $0 $0 $8,750
- ------------------------------------------------------------------------------------
Richard C. Rantzow
Trustee $10,000 $0 $0 $10,000
- ------------------------------------------------------------------------------------

</TABLE>

As of September 30, 1997, the officers and Trustees of the Trust owned less than
1% of the outstanding shares of any Portfolio.

14
<PAGE>

INVESTMENT ADVISORY AGREEMENTS

The Growth & Income, Bond and Intermediate Bond Portfolios employ First
Tennessee Bank National Association, Memphis, Tennessee, to furnish investment
advisory and other services to each such Portfolio. Under the Investment
Advisory and Management Agreement with each such Portfolio, First Tennessee is
authorized to appoint one or more sub-advisers at First Tennessee's expense.
Highland Capital Management Corp., Memphis, Tennessee, acts as Sub-Adviser to
the Growth & Income, Bond and Intermediate Bond Portfolios. Subject to the
direction of the Trustees and of First Tennessee, the Sub-Adviser will direct
the investments of these Portfolios in accordance with their respective
investment objective, policies and limitations.

First Tennessee and Investment Advisers, Inc., Minneapolis, Minnesota, act as
Co-Advisers to the Capital Appreciation Portfolio. Subject to the direction of
the Trustees and monitoring by First Tennessee, IAI directs the investments of
this Portfolio in accordance with the Portfolio's investment objective, policies
and limitations.

In addition to First Tennessee's and IAI's fees and the fees payable to the
Transfer Agent, Pricing and Accounting Agent, and to the Administrator, each
Portfolio pays for all its expenses, without limitation, that are not assumed by
these parties. Each Portfolio pays for typesetting, printing and mailing of
proxy material to existing shareholders, legal expenses, and the fees of the
custodian, auditor and Trustees. Other expenses paid by each Portfolio include:
interest, taxes, brokerage commissions, the Portfolio's proportionate share of
insurance premiums and Investment Company Institute dues, and costs of
registering shares under federal and state securities laws. Each Portfolio also
is liable for such nonrecurring expenses as may arise, including costs of
litigation to which each Portfolio is a party, and its obligation under the
Declaration of Trust to indemnify its officers and Trustees with respect to such
litigation.

For managing the investment and business affairs of the Growth & Income, Capital
Appreciation, Bond and Intermediate Bond Portfolios, First Tennessee is entitled
to receive a monthly management fee at the annual rate of .65%, .15%, .55% and
.50% of each Portfolio's average net assets, respectively. For the fiscal years
ended June 30, 1997, 1996 and 1995, First Tennessee earned $1,520,039,
$1,076,198 and $686,850 from the Growth & Income Portfolio, respectively, before
waiving $350,778, $358,250 and $532,648 of its fees, respectively. First
Tennessee has voluntarily agreed to waive its fee to .50%, .00%, .15% and .00%
of the average net assets of the Growth & Income, Capital Appreciation, Bond and
Intermediate Bond Portfolios, respectively. The fee waivers may be discontinued
at any time. For the fiscal years ended June 30, 1997, 1996 and 1995, First
Tennessee earned $658,049, $563,748 and $447,309 from the Bond Portfolio,
respectively, before waiving $478,581, $482,559 and $447,309 of its fees,
respectively. The Capital Appreciation and Intermediate Bond Portfolios had not
commenced operations as of June 30, 1997.

Under its Investment Advisory and Management Agreement with each of the Growth &
Income, Bond and Intermediate Bond Portfolios, First Tennessee is authorized, at
its own expense, to hire sub-advisers to provide investment advice to each such
Portfolio. The Sub-Adviser, is entitled to receive from First Tennessee a
monthly sub-advisory fee at the annual rate of .38% of Growth & Income
Portfolio's average net assets, .33% of Bond Portfolio's average net assets and
.30% of Intermediate Bond Portfolio's average net assets. As Co-Adviser to the
Capital Appreciation Portfolio, IAI is entitled to receive .70% of that
Portfolio's average net assets up to $50 million and .65% thereafter. Under the
terms of each sub-advisory agreement with First Tennessee and IAI's Investment
Advisory and Management Agreement with the Trust, the Sub-Adviser, subject to
the supervision of First Tennessee, and IAI supervise the day-to-day operations
of their respective Portfolios and provide investment research and credit
analysis concerning their respective Portfolios' investments, conduct a
continual program of investment of their respective Portfolios' assets and
maintain the books and records required in connection with their duties under
their advisory agreements. In addition, the Sub-Adviser and IAI keep First
Tennessee informed of the developments materially affecting each Portfolio. The
Sub-Adviser is currently waiving some or all of the fees it is entitled to
receive from First Tennessee.

ADMINISTRATION AGREEMENT AND OTHER CONTRACTS

ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
Administrator and Distributor), is the Administrator and Distributor to each
Portfolio. ALPS, a Colorado corporation, is a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc.

As the Administrator, ALPS assists in each Portfolio's administration and
operation, including, but not limited to, providing office space and various
legal and accounting services in connection with the regulatory requirements
applicable to each Portfolio. ALPS is entitled to and receives from each
Portfolio a monthly fee at the annual rate of .15% of average net assets.

15
<PAGE>

For the fiscal years ended June 30, 1997 and 1996, ALPS earned administration
fees in the amount of $350,778 and $248,353 from the Growth & Income Portfolio.
For the fiscal years ended June 30, 1997 and 1996, ALPS earned administration
fees in the amount of $179,468 and $153,749 from the Bond Portfolio,
respectively. The Capital Appreciation and Intermediate Bond Portfolios had not
commenced operations as of June 30, 1997. For the fiscal year ended June 30,
1995, National Financial Services Corporation (NFSC) served as the Administrator
and Distributor for the Growth & Income and Bond Portfolios. As Administrator,
NFSC earned fees from each Portfolio computed daily and payable monthly at an
annual rate of .20% of average net assets through $100 million, .15% above $100
million and through $200 million, and .10% over $200 million. For the fiscal
year ended June 30, 1995, NFSC earned administration fees in the amount of
$208,504 and $162,658 from the Growth & Income Portfolio and the Bond Portfolio,
respectively.

First Tennessee serves as the Co-Administrator for each Portfolio. As the
Co-Administrator, First Tennessee assists in each Portfolio's operation,
including, but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from each Portfolio a monthly fee at the annual
rate of .05% of average net assets. For the fiscal years ended June 30, 1997 and
1996, First Tennessee earned co-administration fees in the amount of $116,926
and $82,965 from the Growth & Income Portfolio, respectively before waiving $0
and $34,639 of its fees, respectively. For the fiscal years ended June 30, 1997
and 1996, First Tennessee earned co-administration fees in the amount of $59,823
and $51,198 from the Bond Portfolio, respectively, before waiving $0 and
$23,882, respectively.

As the Distributor, ALPS sells shares of Class I as agent on behalf of the Trust
at no additional cost to the Trust. Class III is obligated to pay ALPS monthly
a 12b-1 fee at the annual rate of .75% of average net assets, all or a portion
of which may be paid out to broker-dealers or others involved in the
distribution of Class III shares. See "Administration Agreements and contracts -
Distribution Plan." Classes II and III pay shareholder servicing fees to
Investment Professionals at an annual rate of .25% of average net assets as more
fully described under the section "Administration Agreements and Other Contracts
- - Shareholder Services Plans". First Tennessee and its affiliates neither
participate in nor are responsible for the underwriting of Portfolio shares.
Consistent with applicable law, affiliates of First Tennessee may receive
commissions or asset-based fees.

TRANSFER AGENT, FUND ACCOUNTING AND CUSTODIAN. Chase Global Funds Services
Company (CGFSC or the Transfer Agent), provides transfer agent and shareholder
services for each Portfolio, and calculates the NAV and dividends of each Class
of each Portfolio and maintains the portfolio and general accounting records.
For such services, CGFSG is entitled to receive from each Class of each
Portfolio, fees at the annual rate of .07% of each Class' average net assets
through $50 million and .05% over $50 million plus out-of-pocket expenses. Chase
Manhattan Bank (Chase or the Custodian) is Custodian of the assets of the
Portfolios. The Custodian is responsible for the safekeeping of the Portfolio's
assets and the appointment of sub-custodian banks and clearing agencies. For
such services, Chase is entitled to receive from each Portfolio fees at the
annual rate of .018% of average net assets plus out-of-pocket expenses. The
Custodian takes no part in determining the investment policies of the Portfolios
or in deciding which securities are purchased or sold by the Portfolios. The
Portfolios, however, may invest in obligations of the Custodian and may purchase
securities from or sell securities to the Custodian.

DISTRIBUTION PLAN. The Trustees of the Trust have adopted a Distribution Plan
on behalf of Class III of each Portfolio (each Class III Plan) pursuant to Rule
12b-1 (the Rule) under the 1940 Act. The Rule provides in substance that a
mutual fund may not engage directly or indirectly in financing any activity that
is intended primarily to result in the sale of shares of the fund except
pursuant to a plan adopted by the fund under the Rule. The Trustees have
adopted the Plans to allow each class and ALPS to incur distribution expenses.
ALPS receives a Distribution and Service fee (12b-1 fee) of up to 0.75% of the
average net assets of Class III of each Portfolio. (These fees are in addition
to the fees paid to ALPS under the Administration Agreement.) The Trust or
ALPS, on behalf of Class III of each Portfolio, may enter into servicing
agreements (Service Agreements) with banks, broker-dealers or other institutions
(Agency Institutions). Each Class III Plan provides that ALPS may use its fees
and other resources to make payments to Agency Institutions for performance of
distribution-related services, including those enumerated above. The Service
Agreements further provide for compensation to broker-dealers for their efforts
to sell Class III shares. The distribution-related services include, but are
not limited to, the following: formulation and implementation of marketing and
promotional activities, such as mail promotions and television, radio,
newspaper, magazine and other mass media advertising; preparation, printing and
distribution of sales literature; preparation, printing and distribution of
prospectuses of each Portfolio and reports to recipients other than existing
shareholders of each Portfolio; obtaining such information, analyzes and reports
with respect to marketing and promotional activities as ALPS may from time to
time, deem advisable; making payments to securities dealers and others engaged
in the sales of Class III Shares; and providing training, marketing and support
to such dealers and others with respect to the sale of Class III Shares. Each
Class III Plan recognizes ALPS may use its fees and other resources to pay
expenses associated with the promotion and administration of activities
primarily intended to result in the sale of shares.

16
<PAGE>

Each Plan has been approved by the Trustees, including the majority of
disinterested Trustees. As required by the Rule, the Trustees carefully
considered all pertinent factors relating to the implementation of the Plans
prior to its approval, and have determined that there is a reasonable
likelihood that each Plan will benefit each Portfolio and its shareholders.
To the extent that the Class III Plans give ALPS greater flexibility in
connection with the distribution of shares of the class, additional sales of
shares may result.

The Class III Plans could be construed as compensation plans because ALPS is
paid a fixed fee and is given discretion concerning what expenses are payable
under the Plans. ALPS may spend more for marketing and distribution than it
receives in fees and reimbursements from each Portfolio. However, to the extent
fees received exceed expenses, including indirect expenses such as overhead,
ALPS could be said to have received a profit. For example, if ALPS pays $1 for
Class III distribution-related expenses and receives $2 under a Class III Plan,
the $1 difference could be said to be a profit for ALPS. (Because ALPS is
reimbursed for its out-of-pocket direct promotional expenses, a Class III Plan
also could be construed as a reimbursement plan. Until the issue is resolved by
the SEC, unreimbursed expenses incurred in one year will not be carried over to
a subsequent year.) If after payments by ALPS for marketing and distribution
there are any remaining fees attributable to a Class III Plan, these may be used
as ALPS may elect. Since the amount payable under a Class III Plan will be
commingled with ALPS's general funds, including the revenues it receives in the
conduct of its business, it is possible that certain of ALPS's overhead expenses
will be paid out of Plan fees and that these expenses may include items such as
the costs of leases, depreciation, communications, salaries, training and
supplies. Each Portfolio believes that such expenses, if paid, will be paid
only indirectly out of the fees being paid under the Plan.

For the fiscal year ended June 30, 1997, Class III of the Growth & Income
Portfolio and the Bond Portfolio paid distribution fees in the amounts of
$314,518 and $21,842, respectively. All of these fees were paid as compensation
to dealers. The Capital Appreciation and Bond Portfolios had not commenced
operations as of June 30, 1997.

SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II and Class III have adopted Shareholder Services Plans
to compensate Agency Institutions for individual shareholder services and
account maintenance. These functions include: maintaining account records for
each shareholder who beneficially owns Class II or Class III Shares; answering
questions and handling correspondence from shareholders about their accounts;
handling the transmission of funds representing the purchase price or redemption
proceeds; issuing confirmations for transactions in Class II or Class III Shares
by shareholders; assisting customers in completing application forms;
communicating with the transfer agent; and providing account maintenance and
account level support for all transactions. For these services the
participating Agency Institutions are paid a service fee at the annual rate of
up to .25% of average net assets of Class II and Class III.

For the fiscal year ended June 30, 1997, the Growth & Income Portfolio and the
Bond Portfolio paid shareholder servicing fees in the following amounts (the
Capital Appreciation and Intermediate Bond Portfolios had not commenced
operations as of June 30, 1997):

Growth & Income Bond
Portfolio Portfolio
--------- ---------

Class II $ 17,386 $1,260
Class III $104,839 $7,281

Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, controlling, or distributing
the shares of a registered, open-end investment company continuously engaged in
the issuance of its shares and prohibit banks generally from issuing,
underwriting, selling or distributing securities. The same laws and regulations
generally permit a bank or bank affiliate to act as an investment adviser and
co-administrator and to purchase shares of the investment company as agent for
and upon the order of a customer. In the Trust's and Investment Adviser's
opinion, banks and their affiliates may be paid for investment advisory,
shareholder servicing, recordkeeping and co-administration functions. Changes
in federal or state statutes and regulations pertaining to the permissible
activities of banks and their affiliates or subsidiaries, as well as further
judicial or administrative decisions or interpretations, could prevent a bank
from continuing to perform all or a part of the contemplated services. If a
bank or its affiliates were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. In such event, changes in the
operation of the Portfolios might occur, including possible termination of any
automatic investment or redemption or other services then being provided by any
bank. It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences. The Portfolios may
execute portfolio transactions with and purchase securities

17
<PAGE>

issued by depository institutions that receive payments under the Plans. No
preference will be shown in the selection of investments for the instruments of
such depository institutions. In addition, state securities laws on this issue
may differ from the interpretations of federal law expressed herein, and banks
and other financial institutions may be required to register as dealers pursuant
to state law.

DESCRIPTION OF THE TRUST

TRUST ORGANIZATION. Growth & Income Portfolio and Bond Portfolio are Portfolios
of First Funds (formerly The Masters Group of Mutual Funds), an open-end
management investment company organized as a Massachusetts business trust by a
Declaration of Trust dated March 6, 1992, as amended and restated on September
4, 1992. The Declaration of Trust permits the Trustees to create additional
Portfolios and Classes. There are nine Portfolios of the Trust, each with three
Classes.

The assets of the Trust received for the issue or sale of shares of each
Portfolio and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are specially allocated to such Portfolio, and
constitute the underlying assets of such Portfolio. The underlying assets of
each Portfolio are segregated on the books of account, and are to be charged
with the liabilities with respect to such Portfolio and with a share of the
general expenses of the Trust. Expenses with respect to the Trust are to be
allocated in proportion to the asset value of the respective Portfolios except
where allocations of direct expense can otherwise be fairly made. The officers
of the Trust, subject to the general supervision of the Trustees, have the power
to determine which expenses are allocable to a given Portfolio, or which are
general or allocable to all of the Portfolios. In the event of the dissolution
or liquidation of the Trust, shareholders of a Portfolio are entitled to receive
as a class the underlying assets of such Portfolio available for distribution.

SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except for
the payment of the purchase price of shares and requires that each agreement,
obligation, or instrument entered into or executed by the Trust or the Trustees
shall include a provision limiting the obligations created thereby to the Trust
and its assets. The Declaration of Trust provides for indemnification out of
each Portfolio's property of any shareholders held personally liable for the
obligations of each Portfolio. The Declaration of Trust also provides that each
Portfolio shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of a Portfolio and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Portfolio itself
would be unable to meet its obligations. The Trustees believe that, in view of
the above, the risk of personal liability to shareholders is remote.

The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.

As of September 30, 1997, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios:

Name and Address Portfolio Class % of Class Held
- ---------------- --------- ----- ---------------

First Tennessee National Corp. Growth & Income I 47%
D/B Pension Plan Bond I 57%
Memphis, TN Capital Appreciation I 92%

First Tennessee National Corp. Growth & Income I 10%
401K Savings - Fund A Bond I 6%
Memphis, TN Capital Appreciation I 6%

Memphis Commerce Square Growth & Income II 13%
FBO National Bank of Commerce
Memphis, TN

Giobbi Turner Trust #1 Bond II 26%
1277 East Massey
Memphis, TN 38120

18
<PAGE>

Janet Forbes Misner Trust Bond II 20%
76 Walnut Grove Circle
Memphis, TN 38117

Harvey B. Jackson, IRT Bond II 16%
4274 Fox Race Cv.
Memphis, TN 38141

Bank of Bolivar County PS Fixed Bond II 12%
P.O. Box 88
Shelby, MS 38774

James G. Wills Rollover IRA Bond II 11%
241 Sea Marsh Drive
Kiawah Island, SC 29455

Charles S. Hughs Rollover IRT Bond II 10%
P.O. Box 771596
Memphis, TN 38177

The Smith Trust Bond II 6%
Joe G. Bagwell, Trustee
8560 Kingston Pike Ste C-202
Knoxville, TN 38919

Effie W. Porter and Bond II 5%
Leslie F. Heun, JT TEN
6920 Amberly Rd.
Memphis, TN 38119

VOTING RIGHTS. Each Portfolio's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting and
dividend rights, the right of redemption, and the privilege of exchange are
described in the Prospectus. Shares are fully paid and nonassessable, except as
set forth under the heading "Shareholder and Trustee Liability" above.
Shareholders representing 10% or more of the Trust or a Portfolio may, as set
forth in the Declaration of Trust, call meetings of the Trust or a Portfolio for
any purpose related to the Trust or Portfolio, as the case may be, including, in
the case of a meeting of the entire Trust, the purpose of voting on removal of
one or more Trustees. The Trust or any Portfolio may be terminated upon the
sale of its assets to another open-end management investment company, or upon
liquidation and distribution of its assets, if approved by vote of the holders
of a majority of the outstanding shares of the Trust or that Portfolio. If not
so terminated, the Trust and each Portfolio will continue indefinitely.

CLASSES. Pursuant to the Declaration of Trust, the Trustees have authorized
additional Classes of shares for each Portfolio of the Trust. Although the
investment objective for each separate Class of a particular Portfolio is the
same, fee structures are different such that one Class may have a higher yield
than another Class of the same Portfolio at any particular time. Shareholders
of the Trust will vote together in the aggregate and not separately by
Portfolio, or by Class thereof, except as otherwise required by law or when the
Trustees determine that the matter to be voted upon affects only the interests
of the shareholders of a particular Portfolio or a Class thereof. Pursuant to a
vote by the Board of Trustees, the Trust has adopted Rule 18f-3 under the Act
and has issued multiple Classes of shares with respect to each of its
Portfolios. Accordingly, the rights, privileges and obligations of each such
Class will be determined in accordance with such rule.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 160 Federal Street, Boston,
Massachusetts, serves as the Trust's independent accountant. The independent
accountant examines the annual financial statements for the Trust and provides
other audit, tax, and related services.

FINANCIAL STATEMENTS

The Growth & Income and Bond Portfolios' financial statements and financial
highlights for the fiscal year ended June 30, 1997 are included in the Trust's
Annual Report which is a separate report supplied independent of this Statement
of Additional Information. The Capital Appreciation and Intermediate Bond
Portfolios had not commenced operations as of June 30, 1997. The Growth & Income
and Bond Portfolios' financial statements and financial highlights are
incorporated herein by reference.

19
<PAGE>

APPENDIX

DOLLAR-WEIGHTED AVERAGE MATURITY for Bond Portfolio is derived by multiplying
the value of each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the value of the
Portfolio. An obligation's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to this rule.

For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. Also, the
maturities of mortgage-backed securities and some asset-backed securities, such
as collateralized mortgage obligations, are determined on a weighted average
life basis, which is the average time for principal to be repaid. For a
mortgage security, this average time is calculated by assuming a constant
prepayment rate for the life of the mortgage. The weighted average life of
these securities is likely to be substantially shorter than their stated final
maturity.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:

Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protections may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than Aaa securities.

A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.

Baa - Bonds rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:

AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.

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

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

BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in highest-rated categories.

The ratings from AA to BBB may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.

20
<PAGE>

FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 24, 1997

This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of Tennessee Tax-Free Portfolio dated October
24, 1997. Please retain this Statement for future reference. The Portfolio's
financial statements and financial highlights, included in the Annual Report for
the fiscal year ended June 30, 1997, are incorporated herein by reference. To
obtain additional free copies of this Statement, the Annual Report or the
Prospectus, please call the Distributor at 1-800-442-1941, option 1 or write to
the Distributor at 370 17th Street, Suite 3100, Denver CO 80202.

TABLE OF CONTENTS PAGE

Investment Restrictions and Limitations 2
Investment Instruments 3
Special Considerations Affecting Tennessee 6
Portfolio Transactions 6
Valuation of Portfolio Securities 7
Performance 7
Additional Purchase and Redemption Information 10
Distributions and Taxes 11
Trustees and Officers 12
Investment Advisory Agreement 13
Administration Agreement and Other Contracts 13
Description of the Trust 16
Financial Statements 17
Appendix 17

INVESTMENT ADVISER
First Tennessee Bank National Association (First Tennessee or the Investment
Adviser)

ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. (ALPS or the Administrator and Distributor)

CO-ADMINISTRATOR
First Tennessee Bank National Association (First Tennessee or the
Co-Administrator)

TRANSFER AGENT & SHAREHOLDER SERVICING AGENT
Chase Global Funds Services Company (CGFSC or the Transfer Agent)

CUSTODIAN
Chase Manhattan Bank, N.A. (Chase or the Custodian)

1
<PAGE>

INVESTMENT RESTRICTIONS AND LIMITATIONS

The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of the Portfolio's assets that may be invested in
any security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with the
Portfolio's investment policies and limitations.

Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940) of the Portfolio. However, except for the
fundamental investment limitations set forth below, the investment policies and
limitations described in this Statement of Additional Information are not
fundamental and may be changed without shareholder approval.

INVESTMENT LIMITATIONS OF TENNESSEE TAX-FREE PORTFOLIO

THE FOLLOWING ARE TENNESSEE TAX-FREE PORTFOLIO'S FUNDAMENTAL LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:

(1) issue senior securities, except as permitted under the Investment
Company Act of 1940;

(2) borrow money, except that the Portfolio may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount
not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;

(3) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;

(4) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or tax-exempt obligations issued or guaranteed by a
U.S. territory or possession or the state of Tennessee or any county,
municipality, or political subdivision of any of the foregoing,
including any agency, board authority, or commission of the foregoing)
if, as a result, 25% or more of the Portfolio's total assets would be
invested in securities of companies whose principal business activities
are in the same industry;

(5) purchase or sell real estate, unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate
business);

(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Portfolio from purchasing or selling options and futures contracts
or from investing in securities or other instruments backed by physical
commodities); or

(7) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limit
does not apply to purchases of debt securities or to repurchase
agreements.

(8) The Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end management investment company with substantially the
same fundamental investment objectives, policies, and limitations as the
Portfolio.

THE FOLLOWING LIMITATIONS OF TENNESSEE TAX-FREE PORTFOLIO ARE NOT FUNDAMENTAL
AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:

(i) To meet federal tax requirements for qualification as a "regulated
investment company," the Portfolio limits its investments so that at the
close of each quarter of its taxable year: (a) with regard to at least
50% of total assets, no more than 5% of total assets are invested in the
securities of a single issuer, and (b) no more than 25% of total assets
are invested in the securities of a single issuer. Limitations (a) and
(b) do not apply to "government securities" as defined for federal tax
purposes.

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<PAGE>

(ii) The Portfolio does not currently intend during the coming year to
purchase securities on margin, except that the Portfolio may obtain such
short-term credits as are necessary for the clearance of transactions,
and provided that margin payments in connection with futures contracts
and options on futures contracts shall not constitute purchasing
securities on margin.

(iii) The Portfolio may borrow money only (a) from a bank, or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation 2). The Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.

(iv) The Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 15% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.

(v) The Portfolio does not currently intend during the coming year to engage
in repurchase agreements or make loans, but this limitation does not
apply to purchases of debt securities.

INVESTMENT INSTRUMENTS

DELAYED DELIVERY TRANSACTIONS. The Portfolio may buy and sell securities on a
delayed delivery or when-issued basis. These transactions involve a commitment
by the Portfolio to purchase or sell specific securities at a predetermined
price and/or yield, with payment and delivery taking place after the customary
settlement period for that type of security (and more than seven days in the
future). Typically, no interest accrues to the purchaser until the security is
delivered. The Portfolio may receive fees for entering into delayed delivery
transactions.

When purchasing securities on a delayed delivery basis, the Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with the
Portfolio's other investments. If the Portfolio remains substantially fully
invested at a time when delayed delivery purchases are outstanding, the delayed
delivery purchases may result in a form of leverage. When delayed delivery
purchases are outstanding, the Portfolio will set aside appropriate liquid
assets in a segregated custodial account to cover its purchase obligations.
When the Portfolio has sold a security on a delayed delivery basis, the
Portfolio does not participate in further gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the securities, the Portfolio could miss a favorable price or yield
opportunity, or could suffer a loss.

The Portfolio may renegotiate delayed delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.

FEDERALLY-TAXABLE OBLIGATIONS. Tennessee Tax-Free Portfolio does not intend to
invest in securities whose interest is federally taxable; however, from time to
time, the Portfolio may invest a portion of its assets on a temporary basis in
fixed-income obligations whose interest is subject to federal income tax. As an
operating policy, the Portfolio intends to invest its assets to achieve as fully
as possible tax exempt income for both Tennessee state and federal purposes.
For example, the Portfolio may invest in obligations whose interest is federally
taxable pending the investment or reinvestment in municipal securities of
proceeds from the sale of its shares or sales of portfolio securities.

Should the Portfolio invest in taxable obligations, it would purchase securities
which in the judgment of First Tennessee are of high quality. These would
include obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, obligations of domestic banks, and repurchase agreements.
The Portfolio's standards for high-quality taxable obligations are essentially
the same as those described by Moody's Investors Service, Inc. (Moody's) in
rating corporate obligations within its two highest ratings of Aaa and Aa, and
those described by Standard and Poor's Corporation (S&P) in rating corporate
obligations within its two highest ratings of AAA and AA.

Proposals to restrict or eliminate the federal income tax exemption for interest
on municipal obligations are introduced before Congress from time to time.
Proposals also may be introduced before the Tennessee General Assembly that
would affect the state tax treatment of the Portfolio's distributions. If such
proposals were enacted, the availability of municipal obligations and the value
of the Portfolio's holdings would be affected and the Board of Trustees (the
Trustees) would reevaluate the Portfolio's investment objective and policies.

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<PAGE>

Tennessee Tax-Free Portfolio anticipates being as fully invested as practicable
in municipal securities; however, there may be occasions when as a result of
maturities of portfolio securities, or sales of Portfolio shares, or in order to
meet redemption requests, the Portfolio may hold cash that is not earning
income. In addition, there may be occasions when, in order to raise cash to
meet redemptions, the Portfolio may be required to sell securities at a loss.

ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued. Under guidelines established by the Trustees, First Tennessee
determines the liquidity of Tennessee Tax-Free Portfolio's investments and,
through reports from First Tennessee, the Trustees monitor investments in
illiquid instruments. In determining the liquidity of the Portfolio's
investments, First Tennessee may consider various factors including (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the
nature of the security (including any demand or tender features) and (5) the
nature of the marketplace for trades (including the ability to assign or offset
the Portfolio's rights and obligations relating to the investment). Investments
currently considered by the Portfolio to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, and some restricted securities determined by First Tennessee to be
illiquid. In the absence of market quotations, illiquid investments are valued
at fair value as determined in good faith by the Trustees. If through a change
in values, net assets or other circumstances, the Portfolio were in a position
where more than 15% of its net assets were invested in illiquid securities, the
Trustees would seek to take appropriate steps to protect liquidity.

MUNICIPAL LEASE OBLIGATIONS. The Portfolio may invest a portion of its assets
in municipal leases and participation interests therein. These obligations,
which may take the form of a lease, an installment purchase, or a conditional
sale contract, are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities. Generally, the
Portfolio will not hold such obligations directly as a lessor of the property,
but will purchase a participation interest in a municipal obligation from a bank
or other third party. A participation interest gives a Portfolio a specified,
undivided interest in the obligation in proportion to its purchased interest in
the total amount of the obligation.

Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchase, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses"
providing that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations.

REFUNDING CONTRACTS. Tennessee Tax-Free Portfolio generally will not be
obligated to pay the full purchase price if it fails to perform under a
refunding contract. Instead, refunding contracts generally provide for payment
of liquidated damages to the issuer (currently 15 - 20% of the purchase price).
The Portfolio may secure its obligations under a refunding contract by
depositing collateral or a letter of credit equal to the liquidated damages
provisions of the refunding contract. When required by Securities and Exchange
Commission (SEC) guidelines, the Portfolio will place liquid assets in a
segregated custodial account equal in amount to its obligations under refunding
contracts.

REPURCHASE AGREEMENTS are transactions in which the Portfolio purchases a
security and simultaneously commits to resell that security at an agreed upon
price and date within a number of days from the date of purchase. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or maturity of the purchased security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price. This obligation is in effect secured by the underlying security
having a value at least equal to the amount of the agreed upon resale price.
The Portfolio may enter into a repurchase agreement with respect to any security
in which it is authorized to invest. While it presently does not appear
possible to eliminate all risks from the transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delay and costs to the Portfolio in connection with bankruptcy
proceedings), it is the policy of the Portfolio to limit repurchase agreements
to those parties whose creditworthiness has been reviewed and found satisfactory
by First Tennessee.

REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Portfolio
sells a portfolio security to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, the Portfolio
will maintain appropriate high grade liquid assets in a segregated custodial
account to cover its obligation under the agreement. The Portfolio will enter
into reverse repurchase agreements only with parties whose creditworthiness has
been found satisfactory by First Tennessee. As a

4
<PAGE>

result, such transactions may increase fluctuations in the market values of the
Portfolio's assets and may be viewed as a form of leverage.

RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, Tennessee Tax-Free Portfolio may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
each decides to seek registration and the time the Portfolio may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Portfolio might obtain a
less favorable price than prevailed when it decided to seek registration of the
security.

STANDBY COMMITMENTS are puts that entitle holders to same-day settlement at an
exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. Tennessee Tax-Free Portfolio
may acquire standby commitments to enhance the liquidity of portfolio
securities, but only when the issuers of the commitments present minimal risk of
default.

Ordinarily, the Portfolio will not transfer a standby commitment to a third
party, although it could sell the underlying municipal security to a third party
at any time. The Portfolio may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Portfolio would pay a higher price for the securities acquired,
thus reducing their yield to maturity.

Standby commitments are subject to certain risks, including the ability of
issuers to pay for securities at the time the commitments are exercised; the
fact that standby commitments are not marketable by the Portfolio; and that the
maturities of the underlying securities may be different from those of the
commitments.

TENDER OPTION BONDS are created by coupling an intermediate or long-term
fixed-rate tax-exempt bond (generally held pursuant to a custodial arrangement)
with a tender agreement that gives the holder the option to tender the bond at
its face value. As consideration for providing the tender option, the sponsor
(usually a bank, broker-dealer, or other financial institution) receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate (determined by a remarketing or similar agent) that would cause the
bond, coupled with the tender option, to trade at par on the date of such
determination. After payment of the tender option fee, Tennessee Tax-Free
Portfolio effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. In selecting tender option bonds for the
Portfolio, First Tennessee will consider the creditworthiness of the issuer of
the underlying bond, the custodian, and the third party provider of the tender
option. In certain instances, a sponsor may terminate a tender option if, for
example, the issuer of the underlying bond defaults on interest payments.

VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS (VRDOs/FRDOs) are obligations that
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 obligations provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value for
the VRDO or FRDO that approximates its par value.

Tennessee Tax-Free Portfolio may invest in fixed-rate bonds that are subject to
third party puts and in participation interests in such bonds held by a bank in
trust or otherwise. These bonds and participation interests have tender options
or demand features that permit the Portfolio to tender (or put) their bonds to
an institution at periodic intervals and to receive the principal amount
thereof. The Portfolio considers variable rate instruments structured in this
way (Participating VRDOs) to be essentially equivalent to other VRDOs they
purchase.

ZERO COUPON BONDS do not make regular interest payments; instead they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its daily
dividend, the Portfolio takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value.

A broker-dealer creates a DERIVATIVE ZERO by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.

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<PAGE>

in this fashion. ORIGINAL ISSUE ZEROS are zero coupon securities originally
issued by the U.S. government, a government agency, or a corporation in zero
coupon form.

SPECIAL CONSIDERATIONS AFFECTING TENNESSEE

TENNESSEE OBLIGATIONS. The following information as to certain Tennessee
considerations is given to investors in view of the Portfolio's policy of
concentrating its investments in Tennessee issuers. Such information is derived
from sources that are generally available to investors and is believed to be
accurate. Such information constitutes only a brief summary, does not purport
to be a complete description and is based on information from official
statements relating to securities offerings of Tennessee issuers. Neither the
Trust or the Portfolio has independently verified this information.

In 1978, the voters of the State of Tennessee approved an amendment to the State
Constitution requiring that (1) the total expenditures of the State for any
fiscal year shall not exceed the State's revenues and reserves, including the
proceeds of debt obligations issued to finance capital expenditures and (2) in
no year shall the rate of growth of appropriations from State tax revenues
exceed the estimated rate of growth of the State's economy. In the past the
Governor and the General Assembly have had to restrict expenditures to comply
with the State Constitution.

While the financial operations of the State were negatively impacted by the
national economic downturn, the State's finances have stabilized in recent
years. The General Fund balance was reduced to $7.3 million in 1991; however,
operating surpluses for 1992 built up the balance to $150.1 million for 1993. In
fiscal 1996 the General Fund was $128.6 million.

Several new programs could have a negative impact on the financial operations of
the State. A half percent increase in the sales tax rate, imposed in fiscal
1993, was dedicated to a new Basic Education Program. This increase has since
been made permanent. Tennessee will provide health care to the entire Medicaid
population as well as the uninsured population in the State. A service tax that
was implemented to help fund this program was repealed in connection with the
implementation of the expanded health care program although recently, the costs
of this healthcare plan have stabilized..

The Tennessee economy is largely based on manufacturing and services, which
accounted for approximately 42% of the gross State product in 1995. The location
of General Motors' Saturn project in Tennessee is believed to demonstrate the
continuing viability of manufacturing in the State. Other important segments of
the State economy include the wholesale and retail trade, transportation, and
the government sector. The State unemployment rate for August 1997 increased to
5.1% from 4.4% for August 1996, which is slightly higher than the national
average which was 4.9% for August 1997. There can be no assurance that
Tennessee's relatively favorable economic performance will continue.

As of the date of this Statement of Additional Information, general obligations
of the State of Tennessee are rated "AA+," "Aaa" and "AAA" by S&P, Moody's and
Fitch. There can be no assurance that the economic conditions on which these
ratings are based will continue or that particular bond issues may not be
adversely affected by changes in economic, political or other conditions.

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of securities are placed on behalf of the
Portfolio by First Tennessee pursuant to authority contained in the Portfolio's
Investment Advisory and Management Agreement. First Tennessee is also
responsible for the placement of transaction orders for other investment
companies and accounts for which it or its affiliates act as investment advisor.
In selecting broker-dealers, subject to applicable limitations of the federal
securities laws, First Tennessee considers various relevant factors, including,
but not limited to, the broker's execution capability; the broker's perceived
financial stability; the broker's responsiveness to the First Tennessee's
transaction requests; and the broker's clearance and settlement capability.

The Portfolio may execute portfolio transactions with broker-dealers who provide
research and execution services to the Portfolio or other accounts over which
First Tennessee or its affiliates exercise investment discretion. Such services
may include research-related computer hardware and software; furnishing analyses
and reports concerning issuers, industries, and economic factors and trends.

The receipt of research from broker-dealers that execute transactions on behalf
of the Portfolio may be useful to First Tennessee in rendering investment
management services to the Portfolio and/or its other clients, and conversely,
such information provided by broker-dealers who have executed transaction orders
on behalf of other clients may be useful to First Tennessee in carrying out its
obligations to the Portfolio. The receipt of such research has not reduced
First

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<PAGE>

Tennessee's normal independent research activities; however, it enables First
Tennessee to avoid the additional expenses that could be incurred if it tried to
develop comparable information through its own efforts.

Subject to applicable limitations of the federal securities laws, broker-dealers
may receive commissions for agency transactions that are higher than the
commission of another broker-dealer who might have charged for their research
and execution services. In order to cause the Portfolio to pay such higher
commissions, First Tennessee must determine in good faith that such commissions
are reasonable in relation to the value of the brokerage and research services
provided by such executing broker-dealers viewed in terms of a particular
transaction or First Tennessee's overall responsibilities to the Portfolio and
its other clients. In reaching this determination, First Tennessee will not
attempt to place a specific dollar value on the brokerage and research services
provided or to determine what portion of the compensation should be related to
those services.

First Tennessee is authorized to use research services provided by and to place
portfolio transactions to the extent permitted by law, with brokerage firms that
have provided assistance in the distribution of shares of the Portfolio.

The Trustees periodically review First Tennessee's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Portfolio and review the commissions paid by the Portfolio over
representative periods of time to determine if they are reasonable in relation
to the benefits to the Portfolio.

For the fiscal periods ended June 30, 1997 and 1996, the portfolio turnover rate
was 122% and 8%, respectively. The increase in portfolio turnover rate is due
primarily to the fact that the 1996 rate reflects only the first six months of
the Portfolio's operations. No brokerage commissions were paid by the Portfolio
during the fiscal periods ended June 30, 1997 and 1996.

From time to time the Trustees will review whether the recapture for the benefit
of the Portfolio of some portion of the brokerage commissions or similar fees
paid by the Portfolio on portfolio transactions is legally permissible and
advisable. The Portfolio seeks to recapture soliciting broker-dealer fees on the
tender of portfolio securities, but at present no other recapture arrangements
are in effect. The Trustees intend to continue to review whether recapture
opportunities are available and are legally permissible and, if so, to
determine, in the exercise of their business judgment, whether it would be
advisable for the Portfolio to seek such recapture.

When two or more Portfolios are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance with a
formula considered by the Trustees and First Tennessee to be equitable to each
Portfolio. In some cases this system could have a detrimental effect on the
price or value of the security as far as the Portfolio is concerned. In other
cases, however, the ability of the Portfolio to participate in volume
transactions will produce better executions for the Portfolio. It is the
current opinion of the Trustees that the desirability of retaining First
Tennessee as investment adviser to the Portfolio outweighs any disadvantages
that may be said to exist from exposure to simultaneous transactions.

VALUATION OF PORTFOLIO SECURITIES

Valuations of securities furnished by the pricing service employed by the
Portfolio are based upon a computerized matrix system and/or appraisals by the
independent pricing service, in each case in reliance upon information
concerning market transactions and quotations from recognized securities
dealers. The methods used by the pricing service and the quality of valuations
so established are reviewed by officers of the Portfolio and the Portfolio's
pricing agent under general supervision of the Trustees.

Use of pricing services has been approved by the Board of Trustees. Securities
and other assets for which there is no readily available market are valued in
good faith by a committee appointed by the Board of Trustees. The procedures
set forth above need not be used to determine the value of the securities owned
by the fund if, in the opinion of a committee
appointed by the Board of Trustees, some other method (e.g., closing
over-the-counter- bid prices in the case of debt instruments traded on an
exchange) would more accurately reflect the fair market value of such
securities.

PERFORMANCE

For each class of the Portfolio, YIELDS used in advertising are computed by
dividing interest income for a given 30-day or one-month period, net of
expenses, by the average number of shares entitled to receive dividends during
the period, dividing this figure by the net asset value per share (NAV) at the
end of the period and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for purposes
of yield quotations in accordance with standardized methods applicable to all
bond funds. In general, interest income is reduced with respect

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to bonds trading at a premium over their par value by subtracting a portion of
the premium from income on a daily basis, and is increased with respect to bonds
trading at a discount by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from the calculation.

As of June 30, 1997, the 30-day yield was 4.96%, 4.77 % and 4.74% for Class I,
II and III, respectively.

Tennessee Tax-Free Portfolio also may quote the TAX-EQUIVALENT YIELD for each
class, which shows the taxable yield an investor would have to earn, before
taxes, to equal the tax-free yield. Tax-equivalent yield is the current yield
that would have to be earned, in the investor's tax bracket, to match the
tax-free yields shown below after taking federal income taxes into account.
Tax-equivalent yields are calculated by dividing current yield by the result of
one minus a stated federal or combined federal and state tax rate. It gives the
approximate yield a taxable security must provide at various income brackets to
produce after-tax yields equivalent to those of tax-exempt obligations yielding
from 2.0% to 8.0%. Of course, no assurance can be given that each class will
achieve any specific tax-exempt yield. While the Portfolio invests principally
in municipal obligations whose interest is not includable in gross income for
purposes of calculating federal income tax, other income received by the
Portfolio may be taxable.

The following table shows the effect of a shareholder's tax status on effective
yield under the federal income tax laws for 1997:

1997 TAX RATES AND TAX-EQUIVALENT YIELDS

Taxable Federal
Income * Tax If individual tax-exempt yield is:
Bracket ** 2.00% 3.00% 4.00%
single return joint return Then taxable equivalent yield is:
<S> <C> <C> <C> <C> <C>
$0 - $24,650 $0 - $41,200 15% 2.35% 3.53% 4.71%
$24,651 - $59,750 $41,201 - $99,600 28% 2.78% 4.17% 5.56%
$59,751 - $124,650 $99,601 - $151,750 31% 2.90% 4.35% 5.80%
$124,651 - $271,050 $151,751 - $271,050 36% 3.13% 4.69% 6.25%
$271,051 - above $271,051 - above 39.6% 3.31% 4.97% 6.62%

</TABLE>

* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1997 tax rates.
** Excludes the impact of the phaseout of personal exemptions, limitation on
itemized deductions, and other credits, exclusions, and adjustments which
may raise a taxpayer's marginal tax rate. An increase in a shareholder's
marginal tax rate would increase that shareholder's tax-equivalent yield.

Tennessee individual income tax is levied at a flat rate of 6%. The tax is
levied on dividend and interest income.

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If your effective combined federal and Tennessee state tax rate in 1997 is:
20.10% 32.32% 35.14% 39.84% 43.22%
Then your tax-equivalent yield is:
TAX-EQUIVALENT YIELD*
2.0% 2.50% 2.96% 3.08% 3.32% 3.52%
3.0% 3.75% 4.43% 4.63% 4.99% 5.28%
4.0% 5.01% 5.91% 6.17% 6.65% 7.04%
5.0% 6.26% 7.39% 7.71% 8.31% 8.81%
6.0% 7.51% 8.87% 9.25% 9.97% 10.57%
7.0% 8.76% 10.34% 10.79% 11.64% 12.33%
8.0% 10.01% 11.82% 12.33% 13.30% 14.09%

*The Portfolio may invest a portion of its assets in obligations that are
subject to state or federal income tax. When the Portfolio invests in these
obligations, its tax-equivalent yield will be lower. In the table above,
tax-equivalent yields are calculated assuming investments are 100% federally and
state tax-free.

TOTAL RETURNS for each Class of the Portfolio quoted in advertising reflect all
aspects of return, including the effect of reinvesting dividends and capital
gain distributions (if any), and any change in NAV over the period. AVERAGE
ANNUAL TOTAL RETURNS are calculated by determining the growth or decline in
value of a hypothetical historical investment over a stated period, and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative total return of 100% over ten years would
produce an average annual total return of 7.18%, which is the steady annual rate
of return that would equal 100% growth on a compounded basis in ten years.
While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that performance is not
constant over time, but changes from year to year, and that average annual total
returns represent averaged figures as opposed to the actual year-to-year
performance. Average annual returns covering periods of less than one year are
calculated by determining total return for the period, extending that return for
a full year (assuming that performance remains constant over the year), and
quoting the result as an annual return. The following table shows total returns
as of June 30, 1997 for each Class of the Portfolio:

</TABLE>

The Portfolio may compare the performance of its Classes or the performance of
securities in which it or its Classes may invest to other mutual funds,
especially to those with similar investment objectives. These comparisons may
be based on data published by IBC/Donoghue's Money Fund Report of Ashland, MA
01721, or by Lipper Analytical Services, Inc. (Lipper, sometimes referred to as
Lipper Analytical Services), an independent service located in Summit, New
Jersey that monitors the performance of mutual funds. Lipper generally ranks
funds on the basis of total return, assuming reinvestment of distributions, but
does not take sales charges or redemption fees into consideration, and is
prepared without regard to tax consequences. Lipper may also rank funds based
on yield. In addition to the mutual fund rankings, the Portfolio's performance
may be compared to mutual fund performance indices prepared by Lipper. The BOND
FUND REPORT AVERAGES' which is reported in the BOND FUND REPORT, covers taxable
bond funds. Investors should give consideration to the quality and maturity of
the portfolio securities of the respective investment companies when comparing
investment alternatives.

From time to time, the Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance.

9
<PAGE>

The Portfolio may be compared in advertising to certificates of deposits (CDs)
or other investments issued by banks. Mutual funds differ from bank investments
in several respects. For example, the Portfolio may offer greater liquidity or
higher potential returns than CDs, and the Portfolio does not guarantee your
principal or your return.

The Portfolio may compare its performance to that of the Lehman Brothers
Municipal Bond Index, an index comprised of revenue bonds and state government
obligations. The Portfolio may also compare its performance to that of the
Lehman Brothers General Obligation Bond Index, an index comprised of all public,
fixed-rate, non-convertible investment-grade domestic corporate debt. The
Portfolio may also quote mutual fund rating services in its advertising
materials, including data from a mutual fund rating service which rates mutual
funds on the basis of risk adjusted performance. Because the fees for Class II
and Class III are higher than the fees for Class I, yields and returns for those
classes will be lower than for Class I.

The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, the
investor invests a fixed dollar amount at periodic intervals, thereby purchasing
fewer shares when prices are high and more shares when prices are low. While
such a strategy does not assure a profit nor guard against loss in a declining
market, the investor's average cost per share can be lower than if fixed numbers
of shares had been purchased at those intervals. In evaluating such a plan,
investors should consider their ability to continue purchasing shares through
periods of low price levels.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

The following holiday closings have been scheduled: Veterans' Day, Thanksgiving
Day, Christmas Day, New Year's Day, Dr. Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, and Columbus Day.
Although First Tennessee expects the same holiday schedule to be observed in the
future, the New York Stock Exchange (NYSE) and the Federal Reserve Bank of New
York (New York Federal Reserve) may modify their holiday schedules at any time.

If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing the
Portfolio's NAV. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and will incur any costs
of sale, as well as the associated inconveniences.

Pursuant to Rule 11a-3 under the 1940 Act, the Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Portfolio's exchange privilege. Under Rule 11a-3, the 60 day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange, or (ii) under extraordinary
circumstances, a Portfolio temporarily suspends the offering of shares as
permitted under the 1940 Act or by the SEC or because it is unable to invest
amounts effectively in accordance with its investment objective and policies.
This exchange limit may be modified for accounts in certain institutional
retirement plans to conform to plan exchange limits and Department of Labor
Regulations.

ADDITIONAL CLASS II AND CLASS III INFORMATION

PURCHASE INFORMATION. As provided for in Rule 22d-1 under the 1940 Act, ALPS
Mutual Funds Services, Inc. (ALPS or the Distributor), exercises its right to
waive the Portfolio's Class II shares' maximum 3.75% sales charge in connection
with the Portfolio's merger with or acquisition of any investment company or
trust.

SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in Class
II and Class III with Systematic Investing by completing the appropriate section
on the account application and attaching a voided personal check. If the bank
account is jointly owned, make sure that all owners sign. Investments may be
made monthly by automatically deducting $25 or more from your checking account.
This monthly purchase amount may be changed at any time. There is a $50 minimum
initial investment requirement for this option. For employees of First
Tennessee Bank National Association or any of its affiliates who participate in
the Systematic Investing Program, the minimum initial investment requirement is
$50. Accounts will be drafted on or about the first business day of every
month. Systematic Investing may be canceled at any time without payment of a
cancellation fee. Investors will receive a confirmation from their securities
broker or financial

10
<PAGE>

institution (Investment Professional), or from the Transfer Agent for every
transaction, and a debit entry will appear on your bank statement.

SYSTEMATIC WITHDRAWAL PLAN. Investors can have monthly, quarterly or
semi-annual checks sent from their account to you, to a person named by them, or
to their bank checking account. The Systematic Withdrawal Plan payments are
drawn from share redemptions and must be in the amount of $100 or more per
Portfolio per month. If Systematic Withdrawal Plan redemptions exceed income
dividends earned on shares, an account eventually may be exhausted. Contact the
Investment Professional for more information.

DISTRIBUTIONS AND TAXES

DIVIDENDS. To the extent that the Portfolio's income is derived from federally
tax-exempt interest, the daily dividends declared by the Portfolio are also
federally tax-exempt. The Portfolio will send each shareholder a notice in
January describing the tax status of dividends and capital gain distributions,
if any, for the prior year. Dividends derived from Tennessee Tax-Free
Portfolio's tax-exempt income are not subject to federal income tax, but must be
reported to the IRS by shareholders. Exempt-interest dividends are included in
income for purposes of computing the portion of social security and railroad
retirement benefits that may be subject to federal tax. If the Portfolio earns
taxable income or capital gains from its investments, these amounts will be
designated as taxable distributions. Dividends derived from taxable investment
income and short-term capital gains are taxable as ordinary income. The
Portfolio will send a tax statement showing the amount of tax-exempt
distributions for the past calendar year, and will send an IRS Form 1099-DIV by
January 31 if the Portfolio makes any taxable distributions.

The Portfolio purchases municipal obligations based on opinions of bond counsel
regarding the federal income tax status of the obligations. These opinions
generally will be based upon covenants by the issuers regarding continuing
compliance with federal tax requirements. If the issuer of an obligation fails
to comply with its covenants at any time, interest on the obligation could
become federally taxable retroactive to the date the obligation was issued.

As a result of the Tax Reform Act of 1986, interest on certain "private
activity" securities (referred to in the Internal Revenue Code as "qualified
bonds") is subject to the federal alternative minimum tax (AMT), although the
interest continues to be excludable from gross income for other purposes.
Interest from private activity securities will be considered tax-exempt for
purposes of the Portfolio's policies of investing so that at least 80% of its
income is free from federal income tax. Interest from private activity
securities is a tax preference item for the purpose of determining whether a
taxpayer is subject to the AMT and the amount of AMT to be paid, if any.
Private activity securities issued after August 7, 1986 to benefit a private or
industrial user or to finance a private facility are affected by this rule.

STATE TAXES. In the opinion of fund counsel, Baker, Donelson, Bearman &
Caldwell, investments in Tennessee Tax-Free Portfolio will not be subject to
Tennessee personal income taxes on distributions received from the Portfolio to
the extent such distributions are attributable to interest on bonds or
securities of the U.S. government or any of its agencies or instrumentalities,
or in bonds or other securities of the State of Tennessee or any county,
municipality or political subdivision, including any agency, board, authority or
commission. Other distributions from the Portfolio, including dividends
attributable to obligations of issuers in other states, and all long-term and
short-term capital gains, will not be exempt from personal income taxes in
Tennessee. The Portfolio will report annually the percentage and source, on a
state-by-state basis, of interest income received by the Portfolio on municipal
bonds during the preceding year.

CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains realized by the Portfolio
on the sale of securities and distributed to shareholders are federally taxable
as long-term capital gains regardless of the length of time that shareholders
have held their shares. If a shareholder receives a long-term capital gain
distribution on shares of the Portfolio, and such shares are held less than six
months and are sold at a loss, the portion of the loss equal to the amount of
the long-term capital gain distribution will be considered a long-term loss for
tax purposes.

A portion of the gain on bonds purchased at a discount after April 30, 1993 and
short-term capital gains distributed by the Portfolio are taxable to
shareholders as dividends, not as capital gains. Distributions from short-term
capital gains do not qualify for the dividends received deduction. Dividend
distributions resulting from a re-characterization of gain from the sale of
bonds purchased at a discount after April 30, 1993 are not considered income for
the purposes of the Portfolio's policy of investing so that at least 80% of its
income is free from federal income tax.

TAX STATUS OF THE TRUST. The Portfolio intends to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, (the
Code), so that the Portfolio will not be liable for federal income or excise
taxes on net investment income or capital gains to the extent that these are
distributed to shareholders in accordance with applicable

11
<PAGE>

provisions of the Code. In order to qualify as a regulated investment company
and avoid being subject to federal income or excise taxes, the Portfolio intends
to distribute substantially all of its net investment income and net realized
capital gains within each calendar year as well as on a fiscal year basis. The
Portfolio also intends to comply with other tax rules applicable to regulated
investment companies, including a requirement that capital gains from the sale
of securities held for less than three months must constitute less than 30% of
the Portfolio's gross income for each fiscal year.

OTHER TAX INFORMATION. The information above is only a summary of some of the
tax consequences generally affecting the Portfolio and its shareholders, and no
attempt has been made to discuss individual tax consequences. In addition to
federal income taxes, shareholders of the Portfolio may be subject to state and
local taxes on distributions received from the Portfolio. Investors should
consult their tax advisors to determine whether the Portfolio is suitable to
their particular tax situation.

Effective January 1, 1993, federal income tax will be withheld at a 20% rate on
any eligible rollover distributions that are not transferred directly to another
qualified plan or IRA. Actual income tax may be higher or lower and will be due
when tax forms for the year are filed. Taxes will not be withheld in cases of
direct rollover into an IRA or another qualified plan.

TRUSTEES AND OFFICERS

*JAMES V. HYATT, Secretary, is General Counsel of ALPS . Prior to joining ALPS,
Mr. Hyatt served as Senior Legal Counsel for Fidelity Investments and Clerk for
Fidelity Management Trust Company.

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<PAGE>

- --------------------------------------------------------------------------------
Aggregate
Pension Or Compensation
Retirement Estimated From The
Aggregate Benefits Annual Trust and
Compensation Accrued As Benefits Fund Complex
From the Part of Fund Upon Paid to
Trust Expenses Retirement Trustees
- --------------------------------------------------------------------------------

Thomas M. Batchelor
Trustee $10,000 $0 $0 $10,000
- --------------------------------------------------------------------------------

John A. DeCell
Trustee $10,000 $0 $0 $10,000
- --------------------------------------------------------------------------------

L.R. Jalenak, Jr.
Trustee $10,000 $0 $0 $10,000
- --------------------------------------------------------------------------------

Larry W. Papasan,
Trustee $8,750 $0 $0 $8,750
- --------------------------------------------------------------------------------

Richard C. Rantzow
Trustee $10,000 $0 $0 $10,000
- --------------------------------------------------------------------------------

As of September 30, 1997, the officers and Trustees of the Trust owned less than
1% of the outstanding shares of any Portfolio.

INVESTMENT ADVISORY AGREEMENT

The Portfolio employs First Tennessee Bank National Association (First Tennessee
or the Investment Adviser), Memphis, Tennessee, to furnish investment advisory
and other services to the Portfolio. Under the Investment Advisory and
Management Agreement with the Portfolio, First Tennessee is authorized to
appoint one or more sub-advisers at First Tennessee's expense.

In addition to First Tennessee's fee payable to First Tennessee and the fees
payable to the Transfer Agent and Pricing and Accounting Agent, and to the
Administrator, the Portfolio pays for all its expenses, without limitation, that
are not assumed by these parties. The Portfolio pays for typesetting, printing
and mailing of proxy material to existing shareholders, legal expenses, and the
fees of the custodian, auditor and Trustees. Other expenses paid by the
Portfolio include: interest, taxes, brokerage commissions, the Portfolio's
proportionate share of insurance premiums and Investment Company Institute dues,
and costs of registering shares under federal and state securities laws. The
Portfolio also is liable for such nonrecurring expenses as may arise, including
costs of litigation to which the Portfolio is a party, and its obligation under
the Declaration of Trust to indemnify its officers and Trustees with respect to
such litigation.

For managing its investment and business affairs, Tennessee Tax-Free Portfolio
pays First Tennessee a monthly management fee at the annual rate of .50% of
average net assets. First Tennessee has voluntarily agreed to waive its entire
fee for the Portfolio. This fee waiver may be discontinued at any time. For
the fiscal years ended June 30, 1997 and 1996, First Tennessee earned $65,349
and $12,692, respectively, before waiving its entire fee.

ADMINISTRATION AGREEMENT AND OTHER CONTRACTS

ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
Administrator and Distributor), is the Administrator and Distributor to the
Portfolio under an Administration and General Distribution Agreement. ALPS, a
Colorado corporation, is a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc.

As the Administrator, ALPS assists in the Portfolio's administration and
operation, including, but not limited to, providing office space and various
legal and accounting services in connection with the regulatory requirements
applicable to the Portfolio. ALPS is entitled to and receives from the
Portfolio a monthly fee at the annual rate of .15% of average net assets. From
January 1, 1996 through July 28, 1996, ALPS voluntarily agreed to waive its
administration fee and reimburse the

13
<PAGE>

Portfolio for fund accounting/transfer agent fees as well as custody
out-of-pocket fees. From July 29, 1996 through March 31, 1997, ALPS voluntarily
agreed to waive its administration fee and assume all expenses of the Portfolio
in order to maintain an expense ratio of 0.00% for all classes of the Portfolio,
after taking into consideration waivers by First Tennessee. Effective April 1,
1997, ALPS began to phase out the assumption of Portfolio expenses while
continuing to waive its administration fee. The reimbursement of non-12b-1
expenses for each Class of the Portfolio was reduced by 0.15% as of April 1,
1997, and was further reduced 0.10% on the first business day of each month
thereafter until July 1, 1997 when all remaining reimbursements of non-12b-1
expenses by ALPS were discontinued. For Class IIIof the Portfolio, the
reimbursement of 12b-1 fees by ALPS decreased by 0.125% on April 1, 1997, by
0.05% on the first business day of May and June and by 0.025% on July 1, 1997.
Thereafter, ALPS has voluntarily agreed to waive one half of the 0.50% 12b-1 fee
applicable to Class III of the Portfolio or 0.25% of that Class' average net
assets. ALPS reserves the right to modify or terminate this waiver of 12b-1
expense at any time.

First Tennessee serves as the Co-Administrator for the Portfolio. As the
Co-Administrator, First Tennessee assists in the Portfolio's operation,
including, but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to and receives from the Portfolio a monthly fee at the
annual rate of .05% of average net assets.

As the Distributor, ALPS sells shares of Class I as agent on behalf of the Trust
at no additional cost to the Trust. Class III is obligated to pay ALPS monthly a
12b-1 fee at the annual rate of up to .75% of the average net assets of Class
III, all or a portion of which may be paid out to broker-dealers or others
involved in the distribution of Class III shares. See "Administration Agreements
and Other Contracts - Distribution Plan." Class II and III pay shareholder
servicing fees to Investment Professionals at an annual rate of up to .25% of
average net assets as more fully described under the section "Administration
Agreement and Other Contracts - Shareholder Services Plans". First Tennessee and
its affiliates neither participate in nor are responsible for the underwriting
of Portfolio shares. Consistent with applicable law, affiliates of First
Tennessee may receive commissions or asset-based fees.

TRANSFER AGENT, FUND ACCOUNTING AND CUSTODIAN. Chase Global Funds Services
Company (CGFSC or the Transfer Agent), provides transfer agent and shareholder
services for the Portfolio, and calculates the NAV and dividends of each Class
and maintains the portfolio and general accounting records. For such services,
CGFSG is entitled to receive from each Class fees at the annual rate of 0.07%
of average net assets through $50 million and 0.05% over $50 million plus
out-of-pocket expenses. Chase Manhattan Bank is Custodian of the assets of the
Portfolio. The Custodian is responsible for the safekeeping of the Portfolio's
assets and the appointment of sub-custodian banks and clearing agencies. For
such services, Chase is entitled to receive from each Portfolio fees at the
annual rate of 0.018% of average net assets plus out-of-pocket expenses. The
Custodian takes no part in determining the investment policies of the Portfolio
or in deciding which securities are purchased or sold by the Portfolio. The
Portfolio, however, may invest in obligations of the Custodian and may purchase
securities from or sell securities to the Custodian.

DISTRIBUTION PLAN. The Trustees of the Trust have adopted a Distribution Plan
on behalf of Class III of the Portfolio (the Class III Plan) pursuant to Rule
12b-1 (the Rule) under the 1940 Act. The Rule provides in substance that a
mutual fund may not engage directly or indirectly in financing any activity that
is intended primarily to result in the sale of shares of the fund except
pursuant to a plan adopted by the fund under the Rule. The Trustees have
adopted the Plan to allow Class III and ALPS to incur distribution expenses.
The Class III Plan provides for payment of a distribution fee (12b-1 fee) to
ALPS of up to 0.75% of the average net assets of Class III of the Portfolio.
(These fees are in addition to the fees paid to ALPS under the Administration
Agreement.) The Trustees have limited the 12b-1 fee to 0.50% of Class III's
average net assets. ALPS has agreed to voluntarily waive one half of the 0.50%
12b-1 fee applicable to Class III of the Portfolio or 0.25% of that Class'
average net assets. The Trust or ALPS, on behalf of Class III of the Portfolio,
may enter into servicing agreements (Service Agreements) with banks,
broker-dealers or other institutions (Agency Institutions). The Class III Plan
provides that ALPS may use its fees and other resources to make payments to
Agency Institutions for performance of distribution-related services, including
those enumerated above. The Service Agreements further provide for compensation
to broker-dealers for their efforts to sell Class III shares. The
distribution-related services include, but are not limited to, the following:
formulation and implementation of marketing and promotional activities, such as
mail promotions and television, radio, newspaper, magazine and other mass media
advertising; preparation, printing and distribution of sales literature;
preparation, printing and distribution of prospectuses of the Portfolio and
reports to recipients other than existing shareholders of the Portfolio;
obtaining such information, analyses and reports with respect to marketing and
promotional activities as ALPS may from time to time, deem advisable; making
payments to securities dealers and others engaged in the sales of Class III
Shares; and providing training, marketing and support to such dealers and others
with respect to the sale of Class III Shares. The Class III Plan recognizes
ALPS may use its fees and other resources to pay expenses associated with the
promotion and administration of activities primarily intended to result in the
sale of shares.

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<PAGE>

The Plan has been approved by the Trustees, including the majority of
disinterested Trustees. As required by the Rule, the Trustees carefully
considered all pertinent factors relating to the implementation of the Plans
prior to its approval, and have determined that there is a reasonable likelihood
that the Plan will benefit the Portfolio and its shareholders. To the extent
that the Class III Plans give ALPS greater flexibility in connection with the
distribution of shares of the class, additional sales of shares may result.

The Class III Plans could be construed as compensation plans because ALPS is
paid a fixed fee and is given discretion concerning what expenses are payable
under the Plans. ALPS may spend more for marketing and distribution than it
receives in fees and reimbursements from the Portfolio. However, to the extent
fees received exceed expenses, including indirect expenses such as overhead,
ALPS could be said to have received a profit. For example, if ALPS pays $1 for
Class III distribution-related expenses and receives $2 under a Class III Plan,
the $1 difference could be said to be a profit for ALPS. (Because ALPS is
reimbursed for its out-of-pocket direct promotional expenses, a Class III Plan
also could be construed as a reimbursement plan. Until the issue is resolved by
the SEC, unreimbursed expenses incurred in one year will not be carried over to
a subsequent year.) If after payments by ALPS for marketing and distribution
there are any remaining fees attributable to a Class III Plan, these may be used
as ALPS may elect. Since the amount payable under a Class III Plan will be
commingled with ALPS's general funds, including the revenues it receives in the
conduct of its business, it is possible that certain of ALPS's overhead expenses
will be paid out of Plan fees and that these expenses may include items such as
the costs of leases, depreciation, communications, salaries, training and
supplies. The Portfolio believes that such expenses, if paid, will be paid only
indirectly out of the fees being paid under the Plan. For the fiscal year ended
June 30, 1997, the Portfolio paid distribution fees in the amount of $18,797, a
portion of which was reimbursed by ALPS pursuant to the voluntary waiver and
reimbursement of portfolio expenses discussed under "Administration Agreement
and Other Contracts - Administrator and Distributor." All of these fees were
paid as compensation to dealers.

SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II and Class III have adopted Shareholder Services Plans
to compensate Agency Institutions for individual shareholder services and
account maintenance. These functions include: maintaining account records for
each shareholder who beneficially owns Class III Shares; answering questions and
handling correspondence from shareholders about their accounts; handling the
transmission of funds representing the purchase price or redemption proceeds;
issuing confirmations for transactions in Class III Shares by shareholders;
assisting customers in completing application forms; communicating with the
transfer agent; and providing account maintenance and account level support for
all transactions. For these services the participating Agency Institutions are
paid a service fee at the annual rate of up to .25% of average net assets of
Class II and Class III. Shareholder Servicing Fees for Class II or Class III
have not currently been authorized by the Board of Trustees although such fees
may become effective at a future time. For the fiscal year ended June 30, 1997,
the Portfolio did not pay any shareholder servicing fees.

Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing, controlling, or distributing
the shares of a registered, open-end investment company continuously engaged in
the issuance of its shares and prohibit banks generally from issuing,
underwriting, selling or distributing securities. The same laws and regulations
generally permit a bank or bank affiliate to act as an investment adviser and
co-administrator and to purchase shares of the investment company as agent for
and upon the order of a customer. In the Trust's and Investment Adviser's
opinion, banks and their affiliates may be paid for investment advisory,
shareholder servicing, recordkeeping and co-administration functions. Changes
in federal or state statutes and regulations pertaining to the permissible
activities of banks and their affiliates or subsidiaries, as well as further
judicial or administrative decisions or interpretations, could prevent a bank
from continuing to perform all or a part of the contemplated services. If a
bank or its affiliates were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. In such event, changes in the
operation of the Portfolio might occur, including possible termination of any
automatic investment or redemption or other services then being provided by any
bank. It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences. The Portfolio may execute
portfolio transactions with and purchase securities issued by depository
institutions that receive payments under the Plans. No preference will be shown
in the selection of investments for the instruments of such depository
institutions. In addition, state securities laws on this issue may differ from
the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to state
law.

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<PAGE>

DESCRIPTION OF THE TRUST

TRUST ORGANIZATION. Tennessee Tax Free Portfolio is a portfolio of First Funds
(formerly The Masters Group of Mutual Funds), an open-end management investment
company organized as a Massachusetts business trust by a Declaration of Trust
dated March 6, 1992, as amended and restated on September 4, 1992. The
Declaration of Trust permits the Trustees to create additional portfolios and
classes. There are nine portfolios of the Trust, each with three Classes.

The assets of the Trust received for the issue or sale of shares of the
Portfolio and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are specially allocated to such Portfolio, and
constitute the underlying assets of such Portfolio. The underlying assets of
the Portfolio are segregated on the books of account, and are to be charged with
the liabilities with respect to such Portfolio and with a share of the general
expenses of the Trust. Expenses with respect to the Trust are to be allocated
in proportion to the asset value of the respective Portfolios except where
allocations of direct expense can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which expenses are allocable to a given Portfolio, or which are
general or allocable to all of the Portfolios. In the event of the dissolution
or liquidation of the Trust, shareholders of a Portfolio are entitled to receive
as a class the underlying assets of such Portfolio available for distribution.

SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except for
the payment of the purchase price of shares and requires that each agreement,
obligation, or instrument entered into or executed by the Trust or the Trustees
shall include a provision limiting the obligations created thereby to the Trust
and its assets. The Declaration of Trust provides for indemnification out of
the Portfolio's property of any shareholders held personally liable for the
obligations of the Portfolio. The Declaration of Trust also provides that the
Portfolio shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of a Portfolio and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Portfolio itself
would be unable to meet its obligations. The Trustees believe that, in view of
the above, the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.

As of September 30, 1997, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolio:

Name and Address Class % of Class Held
- ---------------- ----- ---------------

Tennessee Mex. Inc, Agency I 6%
Knoxville, TN

Emmett N. Kennon II 9%
Rose S. Kennon, JTWROS
1603 Tyne Blvd.
Nashville, TN 37215

Gerald E. Stuart III 11%
P.O. Box 10288
Knoxville, TN 37939

NFSC FBO III 7%
H. Barrett Heywood III
Joan Talley Heywood
1506 Lexington Rd.
Chattanooga, TN 37405

S.T. Canale III 5%
1594 Peabody
Memphis, TN 38104

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<PAGE>

VOTING RIGHTS. The Portfolio's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting and
dividend rights, the right of redemption, and the privilege of exchange are
described in the Prospectus. Shares are fully paid and nonassessable, except as
set forth under the heading "Shareholder and Trustee Liability" above.
Shareholders representing 10% or more of the Trust or a Portfolio may, as set
forth in the Declaration of Trust, call meetings of the Trust or a Portfolio for
any purpose related to the Trust or Portfolio, as the case may be, including, in
the case of a meeting of the entire Trust, the purpose of voting on removal of
one or more Trustees. The Trust or any Portfolio may be terminated upon the
sale of its assets to another open-end management investment company, or upon
liquidation and distribution of its assets, if approved by vote of the holders
of a majority of the outstanding shares of the Trust or that Portfolio. If not
so terminated, the Trust and the Portfolio will continue indefinitely.

CLASSES. Pursuant to the Declaration of Trust, the Trustees have authorized
additional classes of shares for the Portfolio of the Trust. Although the
investment objective for each separate class of a particular Portfolio is the
same, fee structures are different such that one class may have a higher yield
than another class of the same Portfolio at any particular time. Shareholders
of the Trust will vote together in the aggregate and not separately by
Portfolio, or by class thereof, except as otherwise required by law or when the
Trustees determine that the matter to be voted upon affects only the interests
of the shareholders of a particular Portfolio or a class thereof. Pursuant to a
vote by the Board of Trustees, the Trust has adopted Rule 18f-3 under the Act
and has issued multiple classes of shares with respect to each of its
Portfolios. Accordingly, the rights, privileges and obligations of each such
class will be determined in accordance with such rule.

FINANCIAL STATEMENTS

The Portfolio's financial statements and financial highlights for the fiscal
year ended June 30, 1997 are included in the Portfolio's Annual Report which is
a separate report supplied independent of this Statement of Additional
Information. The Portfolio's financial statements and financial highlights are
incorporated herein by reference.

APPENDIX

DOLLAR-WEIGHTED AVERAGE MATURITY for the Portfolio is derived by multiplying the
value of each investment by the number of days remaining to its maturity, adding
these calculations, and then dividing the total by the value of the fund's
Portfolio. An obligation's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to this rule.

For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. When a
municipal bond issuer has committed to call an issue of bonds and has
established an independent escrow account that is sufficient to, and is pledged
to, refund that issue, the number of days to maturity for the pre-refunded bond
is considered to be the number of days to the announced call date of the bonds.

The descriptions that follow are examples of eligible ratings for the Portfolio.
The Portfolio may, however, consider the ratings for other types of investments
and the ratings assigned by other rating organizations when determining the
eligibility of a particular investment.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF STATE AND MUNICIPAL
NOTES:
Moody's ratings for state and municipal and other short-term obligations will be
designated Moody's Investment Grade (MIG or VMIG for variable rate obligations).
This distinction is in recognition of the difference between short-term credit
risk and long-term credit risk. Factors affecting the liquidity of the borrower
and short-term cyclical elements are critical in short-term ratings, while other
factors of major importance in bond risk, long-term secular trends for example,
may be less important over the short run. Symbols used will be as follows:

MIG-1/VMIG-1 - This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.

MIG-2/VMIG-2 - This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

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MIG-3/VMIG-3 - This designation denotes favorable quality, with all security
elements accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.

MIG-4/VMIG-4 - This designation denotes adequate quality protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS OF STATE AND MUNICIPAL
NOTES:

SP-1 - Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.

SP-2 - Satisfactory capacity to pay principal and interest.

SP-3 - Speculative capacity to pay principal and interest.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS:

Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than Aaa securities.

A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL BOND RATINGS:

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

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

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

The ratings may be modified by the addition of a plus or minus to show relative
standing within the major rating categories.

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FIRST FUNDS
U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
CASH RESERVE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 24, 1997

This Statement is not a prospectus but should be read in conjunction with
the current Prospectus for each Class of First Funds: U.S. Treasury Money
Market Portfolio, U.S. Government Money Market Portfolio, Municipal Money
Market Portfolio, and Cash Reserve Portfolio dated October 24, 1997. Please
retain this Statement for future reference. The Portfolios' financial
statements and financial highlights included in the Annual Report for the
fiscal year ended June 30, 1997, are incorporated herein by reference. To
obtain additional free copies of this Statement, the Annual Report or the
Prospectus, please call the Distributor at 1-800-442-1941, option 1 or write
to the Distributor at 370 17th Street, Suite 3100, Denver CO 80202.

TABLE OF CONTENTS PAGE
Investment Restrictions and Limitations 2
Investment Instruments 7
Portfolio Transactions 10
Valuation of Portfolio Securities 11
Performance 11
Additional Purchase and Redemption Information 13
Distributions and Taxes 14
Trustees and Officers 15
Investment Advisory Agreement 16
Administration Agreement and Other Contracts 16
Description of the Trust 19
Financial Statements 21
Appendix 21

INVESTMENT ADVISER
First Tennessee Bank National Association (First Tennessee or the Investment
Adviser)

SUB-ADVISER
PNC Institutional Management Corporation (PIMC or the Sub-Adviser)

ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc. (ALPS or the Administrator and Distributor)

CO-ADMINISTRATOR
First Tennessee Bank National Association (First Tennessee or the
Co-Administrator)

TRANSFER AGENT & SHAREHOLDER SERVICING AGENT
Chase Global Funds Services Company (CGFSC or the Transfer Agent)

CUSTODIAN
Chase Manhattan Bank, N.A. (Chase or the Custodian)

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INVESTMENT RESTRICTIONS AND LIMITATIONS

The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Portfolio's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of a Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with a
Portfolio's investment policies and limitations.

Fundamental policies and investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940 (the 1940 Act)) of that Portfolio. However,
except for the fundamental investment limitations set forth below, the
investment policies and limitations described in this Statement of Additional
Information are not fundamental and may be changed without shareholder approval.

INVESTMENT LIMITATIONS OF U.S. TREASURY MONEY MARKET PORTFOLIO

THE FOLLOWING ARE U.S. TREASURY MONEY MARKET PORTFOLIO'S FUNDAMENTAL LIMITATIONS
SET FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:

(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as a
result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer; or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;

(2) issue senior securities, except as permitted under the 1940 Act;

(3) borrow money, except that the Portfolio may (i) borrow money for
temporary or emergency purposes (not for leveraging or investment) and
(ii) engage in reverse repurchase agreements for any purpose; provided
that (i) and (ii) in combination do not exceed 33 1/3% of the Portfolio's
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed this amount will be
reduced within three days (not including Sundays and holidays) to the
extent necessary to comply with the 33 1/3% limitation;

(4) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;

(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Portfolio's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry;

(6) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);

(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or

(8) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to
repurchase agreements.

(9) The Portfolio may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single, open-end management investment company with substantially the
same fundamental investment objectives, policies, and limitations as the
Portfolio.

THE FOLLOWING LIMITATIONS OF U.S. TREASURY MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.

(i) The Portfolio does not currently intend during the coming year to
purchase the voting securities of any issuer.

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(iii) The Portfolio may borrow money only (a) from a bank or (b) by engaging in
reverse repurchase agreements with any party. The Portfolio will not
purchase any security while borrowings (excluding reverse repurchase
agreements) representing more than 5% of its total assets are
outstanding.

(iv) The Portfolio does not currently intend during the coming year to
purchase any security, if, as a result, more than 10% of its net assets
would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.

(v) The Portfolio does not currently intend during the coming year to
purchase or sell futures contracts or call options. This limitation does
not apply to options attached to, or acquired or traded together with,
their underlying securities, and does not apply to securities that
incorporate features similar to options or futures contracts.

(vi) The Portfolio does not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt
securities, to repurchase agreements or to loans of Portfolio securities.

(vii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or
leases.

(vii) The Portfolio does not currently intend during the coming year to invest
all of its assets in the securities of a single, open-end management
investment company with substantially the same fundamental investment
objectives, policies, and limitations as the Portfolio.

INVESTMENT LIMITATIONS OF U.S. GOVERNMENT MONEY MARKET PORTFOLIO

THE FOLLOWING ARE U.S. GOVERNMENT MONEY MARKET PORTFOLIO'S FUNDAMENTAL
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:

(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as a
result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer, or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;

(2) issue senior securities, except as permitted under the 1940 Act;

(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Portfolio's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry;

(6) purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);

(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or

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THE FOLLOWING LIMITATIONS OF U.S. GOVERNMENT MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.

(i) The Portfolio does not currently intend during the coming year to
purchase the voting securities of any issuer.

(vi) The Portfolio does not currently intend during the coming year to make
loans, but this limitation does not apply to purchases of debt securities
to repurchase agreements or to loans of Portfolio securities.

(vii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or
leases.

(viii)The Portfolio does not currently intend during the coming year to invest
all of its assets in the securities of a single, open-end management
investment company with substantially the same fundamental investment
objectives, policies, and limitations as the Portfolio.

INVESTMENT LIMITATIONS OF MUNICIPAL MONEY MARKET PORTFOLIO

THE FOLLOWING ARE MUNICIPAL MONEY MARKET PORTFOLIO'S FUNDAMENTAL LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE PORTFOLIO MAY NOT:

(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities) if, as a
result, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of that issuer, or (b) the Portfolio would
hold more than 10% of the outstanding voting securities of that issuer;

(2) issue senior securities, except as permitted under the 1940 Act;

(3) borrow money, except that the Portfolio may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 33 1/3%
limitation;

(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, or tax-exempt obligations issued or guaranteed by a
U.S. territory or possession or a state or local government, or a
political subdivision of any of the foregoing) if, as a result, 25% or
more of the Portfolio's total assets would be invested in securities of
companies whose principal business activities are in the same industry;

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<PAGE>

(6) buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);

(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or

THE FOLLOWING LIMITATIONS OF MUNICIPAL MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL.

(i) The Portfolio does not currently intend during the coming year to
purchase the voting securities of any issuer.

(iii) The Portfolio may borrow money only (a) from a bank, or (b) by engaging
in reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation (3)). The Portfolio will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.

(vii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or
leases.

INVESTMENT LIMITATIONS OF CASH RESERVE PORTFOLIO

THE FOLLOWING ARE CASH RESERVE PORTFOLIO'S FUNDAMENTAL LIMITATIONS SET FORTH IN
THEIR ENTIRETY. THE PORTFOLIO MAY NOT:

(2) issue senior securities, except as permitted under the 1940 Act;

5
<PAGE>

(other than borrowings). Any borrowings that come to exceed this amount
will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33 1/3% limitation;

(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Portfolio's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry, except that the Portfolio
will invest 25% or more of its total assets in the financial services
industry;

(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; or

THE FOLLOWING LIMITATIONS OF CASH RESERVE PORTFOLIO ARE NOT FUNDAMENTAL AND MAY
BE CHANGED WITHOUT SHAREHOLDER APPROVAL.

(i) The Portfolio does not currently intend during the coming year to
purchase a security (other than a security insured or guaranteed by the
U.S. government or any of its agencies or instrumentalities) if, as a
result, more than 5% of its total assets would be invested in the
securities of a single issuer; provided that the Portfolio may invest up
to 25% of its total assets in the first tier securities of a single
issuer for up to three business days.

(vii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or
leases.

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INVESTMENT INSTRUMENTS

First Tennessee Bank National Association (First Tennessee) serves as Investment
Adviser to the Portfolios, and with the prior approval of the Board of Trustees
(the Trustees), has engaged PNC Institutional Management Corporation (PIMC) to
act as Sub-Adviser to each of the Portfolios, including providing investment
research and credit analysis concerning Portfolio investments and conducting a
continuous program of investment of Portfolio assets in accordance with the
investment policies and objectives of each Portfolio.

RULE 2a-7. The Money Market Portfolios seek to maintain a stable net asset
value per share by limiting Portfolio investments in accordance with the terms
of Rule 2a-7 under the 1940 Act which sets forth limitations on the quality,
maturity and other investment characteristics of registered investment companies
which hold themselves out as money market funds.

ASSET-BACKED SECURITIES for Cash Reserve Portfolio may include pools of
mortgages, loans, receivables or other assets. Payment of principal and
interest may be largely dependent upon the cash flows generated by the assets
backing the securities, and, in certain cases, supported by letters of credit,
surety bonds, or other credit enhancements. The value of asset-backed
securities may also be affected by the creditworthiness of the servicing agent
for the pool, the originator of the loans or receivables, or the financial
institution(s) providing the credit support.

COMMERCIAL PAPER. Cash Reserve Portfolio may purchase commercial paper rated at
the time of purchase A-1 by Standard & Poor's Corporation (S&P) or Prime-1 by
Moody's Investors Service, Inc. (Moody's). The Portfolio may also purchase
unrated commercial paper determined to be of comparable quality at the time of
purchase by PIMC, pursuant to guidelines approved by the Trustees.

When purchasing securities on a delayed-delivery basis, each Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because each Portfolio is not required to pay for securities
until the delivery date, these risks are in addition to the risks associated
with the Portfolios' other investments. If each Portfolio remains substantially
fully invested at a time when delayed-delivery purchases are outstanding, the
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, each Portfolio will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When each Portfolio has sold a security on a
delayed-delivery basis, each Portfolio does not participate in further gains or
losses with respect to the security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, each Portfolio could
miss a favorable price or yield opportunity, or could suffer a loss.

Each Portfolio may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.

FEDERALLY-TAXABLE OBLIGATIONS. Municipal Money Market Portfolio does not intend
to invest in securities whose interest is federally taxable; however, from time
to time, the Portfolio may invest a portion of its assets on a temporary basis
in fixed-income obligations whose interest is subject to federal income tax.
For example, the Portfolio may invest in obligations whose interest is federally
taxable pending the investment or reinvestment in municipal securities of
proceeds from the sale of its shares or sales of portfolio securities.

Should the Portfolio invest in taxable obligations, it would purchase securities
which in the judgment of PIMC are of high quality. These would include
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, obligations of domestic banks, and repurchase agreements.
The Portfolio will purchase taxable obligations only if they meet its quality
requirements as set forth in the Prospectus.

Proposals to restrict or eliminate the federal income tax exemption for interest
on municipal obligations are introduced before Congress from time to time.
Proposals also may be introduced before state legislatures that would affect the
state tax treatment of the Portfolio's distributions. If such proposals were
enacted, the availability of municipal obligations and the value of the
Portfolio's holdings would be affected and the Trustees would reevaluate the
Portfolio's investment objectives and policies.

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Municipal Money Market Portfolio anticipates being as fully invested as
practicable in municipal securities; however, there may be occasions when as a
result of maturities of portfolio securities, or sales of Portfolio shares, or
in order to meet redemption requests, the Portfolio may hold cash that is not
earning income. In addition, there may be occasions when, in order to raise
cash to meet redemptions, the Portfolio may be required to sell securities at a
loss.

ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued. Under guidelines established by the Trustees, PIMC, under the
supervision of First Tennessee, determines the liquidity of Municipal Money
Market Portfolio and Cash Reserve Portfolio's investments and, through reports
from PIMC, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Portfolios' investments, PIMC may consider
various factors including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Portfolios' rights and
obligations relating to the investment). Investments currently considered by
Cash Reserve Portfolio to be illiquid include repurchase agreements not
entitling the holder to payment of principal and interest within seven days, and
some restricted securities and time deposits determined by PIMC to be illiquid.
Investments currently considered by Municipal Money Market Portfolio to be
illiquid include some restricted securities and municipal lease obligations
determined by PIMC to be illiquid. In the absence of market quotations,
illiquid investments are valued for purposes of monitoring amortized cost
valuation at fair value as determined in good faith by the Trustees. If through
a change in values, net assets or other circumstances, the Portfolios were in a
position where more than 10% of their net assets were invested in illiquid
securities, the Trustees would seek to take appropriate steps to protect
liquidity.

MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS, DOMESTIC BRANCHES OF
FOREIGN BANKS, AND FOREIGN BRANCHES OF DOMESTIC BANKS. Cash Reserve Portfolio
may purchase bank obligations, such as certificates of deposit, bankers'
acceptances, bank notes and time deposits, including instruments issued or
supported by the credit of U.S. or foreign banks or savings institutions that
have total assets at the time of purchase in excess of $1 billion. The assets
of a bank or savings institution will be deemed to include the assets of its
domestic and foreign branches for purposes of the Portfolio's investment
policies. Investments in short-term bank obligations may include obligations of
foreign banks and domestic branches of foreign banks, and also foreign branches
of domestic banks.

MUNICIPAL LEASE OBLIGATIONS. Municipal Money Market Portfolio may invest a
portion of its assets in municipal leases and participation interests therein.
These obligations, which may take the form of a lease, an installment purchase,
or a conditional sale contract, are issued by state and local governments and
authorities to acquire land and a wide variety of equipment and facilities.
Generally, the Portfolio will not hold such obligations directly as a lessor of
the property, but will purchase a participation interest in a municipal
obligation from a bank or other third party. A participation interest gives a
Portfolio a specified, undivided interest in the obligation in proportion to its
purchased interest in the total amount of the obligation.

REPURCHASE AGREEMENTS are transactions in which a Portfolio purchases a security
and simultaneously commits to resell that security at an agreed upon price and
date within a number of days from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price. This obligation is in effect secured by the underlying security
having a value at least equal to the amount of the agreed upon resale price and
marked to market daily. Each Portfolio may enter into a repurchase agreement
with respect to any security in which it is authorized to invest even though the
underlying security matures in more than one year. While it presently does not
appear possible to eliminate all risks from the transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delay and costs to each Portfolio in connection with bankruptcy
proceedings), it is the policy of each Portfolio to limit repurchase agreements
to those parties whose creditworthiness has been reviewed and found to present
minimal credit risks by PIMC.

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REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a Portfolio
sells a portfolio instrument to another party, such as a bank or broker-dealer,
in return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, each Portfolio
will maintain appropriate high grade liquid assets in a segregated custodial
account to cover its obligation under the agreement. Each Portfolio will enter
into reverse repurchase agreements only with parties whose creditworthiness has
been found satisfactory by PIMC. Such transactions may increase fluctuations in
the market values of each Portfolio's assets and may be viewed as a form of
leverage.

RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, Municipal Money Market Portfolio and Cash Reserve Portfolio may be
obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
the Portfolios may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the Portfolios might obtain a less favorable price than
prevailed when they decided to seek registration of the security. However, in
general, the Portfolios anticipate holding restricted securities to maturity or
selling them in an exempt transaction.

SHORT SALES AGAINST THE BOX. A Portfolio may sell securities short when it owns
or has the right to obtain securities equivalent in kind or amount to the
securities sold short. Short sales could be used to protect the net asset value
per share (NAV) of that Portfolio in anticipation of increased interest rates
without sacrificing the current yield of the securities sold short. If a
Portfolio enters into a short sale against the box, it will be required to set
aside securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and will be
required to hold such securities while the short sale is outstanding. A
Portfolio will incur transaction costs, including interest expense, in
connection with opening, maintaining and closing short sales against the box.

STANDBY COMMITMENTS are puts that entitle holders to same-day settlement at an
exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. Municipal Money Market
Portfolio may acquire standby commitments to enhance the liquidity of portfolio
securities, but only when the issuers of the commitments present minimal risk of
default.

Issuers or financial intermediaries may obtain letters of credit or other
guarantees to support their ability to buy securities on demand. PIMC may rely
upon its evaluation of a bank's credit in determining whether to support an
instrument supported by a letter of credit. In evaluating a foreign bank's
credit, PIMC will consider whether adequate public information about the bank is
available and whether the bank may be subject to unfavorable political or
economic developments, currency controls, or other governmental restrictions
that might affect the bank's ability to honor its credit commitment.

TENDER OPTION BONDS are created by coupling an intermediate or long-term,
tax-exempt bond (generally held pursuant to a custodial arrangement) with a
tender agreement that gives the holder the option to tender the bond at its face
value. As consideration for providing the tender option, the sponsor (usually a
bank, broker-dealer, or other financial institution) receives periodic fees
equal to the difference between the bond's fixed coupon rate and the rate
(determined by a remarketing or similar agent) that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. After payment of the tender option fee, Municipal Money Market
Portfolio effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. Subject to applicable regulatory
requirements, the Portfolio may buy tender option bonds if the agreement gives
the Portfolio the right to tender the bond to its sponsor no less frequently
than once every 397 days. In selecting tender option bonds for the Portfolio,
PIMC will consider the creditworthiness of the issuer of the underlying bond,
the custodian, and the third party provider of the tender option. In certain
instances, a sponsor may terminate a tender option if, for example, the issuer
of the underlying bond defaults on interest payments.

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<PAGE>

A demand instrument with a conditional demand feature must have received both a
short-term and a long-term high quality rating, or, if unrated, have been
determined to be of comparable quality pursuant to procedures adopted by the
Trustees. A demand instrument with an unconditional demand feature may be
acquired solely in reliance upon a short-term high quality rating or, if
unrated, upon a finding of comparable short-term quality pursuant to procedures
to be adopted by the Trustees.

Municipal Money Market Portfolio and Cash Reserve Portfolio may invest in
fixed-rate bonds that are subject to third party puts and in participation
interests in such bonds held by a bank in trust or otherwise. These bonds and
participation interests have tender options or demand features that permit the
Portfolios to tender (or put) their bonds to an institution at periodic
intervals and to receive the principal amount thereof. The Portfolios consider
variable rate instruments structured in this way (Participating VRDOs) to be
essentially equivalent to other VRDOs they purchase. The IRS has not ruled
whether the interest on participating VRDOs is tax exempt and accordingly,
Municipal Money Market Portfolio and Cash Reserve Portfolio intend to purchase
these instruments based on opinions of PIMC's fund counsel.

Municipal Money Market Portfolio and Cash Reserve Portfolio may invest in
variable or floating rate instruments that ultimately mature in more than 397
days, if the Portfolios acquire a right to sell the instruments that meets
certain requirements set forth in Rule 2a-7. A variable rate instrument
(including instruments subject to a demand feature) that matures in 397 days or
less may be deemed to have a maturity equal to the the earlier of the period
remaining until the next readjustment of the interest rate or the date on which
principal can be recovered on demand. A variable rate instrument that matures
in greater than 397 days but that is subject to a demand feature that is 397
days or less may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand. A
floating rate instrument that matures in more than 397 days but that is subject
to a demand feature may be deemed to have a maturity equal to the period
remaining until the principal amount may be recovered through demand. A floating
rate instrument that matures in 397 days or less shall be deemed to have a
maturity of one day.

U.S. Government Money Market Portfolio and Cash Reserve Portfolio may invest in
variable and floating rate instruments of the U.S. Government, its agencies and
instrumentalities, with remaining maturities of 397 days or more provided that
they are deemed to have a maturity of less than 397 days as defined in
accordance with the rules of the SEC. A variable rate instrument that matures
in 397 days or more may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate.

ZERO COUPON BONDS do not make regular interest payments. Instead, they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its daily
dividend, a Portfolio takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value.

PORTFOLIO TRANSACTIONS

First Tennessee and PIMC (collectively, the Advisers) are responsible for
decisions to buy and sell securities for each Portfolio, broker-dealer
selection, and negotiation of commission rates. Since purchases and sales of
portfolio securities by the Portfolios are usually principal transactions, the
Portfolios incur little or no brokerage commissions. Portfolio securities are
normally purchased directly from the issuer or from a market maker for the
securities. The purchase price paid to dealers serving as market makers may
include a spread between the bid and asked prices. The Portfolios may also
purchase securities from underwriters at prices which include a commission paid
by the issuer to the underwriter. No brokerage commisssions were paid by the
Portfolios during the last three fiscal years.

Each Portfolio does not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity. Each
Portfolio requires that investments mature within 397 days or less, as
determined in accordance with the rules of the SEC. The amortized cost method
of valuing portfolio securities requires that each Portfolio maintain an average
weighted portfolio maturity of 90 days or less. Both policies may result in
relatively high portfolio turnover, but since brokerage commissions are not
normally paid on money market instruments, the high rate of portfolio turnover
is not expected to have a material effect on the Portfolios' net income or
expenses.

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The Advisers' primary consideration in effecting a security transaction is to
obtain the best net price and the most favorable execution of the order. To the
extent that the executions and prices offered by more than one dealer are
comparable, the Advisers may, at their discretion, effect transactions with
dealers that furnish statistical, research and other information or services
which are deemed by the Advisers to be beneficial to the Portfolios' investment
program. Certain research services furnished by dealers may be useful to the
Advisers with clients other than the Portfolios. Similarly, any research
services received by the Advisers through placement of portfolio transactions of
other clients may be of value to the Advisers in fulfilling their obligations to
the Portfolios. The Advisers are of the opinion that the material received is
beneficial in supplementing their research and analysis, and therefore, may
benefit the Portfolios by improving the quality of their investment advice. The
advisory fee paid by the Portfolios is not reduced because the Advisers receive
such services.

The Advisers and their affiliates manage several other investment accounts, some
of which may have objectives similar to that of the Portfolios. It is possible
that at times, identical securities will be acceptable for one or more of such
investment accounts. However, the position of each account in the securities of
the same issue may vary and the length of time that each account may choose to
hold its investment in the securities of the same issue may likewise vary. The
timing and amount of purchase by each account will also be determined by its
cash position. If the purchase or sale of securities consistent with the
investment policies of each Portfolio and one or more of these accounts is
considered at or about the same time, transactions in such securities will be
allocated in good faith among the Portfolios and such accounts in a manner
deemed equitable by the Advisers. The Advisers may combine such transactions,
in accordance with applicable laws and regulations, in order to obtain the best
net price and most favorable execution. The allocation and combination of
simultaneous securities purchases on behalf of each Portfolio will be made in
the same way that such purchases are allocated among or combined with those of
other such investment accounts. Simultaneous transactions could adversely
affect the ability of each Portfolio to obtain or dispose of the full amount of
a security which it seeks to purchase or sell.

Except to the extent permitted by law, portfolio securities will not be
purchased from or sold to or through any "affiliated person," as defined in the
1940 Act, of the Advisers.

VALUATION OF PORTFOLIO SECURITIES

Each Portfolio values its investments on the basis of amortized cost. This
technique involves valuing an instrument at its cost as adjusted for
amortization of premium or accretion of discount rather than its value based on
current market quotations or appropriate substitutes which reflect current
market conditions. The amortized cost value of an instrument may be higher or
lower than the price each Portfolio would receive if it sold the instrument.
Valuing each Portfolio's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7 under the 1940 Act, as
amended. Each Portfolio must adhere to certain conditions under Rule 2a-7 which
are summarized in the Prospectus.

The Trustees and First Tennessee oversee PIMC's adherence to Securities and
Exchange Commission (SEC) rules concerning money market funds, and the
Trustees have established procedures designed to stabilize each Portfolio's
NAV at $1.00. At such intervals as they deem appropriate, the Trustees
consider the extent to which NAV calculated by using market valuations would
deviate from $1.00 per share. If the Trustees believe that a deviation from
each Portfolio's amortized cost per share may result in material dilution or
other unfair results to shareholders, the Trustees have agreed to take such
corrective action, if any, as they deem appropriate to eliminate or reduce,
to the extent reasonably practicable, the dilution or unfair results. Such
corrective action could include selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding dividends; redeeming shares in kind; establishing NAV
by using available market quotations; and such other measures as the Trustees
may deem appropriate.

During periods of declining interest rates, yield based on amortized cost may be
higher than the yield based on market valuations. Under these circumstances, a
shareholder would be able to obtain a somewhat higher yield than would result if
a Portfolio utilized market valuations to determine its NAV. The converse would
apply in a period of rising interest rates.

PERFORMANCE

From time to time, each Class of each Portfolio may quote the CURRENT YIELD and
EFFECTIVE YIELD for each Class in advertisements or in reports or other
communications with shareholders. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The net change in
value of a hypothetical account containing one share reflects the value of
additional shares purchased with dividends from the one original share and
dividends declared on both the original share and any additional shares. This
income is then annualized; that is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The effective yield is
calculated similarly but, when annualized, the income earned by an

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investment is assumed to be reinvested. The effective yield will be slightly
higher than the current yield because of the compounding effect of this assumed
reinvestment. In addition to the current yield, yields may be quoted in
advertising based on any historical seven-day period.

Yield information may be useful in reviewing performance and for providing a
basis for comparison with other investment alternatives. Yield will fluctuate,
unlike investments which pay a fixed yield for a stated period of time.
Investors should give consideration to the quality and maturity of portfolio
securities of the respective investment companies when comparing investments.

Investors should recognize that in periods of declining interest rates, yield
will tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates, yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money from the continuous sale
of its shares will likely be invested in instruments producing lower yields than
the balance of the holdings, thereby reducing the current yield. In periods of
rising interest rates, the opposite can be expected to occur. The 7-day yields
as of June 30, 1997 were as follows:

Class I Class III
------- ---------

U.S. Treasury Money Market 5.00% 4.88%
U.S. Government Money Market 5.18% 4.88%
Municipal Money Market 3.66% 3.40%
Cash Reserve 5.32% 5.09%

Municipal Money Market Portfolio also may quote the TAX-EQUIVALENT YIELD for
each class, which shows the taxable yield an investor would have to earn, before
taxes, to equal the tax-free yield. Tax-equivalent yield is the current yield
that would have to be earned, in the investor's tax bracket, to match the
tax-free yields shown below after taking federal income taxes into account.
Tax-equivalent yields are calculated by dividing current yield by the result of
one minus a stated federal or combined federal and state tax rate. It gives the
approximate yield a taxable security must provide at various income brackets to
produce after-tax yields equivalent to those of tax-exempt obligations yielding
from 2.0% to 4.0%. Of course, no assurance can be given that each class will
achieve any specific tax-exempt yield. While the Portfolio invests
principally in municipal obligations whose interest is not includable in gross
income for purposes of calculating federal income tax, other income received by
the Portfolio may be taxable.

The following table shows the effect of a shareholder's tax status on effective
yield under the federal income tax laws for 1997:

1997 TAX RATES AND TAX-EQUIVALENT YIELDS

Taxable Federal
Income * Tax If individual tax-exempt yield is:
Bracket ** 2.00% 3.00% 4.00%
single return joint return Then taxable equivalent yield is:
<S> <C> <C> <C>
$0 - $24,650 $0 - $41,200 15% 2.35% 3.53% 4.71%
$24,651 - $59,750 $41,201 - $99,600 28% 2.78% 4.17% 5.56%
$59,751 - $124,650 $99,601 - $151,750 31% 2.90% 4.35% 5.80%
$124,651 - $271,050 $151,751 - $271,050 36% 3.13% 4.69% 6.25%
$271,051 - above $271,051 - above 39.6% 3.31% 4.97% 6.62%

</TABLE>

* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1997 tax rates.

** Excludes the impact of the phase out of personal exemptions, limitation
on itemized deductions, and other credits, exclusions, and adjustments
which may raise a taxpayer's marginal tax rate. An increase in a
shareholder's marginal tax rate would increase that shareholder's
tax-equivalent yield.

The Portfolio may invest a portion of its assets in obligations that are subject
to federal income tax. When the Portfolio invests in these obligations, its
tax-equivalent yield will be lower. In the table above, tax-equivalent yields
are calculated assuming investments are 100% federally and state tax-free.

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<PAGE>

(Lipper, sometimes referred to as Lipper Analytical Services), an independent
service located in Summit, New Jersey that monitors the performance of mutual
funds. Lipper generally ranks funds on the basis of total return, assuming
reinvestment of distributions, but does not take sales charges or redemption
fees into consideration, and is prepared without regard to tax consequences.
Lipper may also rank funds based on yield. In addition to the mutual fund
rankings, each Portfolio's performance may be compared to mutual fund
performance indices prepared by Lipper. The MONEY FUND AVERAGES' (Government
and Tax-Free), which is reported in the MONEY FUND REPORT, covers money market
funds.

From time to time each Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications or periodicals. For
example, the Portfolios may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance.

Each Portfolio may compare its performance to the yields or averages of other
money market securities as reported by the Federal Reserve Bulletin, by
TeleRate, a financial information network, or by Salomon Brothers Inc., a
broker-dealer firm; and other fixed-income investments such as certificates of
deposit (CDs). The principal value and interest rate of CDs and money market
securities are fixed at the time of purchase whereas yield will fluctuate.
Unlike some CDs and certain other money market securities, money market mutual
funds, and each Portfolio in particular, are not insured by the Federal Deposit
Insurance Corporation (FDIC). Investors should give consideration to the
quality and maturity of the Portfolio securities of the respective investment
companies when comparing investment alternatives. Each Portfolio may also quote
mutual fund rating services in its advertising materials, including data from a
mutual fund rating service which rates mutual funds on the basis of risk
adjusted performance. Each Portfolio may reference the growth and variety of
money market mutual funds and First Tennessee's or Sub-Adviser's skill and
participation in the industry.

Because the fees for Class II and Class III are higher than the fees for Class
I, yields and returns for those classes will be lower than for Class I.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

The following holiday closings have been scheduled : Veterans' Day,
Thanksgiving Day, Christmas Day, New Year's Day, Dr. Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day , Independence Day, Labor
Day, and Columbus Day. Although First Tennessee expects the same holiday
schedule to be observed in the future, the New York Stock Exchange (NYSE) and
the Federal Reserve Bank of New York (New York Federal Reserve) may modify
their holiday schedules at any time.

If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing each Portfolio's NAV. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and will
incur any costs of sale, as well as the associated inconveniences.

ADDITIONAL CLASS II AND CLASS III INFORMATION

SYSTEMATIC INVESTING PROGRAM. Investors can make regular investments in Class
II and Class III with Systematic Investing by completing the appropriate section
on the account application and attaching a voided personal check. If the bank
account is jointly owned, make sure that all owners sign. Investments may be
made monthly by automatically deducting $25 or more from your checking account.
This monthly purchase amount may be changed at any time. There is a $50 minimum
initial investment requirement for this option. For employees of First
Tennessee or any of its affiliates, who participate in the Systematic Investing
Program, the minimum initial investment requirement is $50. Accounts will be
drafted on or about the first business day of every month. Systematic Investing
may be canceled at any time without payment of a cancellation fee. Investors
will receive a confirmation from their securities broker or financial
institution (Investment Professional), or from the Transfer Agent for every
transaction, and a debit entry will appear on your bank statement.

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<PAGE>

SYSTEMATIC WITHDRAWAL PLAN. Investors can have monthly, quarterly or
semi-annual checks sent from their account to you, to a person named by them, or
to their bank checking account. The Systematic Withdrawal Plan payments are
drawn from share redemptions and must be in the amount of $100 or more per
Portfolio per month. If Systematic Withdrawal Plan redemptions exceed income
dividends earned on shares, an account eventually may be exhausted. Contact the
Investment Professional for more information.

DISTRIBUTIONS AND TAXES

DIVIDENDS. Dividends will not normally qualify for the dividends-received
deduction available to corporations, since the Portfolios' income is primarily
derived from interest income and short-term capital gains. Depending upon state
law, a portion of each Portfolio's dividends attributable to interest income
derived from U.S. government securities may be exempt from state and local
taxation. It is not anticipated that dividends attributable to U.S. government
securities will be exempt from Tennessee income tax. The Portfolios will
provide information on the portion of each Portfolio's dividends, if any, that
qualifies for this exemption.

Dividends derived from Municipal Money Market Portfolio's tax-exempt income are
not subject to federal income tax, but must be reported to the IRS by
shareholders. Exempt-interest dividends are included in income for purposes of
computing the portion of social security and railroad retirement benefits that
may be subject to federal tax. If the Portfolio earns taxable income or capital
gains from its investments, these amounts will be designated as taxable
distributions. Dividends derived from taxable investment income and short-term
capital gains are taxable as ordinary income. Municipal Money Market Portfolio
will send a tax statement showing the amount of tax-exempt distributions for the
past calendar year, and will send an IRS Form 1099-DIV by January 31 if the
Portfolio makes any taxable distributions. It is not anticipated that the
Portfolio's distributions will be exempt from Tennessee income tax.

Each Portfolio's distributions are taxable when they are paid whether taken in
cash or reinvested in additional shares, except that distributions declared in
December and paid in January are taxable as if paid on December 31. Each
Portfolio will send an IRS Form 1099-DIV by January 31.

CAPITAL GAIN DISTRIBUTIONS. Each Portfolio may distribute short-term capital
gains once a year or more often as necessary to maintain their NAVs at $1.00 per
share or to comply with distribution requirements under federal tax law. Each
Portfolio does not anticipate earning long-term capital gains on securities
held.

STATE AND LOCAL TAX ISSUES. For mutual funds organized as business trusts,
state law provides for a pass-through of the state and local income tax
exemption afforded to direct owners of U.S. government securities. Some states
limit this pass-through to mutual funds that invest a certain amount in U.S.
government securities, and some types of securities, such as repurchase
agreements and some agency backed securities, may not qualify for this
pass-through benefit. The tax treatment of dividend distributions from U.S.
Treasury Money Market Portfolio and U.S. Government Money Market Portfolio will
be the same as if a shareholder directly owned a proportionate share of the U.S.
government securities in the Portfolio. Because the income earned on most U.S.
government securities in which the Portfolios invest is exempt from the state
and local income taxes, the portion of dividends from the Portfolios
attributable to these securities will also be free from income taxes. The
exemption from state and local income taxation does not preclude states from
assessing other taxes on the ownership of U.S. government securities.

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<PAGE>

TRUSTEES AND OFFICERS

*JAMES V. HYATT, Secretary, is General Counsel of ALPS . Prior to joining ALPS,
Mr. Hyatt served as Senior Legal Counsel for Fidelity Investments and Clerk for
Fidelity Management Trust Company.

</TABLE>

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<PAGE>

As of September 30, 1997, the officers and Trustees of the Trust owned less than
1% of the outstanding shares of any Portfolio.

INVESTMENT ADVISORY AGREEMENTS

Each Portfolio employs First Tennessee Bank National Association (First
Tennessee), Memphis, Tennessee, to furnish investment advisory and other
services to the Portfolio. Under the Investment Advisory and Management
Agreement with each Portfolio, First Tennessee is authorized to appoint one
or more sub-advisers at First Tennessee's expense. PNC Institutional
Management Corporation, formerly known as Provident Institutional Management
Corporation, (PIMC or the Sub-Adviser), Wilmington, Delaware acts as
Sub-Adviser and, subject to the direction of the Trustees and of First
Tennessee, directs the investments of each Portfolio in accordance with its
investment objective, policies and limitations.

In addition to First Tennessee's fee and the fees payable to the Transfer Agent,
Pricing and Accounting Agent, and to the Administrator, each Portfolio pays for
all its expenses, without limitation, that are not assumed by these parties.
Each Portfolio pays for typesetting, printing and mailing of proxy material to
existing shareholders, legal expenses, and the fees of the custodian, auditor
and Trustees. Other expenses paid by each Portfolio include: interest, taxes,
brokerage commissions, each Portfolio's proportionate share of insurance
premiums and Investment Company Institute dues, and costs of registering shares
under federal and state securities laws. Each Portfolio also is liable for such
nonrecurring expenses as may arise, including costs of litigation to which each
Portfolio is a party, and its obligation under the Declaration of Trust to
indemnify its officers and Trustees with respect to such litigation.

For managing its investment and business affairs, each Portfolio pays First
Tennessee its prorated portion of a monthly management fee at the annual rate of
.25% of aggregate average monthly net assets of all Money Market Portfolios of
the Trust managed by First Tennessee through $1 billion, and .22% on amounts
greater than $1 billion. First Tennessee has voluntarily agreed to waive its
fee to .10% of average net assets. The fee waiver may be discontinued at any
time. For the fiscal year ended June 30, 1997, First Tennessee earned $206,512,
$237,756, $196,108 and $122,479, before waiving fees of $123,907, $142,654,
$117,665 and $73,488 for the respective Portfolios. For the fiscal year ended
June 30, 1996, First Tennessee earned $209,632, $241,977, $241,730, and $69,195
from U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio, and Cash Reserve Portfolio,
respectively, before waiving fees of $133,588, $155,065, $155,521, and $43,354
for the respective Portfolios. For the fiscal year ended June 30, 1995, First
Tennessee earned $127,764, $206,630, $203,876, and $31,714 from U.S. Treasury
Money Market Portfolio, U.S. Government Money Market Portfolio, Municipal Money
Market Portfolio and Cash Reserve Portfolio, respectively, before waiving fees
of $86,879, $140,508, $138,636, and $21,566 for the respective Portfolios.

Under the Investment Advisory and Management Agreement, First Tennessee is
authorized, at its own expense, to hire sub-advisers to provide investment
advice to each Portfolio. As Sub-Adviser, PIMC is paid by First Tennessee a
monthly sub-advisory fee at the annual rate of .08% of aggregate average monthly
net assets of all money market Portfolios of the Trust advised by PIMC, through
$500 million, .06% of the next $500 million, and .05% on amounts greater than $1
billion. Under the terms of the sub-advisory agreement with First Tennessee,
PIMC, subject to the supervision of First Tennessee, supervises the day-to-day
operations of each Portfolio and provides investment research and credit
analysis concerning each Portfolio's investments, conducts a continual program
of investment of each Portfolio's assets and maintains the books and records
required in connection with its duties under each sub-advisory agreement. In
addition, PIMC keeps First Tennessee informed of the developments materially
affecting each Portfolio. For the fiscal year ended June 30, 1997, fees paid to
PIMC were $66,084, $76,082, $62,755 and $39,193 for U.S. Treasury Money Market
Portfolio, U.S. Government Money Market Portfolio, Municipal Money Market
Portfolio and Cash Reserve Portfolio, respectively. For the fiscal year ended
June 30, 1996 fees paid to PIMC were $67,113, $77,564, $77,341, and $22,289 for
U.S. Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio, and Cash Reserve Portfolio, respectively. For
the fiscal year ended June 30, 1995 fees paid to PIMC were $40,884, $66,122,
$65,241, and $10,149 for U.S. Treasury MoneyMarket Portfolio, U.S. Government
Money Market Portfolio, Municipal Money Market Portfolio, and Cash Reserve
Portfolio, respectively.

ADMINISTRATION AGREEMENT AND OTHER CONTRACTS

ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. (ALPS, the
Administrator and Distributor), is the Administrator and Distributor to each
Portfolio under separate Administration and General Distribution Agreements with
respect to each Portfolio. ALPS, a Colorado corporation, is a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc.

16
<PAGE>

each Portfolio. ALPS is entitled to and receives from each Portfolio a monthly
fee at the annual rate of .075% of average net assets.

For each Portfolio's fiscal year ended June 30, 1997, ALPS earned administration
fees in the amount of $61,953, $71,327, $58,833 and $36,744 from the U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio and Cash Reserve Portfolio, respectively. For
each Portfolio's fiscal year ended June 30, 1996, ALPS earned administration
fees in the amount of $62,889, $72,593, $72,519, and $20,758 from the U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio and the Cash Reserve Portfolio respectively.
Prior to July 1, 1995, National Financial Services Corporation (NFSC) served as
the Administrator and Distributor for each Portfolio. As Administrator, NFSC
earned fees from each Portfolio computed daily and payable monthly at an annual
rate of .20% of average net assets through $100 million, .15% above $100 million
and through $200 million, and .10% over $200 million. For each Portfolio's
fiscal year ended June 30, 1995, NFSC earned administration fees in the amount
of $102,211, $165,304, $163,101, and $25,371 from the U.S. Treasury Money Market
Portfolio, U.S. Government Money Market Portfolio, Municipal Money Market
Portfolio and the Cash Reserve Portfolio, respectively. NFSC waived a portion of
its fees payable to each of the MoneyMarket Portfolios during the fiscal year
ended June 30, 1995 so that each Money Market Portfolio paid to NFSC .10% of its
average net assets. For the fiscal year ended June 30, 1995, NFSC waived
administration fees of $51,106, $82,652, $81,551, and $12,685 for the U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio and Cash Reserve Portfolio, respectively

First Tennessee, serves as the Co-Administrator for each Portfolio. As the
Co-Administrator, First Tennessee assists in each Portfolio's operation,
including, but not limited to, providing non-investment related research and
statistical data and various operational and administrative services. First
Tennessee is entitled to receive from each Portfolio a monthly fee at the
annual rate of .05% of average net assets. First Tennessee has voluntarily
agreed to waive its co-administration fee to .025% of each Portfolio's
average net assets. The fee waiver may be discontinued at any time. For each
Portfolio's fiscal year ended June 30, 1997, First Tennessee earned
co-administration fees in the amount of $41,302, $47,551, $39,222 and $24,496
from the U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Municipal Money Market Portfolio and Cash Reserve Portfolio,
respectively, before waiving $20,651, $23,775, $19,611 and $12,248,
respectively. For each Portfolio's fiscal year ended June 30, 1996, First
Tennessee earned co-administration fees in the amount of $41,850, $48,327,
$48,285 and $13,808 from the U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, Municipal Money Market Portfolio and the
Cash Reserve Portfolio, respectively, before waiving $30,649, $36,477,
$37,216 and $9,183, respectively.

As the Distributor, ALPS sells shares of Class I as agent on behalf of the Trust
at no additional cost to the Trust. Class II and III are obligated to pay ALPS
monthly an additional annual fee of up to .25% and .45 % of average net assets,
respectively, which consists of up to .25% in shareholder servicing fees for
Class II and up to .45% in 12b-1 fees for Class III, all or a portion of which
may be paid out to broker-dealers or others involved in the distribution of
Class II or Class III shares. See "Distribution Plans" and "Shareholder Services
Plans" below. First Tennessee and its affiliates neither participate in nor are
responsible for the underwriting of Portfolio shares. Consistent with
applicable law, affiliated brokers of First Tennessee may receive commissions or
asset-based fees.

TRANSFER AGENT, FUND ACCOUNTING AND CUSTODIAN. Chase Global Funds Services
Company (CGFSC or the Transfer Agent), provides transfer agent and shareholder
services for each Portfolio, and calculates the NAV and dividends of each Class
of each Portfolio and maintains the Portfolio and general accounting records.
For such services, CGFSC is entitled to receive from each Class of each
Portfolio, fees at the annual rate of .05% of each Class' average net assets
through $50 million and .03% over $50 million plus out-of-pocket expenses.
Chase Manhattan Bank (Chase or the Custodian) is Custodian of the assets of the
Portfolios. The Custodian is responsible for the safekeeping of each
Portfolio's assets and the appointment of sub-custodian banks and clearing
agencies. For such services, Chase is entitled to receive from each Portfolio
fees at the annual rate of .018% of average net assets plus out-of-pocket
expenses. The Custodian takes no part in determining the investment policies of
the Portfolios or in deciding which securities are purchased or sold by the
Portfolios. The Portfolios, however, may invest in obligations of the Custodian
and may purchase securities from or sell securities to the Custodian.

DISTRIBUTION PLANS. The Trustees of the Trust have adopted a Distribution Plan
on behalf of Class III of each Portfolio (each Class III Plan) pursuant to Rule
12b-1 (the Rule) under the 1940 Act. The Rule provides in substance that a
mutual fund may not engage directly or indirectly in financing any activity that
is intended primarily to result in the sale of shares of the fund except
pursuant to a plan adopted by the fund under the Rule. The Trustees have
adopted the Plan to allow Class III of each Portfolio and ALPS to incur
distribution expenses. The Class III Plan provides for payment of a
distribution fee (12b-1 fee) of up to 0.45% of the average net assets of Class
III of each Portfolio; however, the Trustees have limited such

17
<PAGE>

fees to .25% of each Class III's average net assets. (These fees are in addition
to the fees paid to ALPS under the Administration Agreement.) The Trust or
ALPS, on behalf of Class III of each Portfolio, may enter into servicing
agreements (Service Agreements) with banks, broker-dealers or other institutions
(Agency Institutions). Each Class III Plan provides that ALPS may use its fees
and other resources to make payments to Agency Institutions for performance of
distribution-related services, including those enumerated above. The Service
Agreements further provide for compensation to broker-dealers for their efforts
to sell Class III shares. The distribution-related services include, but are
not limited to, the following: formulation and implementation of marketing and
promotional activities, such as mail promotions and television, radio,
newspaper, magazine and other mass media advertising; preparation, printing and
distribution of sales literature; preparation, printing and distribution of
prospectuses of each Portfolio and reports to recipients other than existing
shareholders of each Portfolio; obtaining such information, analyses and reports
with respect to marketing and promotional activities as ALPS may from time to
time, deem advisable; making payments to securities dealers and others engaged
in the sales of Class III Shares; and providing training, marketing and support
to such dealers and others with respect to the sale of Class III Shares. Each
Class III Plan recognizes ALPS may use its fees and other resources to pay
expenses associated with the promotion and administration of activities
primarily intended to result in the sale of shares.

Each Plan has been approved by the Trustees, including the majority of
disinterested Trustees. As required by the Rule, the Trustees carefully
considered all pertinent factors relating to the implementation of the Plans
prior to its approval, and have determined that there is a reasonable likelihood
that each Plan will benefit each Portfolio and its shareholders. To the extent
that the Class III Plans give ALPS greater flexibility in connection with the
distribution of shares of the class, additional sales of shares may result.

For fiscal year ended June 30, 1997, Class III of the U.S. Treasury Money
Market, U.S. Government Money Market, Municipal Money Market and Cash Reserve
Portfolios paid distribution fees in the amounts of $42,470, $3,636, $12,924 and
$77,234, respectively. All of these fees were paid as compensation to dealers.

SHAREHOLDER SERVICES PLANS. In addition to the Rule 12b-1 Distribution Plans
described above, Class II of each Portfolio has adopted Shareholder Services
Plans to compensate Agency Institutions for individual shareholder services and
account maintenance. These functions include: maintaining account records for
each shareholder who beneficially owns Class II Shares; answering questions and
handling correspondence from shareholders about their accounts; handling the
transmission of funds representing the purchase price or redemption proceeds;
issuing confirmations for transactions in Class II Shares by shareholders;
assisting customers in completing application forms; communicating with the
transfer agent; and providing account maintenance and account level support for
all transactions. For these services the participating Agency Institutions are
paid a service fee at the annual rate of up to .25% of average net assets of
Class II.

18
<PAGE>

would be necessary to continue to provide efficient and effective shareholder
services. In such event, changes in the operation of the Portfolios might
occur, including possible termination of any automatic investment or redemption
or other services then being provided by any bank. It is not expected that
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences. The Portfolios may execute portfolio transactions with
and purchase securities issued by depository institutions that receive payments
under the Plans. No preference will be shown in the selection of investments
for the instruments of such depository institutions. In addition, state
securities laws on this issue may
differ from the interpretations of federal law expressed herein, and banks and
other financial institutions may be required to register as dealers pursuant to
state law.

DESCRIPTION OF THE TRUST

TRUST ORGANIZATION. U.S. Treasury Money Market Portfolio, U.S. Government Money
Market Portfolio, Municipal Money Market Portfolio, and Cash Reserve Portfolio
are portfolios of First Funds (formerly The Masters Group of Mutual Funds), an
open-end management investment company organized as a Massachusetts business
trust by a Declaration of Trust dated March 6, 1992, as amended and restated on
September 4, 1992. The Declaration of Trust permits the Trustees to create
additional portfolios and classes. There are nine portfolios of the Trust, each
with three Classes.

As of September 30, 1997, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios:

Name and Address Portfolio Class % of Class Held
- ---------------- --------- ----- ---------------

Bristol Regional Medical Center U.S. Treasury I 21%
1 Medical Park Blvd.
Bristol, Tn 37621

Action Holding, Inc. U.S. Treasury I 15%
Johnson City, TN

Isaac Hayne Barnwell, III U.S. Treasury I 8%
Memphis, TN

19
<PAGE>

Erlanger Health System U.S. Treasury III 16%
975 East Third St.
Chattanooga, TN 37403

Volunteer State Student U.S. Treasury III 13%
Funding Corp.
Knoxville, TN

Walker Dade Hutcheson U.S. Treasury III 6%
Memphis, TN

Southern Health Care of Alabama U.S. Treasury III 5%
735 Broad St., Ste 900
Chattanooga, TN 37402

Common Stock Fund -TROR U.S. Government I 6%
Memphis, TN

Jackson-Madison County U.S. Government III 88%
General Hospital
708 W. Forest
Jackson, TN 38301

Martha R. Robinson Municipal I 9%
Memphis, TN

National Financial Services Corp. Municipal III 85%
P.O. Box 3752
Church Street Station
New York, NY 10008

C. Roger Blackwood and Municipal III 7%
Nancy D. Blackwood
JT TEN
P.O. Box 951
Springfield, TN 37172

CTF 1 Equity Fund Cash Reserve I 28%
Memphis, TN

Aletha C. Brondine Estate Cash Reserve I 10%
Knoxville, TN

Johnson Bible College Cash Reserve I 7%
7900 Johnson Drive
Knoxville, TN 37998

National Financial Services Corp. Cash Reserve III 83%
P.O. Box 3752
Church Street Station
New York, NY 10008

20
<PAGE>

upon liquidation and distribution of its assets, if approved by vote of the
holders of a majority of the outstanding shares of the Trust or that Portfolio.
If not so terminated, the Trust and each Portfolio will continue indefinitely.

FINANCIAL STATEMENTS

The Portfolios' financial statements and financial highlights for the fiscal
period ended June 30, 1997, are included in the Portfolios' Annual Report, which
is a separate report supplied independent of this Statement of Additional
Information. The Portfolios' financial statements and financial highlights are
incorporated herein by reference.

APPENDIX

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:

Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:

- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- Broad margins in earning coverage of fixed financial charges and with
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S COMMERCIAL PAPER RATINGS:

A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety.

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

21
<PAGE>

PART C. OTHER INFORMATION

Item 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements for the fiscal year ended June 30, 1997 for each
applicable Portfolio are incorporated herein by reference to the Trust's
Annual Report on Form N-30D.

(b) Exhibits:

(1) (a) Declaration of Trust dated as of March 6, 1992 is incorporated
herein by reference to Exhibit 1 to the Trust's Registration
Statement.

(b) Supplement to the Declaration of Trust effective April 24, 1992
is incorporated herein by reference to Exhibit 1(b) to Pre-
Effective Amendment No. 1 to the Trust's Registration Statement.

(c) Amended and Restated Declaration of Trust dated is of September
4, 1992 is incorporated herein by reference to Exhibit 1 (c) to
Post-Effective Amendment No. 1 to the Trust's Registration
Statement.

(d) Supplement to The Declaration of Trust effective August 1, 1993
is incorporated herein by reference to Exhibit 1 (d) to Post-
Effective Amendment No. 4 to the Trust's Registration Statement.

(2) (a) Bylaws of the Trust are incorporated herein by reference to
Exhibit 2 to Post-Effective Amendment No. 1 to the Trust's
Registration Statement.

(b) Amendment to the Bylaws dated November 17, 1992 is incorporated
herein by reference to Exhibit 2(a) to Post-Effective Amendment
No. 1 to the Trust's Registration Statement.

(3) Not Applicable.

(4) Not Applicable.

(5) (a) Investment Advisory and Management Agreements between the First
Funds on behalf of U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, and Municipal Money Market
Portfolio, and First Tennessee Bank National Association dated
September 4, 1992 are incorporated herein by reference to Exhibit
5(a) to Post-Effective Amendment No. 1 to the Trust's
Registration Statement.

(b) Sub-Advisory Agreements between Provident Institutional
Management Corporation and First Tennessee Bank National
Association on behalf of U.S. Treasury Money Market Portfolio,
U.S. Government Money Market Portfolio, and Municipal Money
Market Portfolio, dated September 4, 1992 are incorporated herein
by reference to Exhibit 5(b) to Post-Effective Amendment No. 1 to
the Trust's Registration Statement.

(c) Investment Advisory and Management Agreement between the First
Funds on behalf of Cash Reserve Portfolio, Total Return Equity
Portfolio, and Total Return Fixed Income Portfolio, and First
Tennessee Bank National Association dated February 15, 1993 are
incorporated herein by reference to Exhibit 5(c) to Post-
Effective Amendment No. 3 to the Trust's Registration Statement.

(d) Sub-Advisory Agreements between First Tennessee Investment
Management, Inc. and First Tennessee Bank National Association on
behalf of Total Return Equity Portfolio and Total Return Fixed
Income Portfolio, dated May 4, 1993 are incorporated herein by
reference to Exhibit 5(d) to Post-Effective

<PAGE>

Amendment No. 5 to the Trust's Registration Statement.

(e) Investment Advisory and Management Agreement between First Funds
on behalf of Tennessee Tax-Free Portfolio and First Tennessee
Bank National Association dated October 25, 1995 is incorporated
herein by reference to Exhibit 5(e) to Post-Effective Amendment
No. 9 to the Trust's Registration Statement.

(f) Form of Co-Investment Advisory and Management Agreement between
First Funds on behalf of Capital Appreciation Portfolio and First
Tennessee Bank National Association is incorporated herein by
reference to Exhibit 5(f) to Post-Effective Amendment No. 11
to the Trust's Registration Statement.

(g) Form of Investment Advisory and Management Agreement between
First Funds on behalf of Intermediate Bond Portfolio is
incorporated herein by reference to Exhibit 5(g) to Post-
Effective Amendment No. 10 to the Trust's Registration Statement.

(h) Form of Sub-Advisory Agreement between First Funds on behalf of
Intermediate Bond Portfolio and Highland Capital Management is
incorporated herein by reference to Exhibit 5(h) to Post-
Effective Amendment No. 10 to the Trust's Registration Statement.

(i) Form of Investment Advisory and Management Agreement between
First Funds on behalf of Capital Appreciation Portfolio and
Investment Advisers, Inc. is incorporated herein by reference
to Exhibit 5(i) to Post-Effective Amendment No. 11 to the
Trust's Registration Statement.

(6) (a) General Distribution Agreement between First Funds on behalf of
all Portfolios, and ALPS Mutual Funds Services, Inc., dated
July 1, 1995 is incorporated herein by reference to Exhibit 6(a)
to Post-Effective Amendment No. 8 to the Trust's Registration
Statement.

(b) Administration Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995 is incorporated herein by reference to Exhibit 6(b) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.

(c) Co-Administration Agreement between First Funds on behalf of all
Portfolios, and First Tennessee Bank National Association, dated
July 1, 1995 is incorporated herein by reference to Exhibit 6 (c)
to Post-Effective Amendment No. 9 to the Trust's Registration
Statement.

(d) Form of Servicing Agreement between ALPS Mutual Funds Services,
Inc. and an Agency Institution is incorporated herein by
reference to Exhibit 6(d) to Post-Effective Amendment No. 8 to
the Trust's Registration Statement.

(7) Not Applicable.

(8) (a) Mutual Fund Custody Agreement between the First Funds and Chase
Manhattan Bank of New York dated October 12, 1992 is incorporated
herein by reference to Exhibit 8(a) to Post-Effective Amendment
No.1 to the Trust's Registration Statement.

(b) Mutual Fund Transfer Agency Agreement between the First Funds and
United States Trust Company of New York dated November 10, 1992
is incorporated herein by reference to Exhibit 8(b) to Post-
Effective Amendment No. 1 to the Trust's Registration Statement.

(c) Amendment to Exhibit 8(b) above dated July 28, 1995 is
incorporated herein by reference to Exhibit 8(c) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.

(d) Amendment to Exhibit 8(b) above dated December 7, 1995 is
incorporated herein by reference to Exhibit 8(d) to Post-
Effective Amendment No. 9 to the Trust's Registration Statement.

(9) (a) Fund Accounting and Pricing Services Agreement between the First
Funds and Chase Manhattan Bank of New York dated November 10,
1992 is incorporated herein by reference to Exhibit 9 to Post-
Effective Amendment No. 1 to the Trust's Registration Statement.

(b) Amendment to Exhibit 9(a) above dated July 28, 1995 is
incorporated herein by reference to Exhibit 9(b) to Post-
Effective Amendment No. 8 to the Trust's Registration Statement.

(c) Amendment to Exhibit 9(a) above dated December 7, 1995 is
incorporated herein by reference to Exhibit 9(c) of Post-
Effective Amendment No. 9 to the Trust's Registration Statement.

(10) Not Applicable.

(11) (a) Opinion and Consent of Price Warehouse LLP, independent
accountants, is filed herein as Exhibit 11(a).

(b) Opinion of Baker, Danelson, Bearman & Caldwell, counsel to the
Registrant, is filed herein as Exhibit 11(b).

<PAGE>

(12) Not Applicable

(13) Written assurances that purchase representing initial capital was
made for investment purposes without any present intention of
redeeming or reselling is incorporated herein by reference to
Exhibit 13 to Pre-Effective Amendment No. 2 to the Trust's
Registration Statement.

(14) Form of Individual Retirement Account plan documents.

(15) (a) Distribution and Service Plan Agreements on behalf of all
Portfolios, are incorporated herein by reference to Exhibit 15(a)
to Post-Effective Amendment No. 8 to the Trust's Registration
Statement.

(b) Shareholder Servicing Plan on behalf of Class II and III of each
Portfolio, dated March 20, 1993, is incorporated herein by
reference to Exhibit 15(b) to Post-Effective Amendment No. 8 to
the Trust's Registration Statement.

(16) Schedule of Yield Computations is incorporated herein by
reference to Exhibit 16 to Post-Effective Amendment No. 1 to the
Trust's Registration Statement.

(17) Not Applicable.

(18) Plan Providing for Multiple Classes of Shares pursuant to
Rule 18f-3 is incorporated herein by reference to Exhibit (12) to
Post-Effective Amendment No. 8 to the Trust's Registration
Statement.

Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

Not Applicable.

Item 26. NUMBER OF HOLDERS OF SECURITIES

June 30, 1997

Title of Class: Shares of Beneficial Interest Number of Recordholders
- --------------------------------------------- -----------------------
CLASS I

U.S. Treasury Money Market Portfolio 4
U.S. Government Money Market Portfolio 3
Municipal Money Market Portfolio 4
Cash Reserve Portfolio 3
Growth & Income Portfolio 6
Bond Portfolio 4
Tennessee Tax-Free Portfolio 2

CLASS II

Growth and Income Portfolio 915
Bond Portfolio 19
Tennessee Tax-Free Portfolio 129

CLASS III

Growth & Income Portfolio 2,416

<PAGE>

Bond Portfolio 209
Tennessee Tax-Free Portfolio 97
Treasury Money Market Portfolio 26
Government Money Market Portfolio 21
Municipal Money Market Portfolio 28
Cash Reserve Portfolio 206

Item 27. INDEMNIFICATION

Article XI, Section 2 of the Declaration of Trust sets forth the reasonable and
fair means for determining whether indemnification shall be provided to any past
or present Trustee or officer. It states that the Registrant shall indemnify
any present or past Trustee, or officer to the fullest extent permitted by law
against liability and all expenses reasonably incurred by him in connection with
any claim, action suit or proceeding in which he is involved by virtue of his
service as a trustee, officer, or both. Additionally, amounts paid or incurred
in settlement of such matters are covered by this indemnification.
Indemnification will not be provided in certain circumstances, however. These
include instances of willful misfeasance, bad faith, gross negligence, and
reckless disregard of the duties involved in the conduct of the particular
office involved.

Insofar as indemnification for liability arising under the Securities Act of
1933 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
such indemnification is against public policy is expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, 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.

Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER

First Tennessee Bank National Association serves as Investment Adviser or
Co-Investment Adviser to the Registrant on behalf of each Portfolio.
Investment Advisers Inc. served as Investment Adviser to the Capital
Appreciation Portfolio. The directors and officers of First Tennessee have
held, during the past two fiscal years, the following positions of a
substantial nature:

<PAGE>

First Tennessee Bank National Association (FTB) - Investment Adviser

Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>

Director Robert C. Blattberg Polk Brothers Distinguished Education
Professor of Retailing
J.L. Kellogg Graduate School
of Management
Northwestern University(1)

Director, Factory Card Outlet of Retail
America(2)

Director Carlos H. Cantu President, Chief Executive Consumer services and
Officer, The ServiceMaster Company, supportive management
L.P.(3) services

Director, Haggar Corporation(4) Apparel

Director George E. Cates Chairman of the Board and Chief Real estate investment
Executive Officer, Mid-America Apartment trust
Communities, Inc.(5)

Director, President, J. Kenneth Glass Executive Vice President, FTNC(6) Bank holding company
Tennessee Banking
Group Director, Norlen Life Insurance Credit life insurance
Company(6)

Director, FT Mortgage Companies(7) Mortgage company

Director, FT Mortgage Holding Corporation(8) Mortgage company

Director, FT Mortgage Services, Inc.(9) Mortgage company

Director, Highland Capital Management Investment Advisor
Corp.(10)

Chairman and Director, "A" PLUS Consumer access/discount
Strategic Alliances, Inc.(11) card program and finder

Director, Corona National Life Insurance(12) Credit life insurance

Director, First Tennessee Merchant Merchant processing
Services, Inc.(13)

Director, First Tennessee Merchant Merchant processing
Equipment, Inc.(14)

Director, Federal Flood Certification Corp.(15) Flood insurance

Director James A. Haslam, III Chief Executive Officer and Chief Operating Retail operator of
Officer, Pilot Corporation(16) convenience stores and
travel centers

Director, Plasti-Line, Inc.(17) Sign manufacturer
</TABLE>

<PAGE>

Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>

President, Chairman Ralph Horn President, Chairman of the Board, Chief Bank holding company
of the Board, Chief Executive Officer and Director, FTNC(6)
Executive Officer
and Director Vice President and Director, National bank
First Tennessee Bank National
Association Mississippi(18)

Director, Harrah's Entertainment, Casino, entertainment
Inc.(19)

Director, President, John C. Kelley, Jr. Executive Vice President, FTNC(6) Bank holding company
Memphis Banking
Group Director, Check Consultants, Inc.(6) Check processing and
related services

Director, Check Consultants Company Check processing and
of Tennessee(6) related services

Director, First Tennessee Housing Public welfare investments
Corporation(20)

Director, First Tennessee Equipment Equipment financing
Finance Corporation(37)

Director, First Tennessee Bank National National bank
Association Mississippi(18)

Director R. Brad Martin Chairman of the Board, Chief Retail
Executive Officer, Proffits, Inc.(21)

Director, Harrah's Entertainment, Inc.(18) Casino, entertainment

Director, Pilot Corporation(15) Retail operator of
convenience stores and
travel centers

Director Joseph Orgill, III Chairman of the Board, Distributor and
West Union Corporation(22) manufacturer for
construction industry

Director, Chairman of the Board Wholesale hardware
Orgill, Inc.(23) distributor

Director Vicki R. Palmer Corporate Vice President and Treasurer of Bottler of soft drink
Coca Cola Enterprises, Inc.(24) products

Director Michael D. Rose Chairman of the Board, Promus Hotel Hotel franchisor and
Corporation(25) operator

</TABLE>

<PAGE>

Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>
Director, General Mills, Inc.(26) Food processing

Director, Ashland Inc.(27) Oil company

Director, Darden Restaurants, Inc.(28) Restaurant

Director, Stein Mart, Inc.(29) Retail

Director William B. Sansom Chairman of the Board and Chief Wholesale distributor
Executive Officer, The H.T.
Hackney Company(30)

Director, Martin Marietta Materials(31) Construction aggregate
materials producer

Director, Astec Industries, Inc.(32) Construction aggregate
materials producer

Director Gordon P. Street, Jr. Chairman of the Board, Chief Manufacturing
Executive Officer and President,
North American Royalties, Inc.(33)

Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>

Executive Vice Susan Schmidt Bies Executive Vice President, FTNC(6) Bank holding
President company

Executive Vice Harry A. Johnson, III Executive Vice President Bank holding company
President and General and General Counsel of FTNC(6)
Counsel

Executive Vice George Perry Lewis Director, First Tennessee Broker Dealer
President - Group Brokerage, Inc.(34)
Manager, Money
Management Director, Highland Capital
Management, Corp.(10) Investment Advisor

Director, Hickory Venture Venture Capital
Capital Corporation(35)

Director, Hickory Capital Venture Capital
Corporation(36)

Executive Vice John P. O'Connor, Jr. Executive Vice President and Chief Bank holding company
President and Credit Officer of FTNC(6)
Chief Credit Officer

</TABLE>

<PAGE>

Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>

Executive Vice G. Robert Vezina Executive Vice President of Bank holding company
President FTNC(6)

Executive Vice Elbert L. Thomas, Jr. Executive Vice President and Chief Bank holding company
President, Chief Financial Officer of FTNC(6)
Financial Officer

Executive Vice E. Kelton Morris Director, Highland Capital Management Investment Advisor
President Corp.(10)

Executive Vice David L. Berry None
President

Executive Vice Carey H. Brown None
President

ExecutiveVice Charles Burkett None
President

Senior Vice President Wayne C. Marsh None

Senior Vice President Deborah McDonald None

Senior Vice President Yvonne Watson None

Senior Vice President C. Douglas Kelso None

Senior Vice President David M. Taylor None

Senior Vice President David B. Lantz None

Senior Vice President William E. Woodson None

Senior Vice President Steven J. McNally None

Senior Vice President Scott Bovee None

Senior Vice President Gary L. Hoemann None

Senior Vice President Suzanne Donaldson None

Vice President William J. Branta None

Vice President O. Norris Avey None

Vice President Edward C. Dellinger None

Vice President Otis M. Clayton None

Vice President Ralph W. Herbert None

</TABLE>

<PAGE>

Position Other Business Type of
with FTB Name connections* Business
- -------- ---- -------------- --------
<S> <C> <C> <C>

Vice President John C. Miller None

Vice President Claudette S.Sanders None

Vice President Rosemary Manning None

Vice President Kenneth Koster None

Vice President Maureen MacIver None

Vice President John Barringer None

Investment Analyst Karen Kruse None

Investment Officer Jeff Smith None

Administrative Assistant Joey Brewer None

Chairman and CEO Larry B. Martin None
First Tennessee Bank-Knoxville

President, First Lew Weems None
Tennessee Bank-Knoxville

President, First J. Kenneth Youngblood None
Tennessee Bank-Maryville

President, First Anderson L. Smith None
Tennessee Bank-Morristown

</TABLE>

NOTES:

* All directors of FTB are also directors of its parent, First Tennessee
National Corporation, which controls FTB. Messrs. Glass, Horn, Johnson,
Keen, Kelley, Lewis, O'Connor, Thomas and Vezina and Ms. Bies are
considered executive officers of FTNC.

(1) J.L. Kellogg Graduate School of Management, 875 N. Michigan Ave., Suite
2945, Chicago, IL 60611

(2) Factory Card Outlet of America, 745 Birbinal Drive, Bensenville, IL
60106-1212

(3) ServiceMaster Company, L.P., One ServiceMaster Way, Downers Grove, IL
30515

(4) Haggar Corporation, 6113 Lemmon Ave., Dallas, TX 75209

(5) Mid-America Apartment Communities, Inc., 6584 Poplar Ave., Ste. 340,
Memphis, TN 38138

(6) First Tennessee Bank National Association and First Tennessee National
Corporation, 165 Madison Avenue, Memphis, TN 38103

(7) FT Mortgage Companies, 2974 LBJ Freeway, Dallas, TX 75234

(8) FT Mortgage Holding Corporation, 165 Madison Ave., Memphis, TN 38103

(9) FT Mortgage Services, Inc., 165 Madison Ave., Memphis, TN 38103

<PAGE>

(10) Highland Capital Management Corp., 6077 Primacy Parkway, Suite 228,
Memphis, TN 38117

(11) "A" PLUS Strategic Alliances, Inc., 1700 Rambling Road, Richmond, VA
23235

(12) Corona National Life Insurance, 1421 E. Thomas Road, Phoenix, AZ 85014

(13) First Tennessee Merchant Services, Inc., 300 Court Ave., Memphis, TN
38103

(14) First Tennessee Merchant Equipment, Inc., 300 Court Ave., Memphis, TN
38103

(15) Federal Flood Certification Corporation, 6220 Gaston Ave., Dallas, TX
75214

(16) Pilot Corporation, 5508 Lonas Road, Knoxville, TN 37909

(17) Plasti-Line, Inc., P O Box 59043, Knoxville, TN 37950-9043

(18) First Tennessee Bank National Association Mississippi, 579 Goodman Road
East, Southaven, MS 38671

(19) Harrah's Entertainment, Inc., 1023 Cherry Road, Memphis, TN 38117

(20) First Tennessee Housing Corporation, 165 Madison Ave., Memphis,
TN 38103

(21) Profitt's Inc., 5810 Shelby Oaks Drive, Memphis, TN 38134

(22) West Union Corporation, 35 Union Ave., Suite 300, Memphis, TN 38103

(23) Orgill, Inc., 2100 Latham Street, Memphis, TN 38109

(24) Coca Cola Enterprises, Inc., 2500 Windy Ridge Pkwy, Marietta,
GA 30067

(25) Promus Companies, Inc., 1023 Cherry Road, Memphis, TN 38117

(26) General Mills, Inc., 9200 Wayzata Blvd., Minneapolis, MN 55426

(27) Ashland Co., 2351 Channel Ave., Memphis, TN

(28) Darden Restaurants, Inc., 5900 Lake Ellenor Drive, Orlando, FL 32809

(29) Stein Mart, Inc., 1200 Riverplace Blvd., Jacksonville, FL 32207
(30) The H. T. Hackney Company, Fidelity Bldg., 502 S. Gay Street, Suite
300, Knoxville, TN 37902

(31) Martin Marietta Materials, P. O. Box 30013, Raleigh, NC 27622-0013

(32) Astec Industries, Inc., P O Box 72787, Chattanooga, TN 37407

(33) North American Royalties, 200 E. 8th Street, Chattanooga, TN 37402

(34) First Tennessee Brokerage, Inc., 5100 Poplar Avenue, Memphis, TN 38117

(35) Hickory Venture Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801

(36) Hickory Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801

(37) First Tennessee Equipment Finance Corporation, 165 Madison Ave.,
Memphis, TN 38103

<PAGE>

Highland Capital Management Corp. (Highland)
6077 Primacy Parkway, Memphis, TN

Position Other Business
with Highland Name Connections
------------- ---- -----------
<S> <C> <C>

Director, President Edward J. Goldstein (1) Director,
NexAir, LLC

Director, Chairman of the Board Steven Wishnia (1) None

Director, Executive Vice President,
Secretary James M. Weir (1) None

Director, Executive Vice President
Treasurer Paul H. Berz (1) None

Director, Executive Vice President Charles Thomas Whitman (1) None

Director J. Kenneth Glass see FTB listing

Director E. Kelton Morris see FTB listing

Director George Perry Lewis see FTB listing

Senior Vice President Steven T. Ashby None

Senior Vice President David L. Thompson None

Senior Vice President James R. Turner None

Vice President Donald J. Norsworthy None

</TABLE>

(1) Previously, Managing Director of Highland Capital Management Corp.,
6077 Primacy Parkway, Memphis, TN 38119

(2) NexAir, LLC, 1385 Corporate Avenue, Memphis, TN 38186-1182, distributor of
industrial gases, welding supplies and medical product

Item 29. Principal Underwriters

(a) The sole principal underwriter for the Fund is ALPS Mutual Funds Services,
Inc. which acts as distributor for the Registrant and the following other
funds: Westcore Trust, FGIC Public Trust, and Countrybaskets-TM- Index
Fund, Inc.

(b) To the best of Registrant's knowledge, the directors and executive officers
of ALPS Mutual Funds Services, Inc., the distributor for Registrant, are as
follows:

Name and Principal Positions and Offices with
Business Address* Positions and Offices with Registrant Underwriter
- ------------------ ------------------------------------- --------------------------
<S> <C> <C>
W. Robert Alexander None Chairman and Chief Executive Officer

Arthur J. L. Lucey None President and Secretary

Thomas A. Carter None Chief Financial Officer

<PAGE>

Edmund J. Burke None Senior Vice President

William N. Paston None Vice President

James V. Hyatt Secretary General Counsel

Jeremy O. May Treasurer Fund Controller

Rick A. Pederson None Director

Chris Woessner None Director
</TABLE>

* All addresses are 370 Seventeenth Street, Suite 3100, Denver, Colorado 80202.

Item 30. LOCATION OF ACCOUNTS AND RECORDS

First Tennessee Bank National Association is located at 4990 Poplar Avenue,
Memphis, Tennessee. Highland Capital Management Corp. is located at 6011
Privacy Parkway, Suite 228, Memphis, Tennessee. PNC Institutional Management
Corporation is located at 103 Bellevue Parkway, Wilmington, Delaware.
Investment Advisers, Inc. is located at 3700 First Bank Place, Minneapolis,
Minnesota. These entities will maintain physical possession of each such
account, book or other documents of the Trust, except for those documents
relating to the custodial functions maintained by the Trust's Custodian,
Chase Manhattan Bank of New York, 114 West 47th Street, New York, New York,
and those transfer agent, pricing and bookkeeping and general accounting
records maintained by the Trust's Transfer Agent and Pricing and Accounting
Agent, Chase Global Funds Services Company, a wholly owned subsidiary of
Chase Manhattan Bank of New York, 73 Tremont Street, Boston, Massachusetts.

Item 31. MANAGEMENT SERVICES

Not Applicable.

Item 32. UNDERTAKINGS

(a) Capital Appreciation Portfolio and Intermediate Bond Portfolio undertake to
file a Post-Effective Amendment using financial statements, which need not
be certified, within 6 months, of each Portfolio's effectiveness.

(b) The Registrant, on behalf of each Portfolio undertakes, provided the
information required by Item 5A is contained in the annual report, to
furnish each person to whom a prospectus has been delivered, upon their

<PAGE>

request and without charge, a copy of the Registrant's latest annual report
to shareholders.

The senior officers and directors of IAI and their titles are as follows:

Name Title
- ---- -----

Jeffrey R. Applebaum Senior Vice President
Scott Allen Bettin Senior Vice President
Archie Campbell Black, III Senior Vice President/Treasurer
Iain D. Cheyne Chairman/Director
Stephen C. Coleman Senior Vice President
Larry Ray Hill Executive Vice President
Richard A. Holway Senior Vice President
Irving Philip Knelman President/Chief Operating Officer/Director
Kevin McKendry Director
Timothy A. Palmer Senior Vice President
Peter Phillips Director
Noel Paul Rahn Chief Executive Officer/Director
James S. Sorenson Senior Vice President
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary

All of such persons have been affiliated with IAI for more than two years
except Messrs. Cheyne, McKendry and Phillips. Prior to being appointed to the
Board in 1996, Mr. Cheyne was General Manager of Corporate Banking of Lloyds
Bank plc, and currently is Managing Director, International Banking, Lloyds TSB
Group plc, St. George's House, 6-8 Eastcheap, London, England EC3M 1LL since
1972. Prior to being appointed to the Board in 1996, Mr. McKendry was and
remains Bank Counsel to Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza,
199 Water Street, New York, NY 10038, since 1979. Prior to being appointed to
the Board in 1996, Mr. Phillips was and remains Executive Vice President and
General Manager of Lloyds Bank Plc, P.O. Box 2008, One Seaport Plaza, 199 Water
Street, New York, NY 10038, since 1993.

The address of the officers and directors of IAI is that of IAI, which is
3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.

Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. Both IAI and IAI International's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services

<PAGE>

organization based in London, England. The senior officers and directors of IAI
International and their titles are as follows:

Name Title
- ---- -----

Noel Paul Rahn Chairman of the Board of Directors
Roy C. Gillson Chief Investment Officer/Director
Iain D. Cheyne Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director

Certain of the officers and directors of IAI also serve as officers and
directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The officers
and directors of IAI Trust Company and their titles are as follows:

Name Title
- ------ ------

Archie C. Black Chairman of the Board/President/Treasurer
Christopher J. Smith Director/Vice President
Susan J. Haedt Vice President/Director
Darcy Kent Supervisor of Trust Services
Steven G. Lentz Secretary/Director

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for the effectiveness of this Registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 13 to the Registration Statement to be signed on
its behalf by the undersigned, hereunto duly authorized, in the City of
Memphis, and State of Tennessee, on the 24th day of October, 1997.

FIRST FUNDS

By /c/ Richard C. Rantzow, President*
------------------------------------
Richard C. Rantzow, President

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

/c/ Richard C. Rantzow* President and Trustee October 24, 1997
- --------------------------
Richard C. Rantzow

/c/ Jeremy O. May Treasurer (Principal October 24, 1997
- -------------------------- Financial Officer)
Jeremy O. May

/c/ Thomas M. Batchelor* Trustee October 24, 1997
- --------------------------
Thomas M. Batchelor

/c/ John A. DeCell* Trustee October 24, 1997
- --------------------------
John A. DeCell

/c/ Larry W. Papasan* Trustee October 24, 1997
- --------------------------
Larry W. Papasan

* Signature affixed by Daniel B. Hatzenbuehler pursuant to a power of attorney
dated June 22, 1992 and filed herewith.

<PAGE>

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

=============================================================================

EXHIBITS

FORM N-1A

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

AND

THE INVESTMENT COMPANY ACT OF 1940

=============================================================================

FIRST FUNDS

<PAGE>

EXHIBIT INDEX

EXHIBIT
NUMBER DOCUMENT
- ------- --------

11 (a) Consent of Price Waterhouse, L.L.P., Independent Public Accountants

(b) Opinion of Baker, Danelson, Bearman & Caldwell, Counsel to the
Registrant.

14 Form of Individual Retirement Account plan documents.

27 Financial Data Schedules

1) Growth & Income Portfolio Class I
2) Growth & Income Portfolio Class II
3) Growth & Income Portfolio Class III
4) Bond Portfolio Class I
5) Bond Portfolio Class II
6) Bond Portfolio Class III
7) Tennessee Tax-Free Portfolio Class I
8) Tennessee Tax-Free Portfolio Class II
9) Tennessee Tax-Free Portfolio Class III
10) U.S. Treasury Money Market Portfolio Class I
11) U.S. Treasury Money Market Portfolio Class III
12) U.S. Government Money Market Portfolio Class I
13) U.S. Government Money Market Portfolio Class III
14) Municipal Money Market Portfolio Class I
15) Municipal Money Market Portfolio Class III
16) Cash Reserve Portfolio Class I
17) Cash Reserve Portfolio Class III

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this
Post-Effective Amendment No. 13 to the registration statement on form N-1A
(the "Registration Statement") of our report dated August 12, 1997, relating
to the financial statements and financial highlights appearing in the June
30, 1997 Annual Report to Shareholders of the First Funds, which are also
incorporated by reference into the Registration Statement. We also consent
to the references to us under the heading "Financial Highlights" in the
Prospectuses and under the heading "Independent Accountants" in the
Statements of Additional Information.

/s/ Price Waterhouse LLP

Price Waterhouse LLP
Boston, Massachusetts
October 24, 1997

<PAGE>

Exhibit 11.(b)

Baker Donelson Bearman & Caldwell
First Tennessee Building
Suite 2000
165 Madison Avenue
Memphis, Tennessee 38103

DANIEL B. HATZENBUEHLER
DIRECT DIAL: (901) 577-2306
October 23, 1997

Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549

Re: FIRST FUNDS (THE TRUST): U.S. GOVERNMENT MONEY MARKET PORTFOLIO;
U.S. TREASURY MONEY MARKET PORTFOLIO; MUNICIPAL MONEY MARKET PORTFOLIO;
CASH RESERVE PORTFOLIO; GROWTH AND INCOME PORTFOLIO (FORMERLY TOTAL RETURN
EQUITY PORTFOLIO); BOND PORTFOLIO (FORMERLY TOTAL RETURN FIXED INCOME
PORTFOLIO); CAPITAL APPRECIATION PORTFOLIO; INTERMEDIATE BOND PORTFOLIO AND
TENNESSEE TAX-FREE PORTFOLIO (EACH, A PORTFOLIO)

File No. 33-46374
Post-Effective Amendment No. 13

Dear Sirs:

We serve as counsel to the above-referenced Trust. In that capacity, we
have reviewed the Post-Effective Amendment No. 13 to the Trust's Registration
Statement on Form N-1A which accompanies this letter ("Amendment"), including
the covering letter thereto. The Amendment was prepared by ALPS Mutual Fund
Services, Inc. ("ALPS"), the Trust's Administrator, and, as stated in the
covering letter to the Amendment, is being filed for the principal purpose of
making certain editorial and other changes in the disclosures contained in the
Trust's most recent post-effective amendment in connection with the annual
update of the Trust's Registration Statement. The changes are noted in the
covering letter to the Amendment, and ALPS has advised us that all such changes
are marked in the body of the Amendment. Pursuant to paragraph (e) of Rule 485,
we represent that, to the best of our knowledge based upon the statements of
ALPS contained in the covering letter to the Amendment and our review of the
Amendment and the changes as marked therein, the Amendment does not contain
disclosures which would render it ineligible to become effective pursuant to
Rule 485(b).

<PAGE>

Securities and Exchange Commission
October 23, 1997
Page 2

Further, we consent to the use of our name in the Registration Statement
under the caption of the prospectus for the Tennessee Tax-Free Portfolio
entitled "What is the Effect of Income Tax On This Investment?" and elsewhere it
may appear.

Very truly yours,

Daniel B. Hatzenbuehler

<PAGE>

[LOGO]

- INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT

- DISCLOSURE STATEMENT

- IRA NOTICE OF REVOCATION

- IRA APPLICATION

- IRA TRANSFER FORM

1
<PAGE>

- --------------------------------------------------------------------------------
HOW TO ESTABLISH A
FIRST FUNDS INDIVIDUAL RETIREMENT ACCOUNT
- --------------------------------------------------------------------------------

1. If you have not already done so, please review the prospectus of the FIRST
FUNDS Portfolio(s) in which you will be investing.

2. Also, please read the Individual Retirement Account Disclosure Statement
and the INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT AGREEMENT. These pages
contain the terms and conditions under which your IRA operates.

3. Next, please review and complete the FIRST FUNDS IRA APPLICATION, being
sure to indicate your First Funds Portfolio selection(s) and the tax year
to which your regular contribution applies.

If your contribution is a Rollover of IRA assets previously held by another
IRA Custodian or of assets distributed from a Keogh or Corporate Retirement
Plan, please so indicate in the contribution type marked ROLLOVER.

If you are funding your account with a transfer of IRA assets directly from
your present IRA Custodian, please so indicate in the contribution type
marked TRANSFER OF ASSETS. You must also complete, sign and return the
TRANSFER REQUEST FORM.

If you are leaving a Keogh or Corporate Retirement Plan, you may instruct
your current Custodian to do a DIRECT ROLLOVER to your First Funds IRA.
Please so indicate on the application and complete, sign and return the
TRANSFER REQUEST FORM.

Be sure to consult the Custodian on your present retirement plan concerning
any special requirements it may have, such as a Signature Guarantee, in
order to release your retirement plan assets.

Please call 1-800-442-1941, option #1 if you should have any questions as
you complete the form. Sign the form as your name appears in Section III
and date it.

4. Forward the completed FIRST FUNDS APPLICATION, the TRANSFER REQUEST FORM,
if applicable, and the check for your REGULAR or ROLLOVER CONTRIBUTION to:

First Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

2
<PAGE>

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

FIRST FUNDS INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
(under Section 408(a) of the Internal Revenue Code ["the Code"])

THE CHASE MANHATTAN BANK, N.A. ("CHASE")
The following provisions of Articles I to VIII are in the form promulgated
by the Internal Revenue Service ("IRS") in Form 5305-A for use in establishing
an individual retirement account. These provisions are set forth below to
constitute the First Funds IRA with Chase as the Custodian.
- --------------------------------------------------------------------------------

ARTICLE I - CASH CONTRIBUTIONS

1. The Custodian may accept additional cash contributions on behalf of the
Principal for a tax year of the Principal. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c) (but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3) of the Code, or an employer contribution to a
simplified employee pension plan as described in section 408(k) of the Code.
Rollover contributions before January 1, 1993, include rollovers described in
section 402(a)(5), 402(a)(6), 402(a)(7), 403(a)(4), 403(b)(8) or 408(d)(3) of
the Code, or an employer contribution to a simplified employee pension plan as
described in section 408(k) of the Code.

ARTICLE II - NONFORFEITABILITY

The Principal's interest in the balance of their Custodial Account is
nonforfeitable.

ARTICLE III - INVESTMENT LIMITATIONS

1. No part of the Custodial Account may be invested in life insurance
contracts, nor may the assets of the Custodial Account be commingled with other
property except in a common trust portfolio or common investment portfolio
(within the meaning of section 408(a)(5) of the Code).

2. No part of the Custodial Account may be invested in collectibles
(within the meaning of section 408(m) of the Code) except as otherwise permitted
by section 408(m)(3) of the Code which provides an exception for certain gold
and silver coins and coins issued under the laws of any state.

ARTICLE IV - DISTRIBUTION

1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Principal's interest in their Custodial Account shall be
made in accordance with the following requirements and shall otherwise comply
with section 408(a)(6) of the Code and Proposed Treasury Regulations section
1.408-8, including the incidental death benefit provision of Proposed Treasury
Regulation section 1.401(a)(9)-2, the provisions of which are herein
incorporated by reference.

2. Unless otherwise elected by the time distributions to the Principal are
required to begin under paragraph 3, or to the surviving spouse under paragraph
4, other than in the case of a life annuity, life expectancies shall be
determined annually. Such election shall be irrevocable as to the Principal and
the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be redetermined.

3. The Principal's entire interest in the Custodial Account must be, or
begin to be, distributed by the Principal's required beginning date, April 1
following the calendar year end in which the Principal reaches age 70-1/2 . By
that date, the Principal may elect, in a manner acceptable to the Custodian, to
have the balance in the Custodial Account distributed in:

(a) A single sum payment.

(b) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the life of the Principal.

(c) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the joint and last
survivor lives of the Principal and his or her designated beneficiary.

(d) Equal or substantially equal annual payments over a specified period
that may not be longer than the Principal's life expectancy.

(e) Equal or substantially equal annual payments over a specified period
that may not be longer than the joint life and last survivor
expectancy of the Principal and his or her designated beneficiary.

4. If the Principal dies before his or her entire interest is distributed
to him or her, the entire remaining interest will be distributed as follows:

(a) If the Principal dies on or after distribution of his or her interest
has begun, distribution must continue to be made in accordance with
paragraph 3.

(b) If the Principal dies before distribution of his or her interest has
begun, the entire remaining interest will, at the election of the
Principal or, if the Principal has not so elected, at the election of
the beneficiary or beneficiaries, either

(i) Be distributed by the December 31 of the year containing the
fifth anniversary of the Principal's death, or

(ii) Be distributed in equal or substantially equal payments over the
life or life expectancy of the designated beneficiary or
beneficiaries starting by December 31 of the year following the
year of the Principal's death. If, however, the beneficiary is
the Principal's surviving spouse, then this distribution is not
required to begin before December 31 of the year in which the
Principal would have turned age 70-1/2

(c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) of the Code and its related
regulations has irrevocably commenced, distributions are treated as
having begun on the Principal's required beginning date, even though
payments may actually have been made before that date.

(d) If the Principal dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse,
no additional cash contributions or rollover contributions may be
accepted in the account.

5. In the case of a distribution over a life expectancy in equal or
substantially equal annual payments, in order to determine the minimum annual
payment for each year, divide the Principal's entire interest in the Custodial
Account as of the close of business on December 31 of the preceding year by the
life expectancy of the Principal (or the joint life and last survivor expectancy
of the Principal and the Principal's designated beneficiary, or the life
expectancy of the designated beneficiary, whichever applies). In the case of
distributions under paragraph 3, determine the initial life expectancy (or joint
life and last survivor expectancy) using the attained ages of the Principal and
designated beneficiary as of their birthdays in the year the Principal reaches
age 70-1/2 . In the case of a distribution in accordance with paragraph
4(b)(ii), determine life expectancy using the attained age of the designated
beneficiary as of the beneficiary's birthday in the year distributions are
required to commence.

6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.

ARTICLE V - CUSTODIAN REPORTS

1. The Principal agrees to provide the Custodian with information
necessary for the Custodian to prepare any reports required under section 408(i)
of the Code and Treasury Regulations section 1.408-5 and 1.408-6.

3
<PAGE>

2. The Custodian agrees to submit reports to the Internal Revenue Service
and the Principal as prescribed by the Internal Revenue Service.

ARTICLE VI - CONTROLLING PROVISIONS

Notwithstanding any other articles which may be added or incorporated, the
provisions of Article I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) of the Code and
related regulations will be invalid.

ARTICLE VII - AMENDMENTS

This agreement will be amended from time to time to comply with the
provisions of the Code and related regulations. Other amendments may be made
with the consent of the persons whose signatures appear below.

ARTICLE VIII - INDIVIDUALIZED PROVISIONS

1. The Custodian shall invest all funds in the Principal's Custodial
Account and earnings thereon in shares ("Portfolio Shares") of funds which have
been designated by First Funds (the "Portfolio") as eligible for investment
under this Custodial Account.

2. The shareholder of record of all Portfolio Shares shall be the
Custodian or its nominee.

3. The Principal shall, from time to time, direct the Custodian to invest
the assets in his/her Custodial Account in Portfolio Shares. Contributions
received with no accompanying direction as to how they should be invested will
be invested in the same proportional fashion reflective of Principal's current
balances in the various portfolios of First Funds. Minimum investment
requirements will be followed. The Principal shall be the beneficial owner of
all Portfolio Shares held in the Custodial Account, and the Custodian shall not
vote any of such Shares except upon the written direction of the Principal.

4. The Custodian agrees to forward, or to cause to be forwarded, to the
Principal a then-current Prospectus of the applicable Portfolio and all notices,
proxies and related proxy soliciting materials it receives applicable to
Portfolio Shares of the Portfolio.

5. The Principal shall have the right by written notice to the Custodian
to designate a beneficiary (or to change a previously designated beneficiary) to
receive any benefit to which the Principal may be entitled in the event of
his/her death prior to the complete distribution of the Custodial Account. If
no designation is in effect on the Principal's death, or if the designated
beneficiary has predeceased the Principal, the beneficiary shall be the
Principal's estate.

6. (a) The Custodian shall have the right to receive rollover
contributions as described in Article I. If any property other than
cash or cash equivalents is transferred to it as a rollover
contribution, the property shall be sold by the Custodian and
reinvested as provided in paragraph 1 of this Article VIII. The
Custodian reserves the right to refuse to accept any property not in
the form of cash or cash equivalents.

(b) The Custodian, upon the written direction of the Principal and
after submission to the Custodian of such documents as it may
reasonably require, shall transfer the assets held under this
Custodial Account (reduced by (i) any amounts referred to in paragraph
8 of this Article VIII, and (ii) any amounts required to be
distributed during the calendar year of transfer pursuant to Article
IV to a successor individual retirement account or individual
retirement annuity for the Principal's benefit.

(c) Any amounts received or transferred by the Custodian under this
paragraph 6 shall be accompanied by such records and other documents
as the Custodian deems necessary to establish the nature, value and
extent of the assets and of the various interests therein.

7. The Principal hereby delegates to the Custodian the power to amend the
terms of this Custodial Account at any time, and hereby consents to such
amendments, provided they comply with all applicable provisions of the Code and
the regulations thereunder. Any amendment shall be effective when notice of the
amendment is mailed to the address of the Principal indicated on the Custodian's
records.

8. The Custodian will receive reasonable annual compensation as set forth
in its Schedule of Fees. The Custodian will pay from the Custodial Account all
fees and expenses reasonably incurred by the Trust, to the extent such fees and
expenses are for the ordinary and necessary administration and operation of the
Trust, unless the Principal pays such fees and expenses. Any fee or expense
paid, directly or indirectly, by the Principal is not a contribution to the
Trust, provided the fee or expense relates to the ordinary and necessary
administration of the Trust. Any income taxes or other taxes levied or assessed
upon or with respect to the assets of the Custodial Account or earnings thereon,
any transfer taxes incurred, and other administrative expenses reasonably
incurred by the Custodian in the performance of its duties (including fees for
legal services rendered to the Custodian and the Custodian's compensation) may
be paid by the Principal and, unless so paid within the time period established
by the Custodian, shall be paid from the Principal's Custodial Account. The
Custodian reserves the right to change or adjust its compensation upon 30 days'
advance written notice to the Principal.

9. The benefits provided hereunder shall not be subject to alienation,
assignment, garnishment, attachment, execution or levy of any kind, and any
attempt to cause such benefits to be so subjected shall not be recognized,
except to such extent as may be required by law.

10. In taking any action or determining any fact or question which may
arise under this Custodial Account, First Funds and the Custodian may rely upon
any statement by the Principal with respect thereto. The Principal hereby
agrees that First Funds and the Custodian will not be liable for any loss or
expense resulting from any action taken or determination made in reliance on
such statement. The Principal assumes sole responsibility for assuring that
contributions to the Custodial Account satisfy the limits specified in the
applicable sections of the Code.

11. The Custodian may resign at any time upon 9 days' written notice to
the Principal and to First Funds and may be removed by First Funds at any time
upon 90 days' written notice to the Custodian. Upon the resignation or removal
of the Custodian, a successor Custodian shall be appointed within 90 days of
such resignation and, in the absence of such appointment, the Custodian shall
appoint a successor unless the Custodial Account is sooner terminated. Any
successor Custodian shall be a bank (as defined in section 408(n) of the Code)
or such other person found qualified to act as a Custodian under an individual
retirement account by the Secretary of the Treasury or his/her delegate. The
appointment of a successor Custodian shall be effective upon receipt by the
predecessor Custodian of such successor's written acceptance which shall be
submitted to First Funds, the Custodian and the Principal. Within 90 days of
the effective date of a successor Custodian's appointment, the Custodian shall
transfer and deliver to the successor Custodian applicable account records and
assets of the Custodial Account (reduced by any unpaid amounts referred to in
paragraph 8 of this Article VIII). The successor Custodian shall be subject to
the provisions of this Custodial Account (or any successor thereto) on the
effective date of its appointment.

12. Notwithstanding any provision hereof to the contrary, for taxable
years in which contributions to the Custodial Account are to qualify as
contributions to a spousal individual retirement account, the following
provisions shall apply: A separate Custodial Account shall be established in the
name of the spouse, who shall thereafter be deemed to be the Principal with
respect to the separate Custodial Account. The sum of the amount contributed to
the Custodial Accounts of the Principal and the Principal's spouse shall not
exceed the lesser of:

(a) An amount equal to 100% of the compensation (including earned income
in the case of a self-employed individual) includable in the employed
spouse's gross income for the taxable year; or

(b) $2,250, provided, however, that no more than $2,000 may be contributed
to either of such Custodial Accounts.

13. The Custodian shall, from time to time, in accordance with
instructions in writing from the Principal, make distributions out of the
Custodial Account to the Principal in the manner and amounts as may be specified
in the instructions. The Custodian assumes (and shall have) no responsibility
to make any distribution to the Principal (or the Principal's beneficiary if the
Principal is deceased) unless and until the written instructions specify the
reason for the distribution and the manner of distribution elected. Prior to
making any such distribution from the Custodial Account, the Custodian shall be
furnished with any and all applications, certificates, tax waivers, signature
guarantees and other documents (including proof of any legal representative's
authority) deemed necessary or advisable by the Custodian, but the Custodian
shall not be liable for complying with written instructions which appear on
their face to be genuine, or for refusing to comply if not satisfied such
instructions are genuine, and assumes no duty of further inquiry. Upon receipt
of proper written instructions as required above, the Custodian shall cause the
assets of the Custodial Account to be distributed in cash and/or in kind, as
specified in the written instructions.

14. Distribution of the assets of the Custodial Account shall be made in
accordance with the provisions of Article IV as the Principal (or the
Principal's beneficiary if the Principal is deceased) shall elect by written
instructions to the Custodian; subject, however, to the following:

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(a) No distribution from the Custodial Account shall be made in the form
of an annuity contract.

(b) If the Principal dies before his/her entire interest in the Custodial
Account has been distributed, and if the designated beneficiary of the
Principal is the Principal's surviving spouse, the spouse may treat the
Custodial Account as his/her own individual retirement account. This
election will be deemed to have been made if the surviving spouse makes a
regular contribution to the Custodial Account, makes a rollover to or from
such Custodial Account, or fails to receive a payment from the Custodial
Account within the appropriate time period applicable to the deceased
Principal under section 401(a)(9)(B) of the Code.

15. The Custodian shall have the authority to employ advisors including
attorneys, accountants, consultants or others regarding the performance of its
duties and responsibilities. The Custodian may act or refrain from acting on
the advice or opinion of any such persons so employed. The Custodian may pay
from the Custodial Account reasonable compensation for such advise or opinion.

The Custodian is authorized to hire agents (including any transfer agent
for Portfolio Shares) to perform certain duties hereunder. Such agents retained
by Custodian shall be paid by the Custodian for their services.

16. This Custodial Account shall terminate coincident with the complete
distribution of the assets of the Principal's Account.

17. All notices to be given by the Custodian to the Principal shall be
deemed to have been given when mailed to the address of the Principal indicated
in the Custodian's records.

18. The Custodian and First Funds shall not be responsible for any losses,
penalties or other consequences to the Principal or any other person arising out
of the making of, or the failure to make, any contributions or withdrawal.

19. (a) In performing the duties conferred upon the Custodian or First
Funds by the Principal hereunder, the Custodian and First Funds shall
act as the agent of the Principal. The parties do not intend to
confer any fiduciary duties on the Custodian (other than any such
duties inherent in the Custodian's status as Custodian) and First
Funds and none shall be implied. The Custodian and First Funds shall
not be liable (and do not assume any responsibility) for the
collection, the deductibility, or the propriety of any contribution
under this Custodial Account, the selection of any Portfolio Shares
for this Custodial Account, or the propriety of any distribution made
in accordance with Article IV and Paragraph 13 or 14 of this Article
VIII, which matters are the sole responsibility of the Principal or
the Principal's beneficiary, as the case may be.

(b) The Custodian shall not (i) exercise any discretionary authority
or discretionary control respecting management of the Custodial
Account or exercise any authority or control respecting the management
or disposition of the assets of the Custodial Account, (ii) render any
investment advice with respect to the assets of the Custodial Account,
or (iii) have any discretionary authority or discretionary
responsibility in the administration of the Custodial Account.

20. The Custodian and First Funds shall be responsible solely for the
performance of those duties expressly assigned to them in this Custodial Account
and do not assume any responsibilities as to duties assigned to anyone else
hereunder or by operation of law. The Custodian shall have no duty to account
for deductible contributions separately from nondeductible contributions, unless
required to do so by applicable law. In determining the taxable amount of a
distribution, the Principal shall rely only on his/her federal tax records, and
the Custodian shall withhold federal income tax from any distribution from the
Custodial Account as if the total amount of the distribution is includable in
the Principal's income, unless withholding is waived.

21. The creation of the Principal's Custodial Account is not effective
until the date the Custodian accepts for investment the Principal's initial
contribution made in accordance with the terms of the Custodial Account.

22. This Custodial Account shall be governed by and construed,
administered and enforced according to the laws of the State of Tennessee,
except to the extent preempted by federal law.

- --------------------------------------------------------------------------------
INDIVIDUAL RETIREMENT ACCOUNT DISCLOSURE STATEMENT
- --------------------------------------------------------------------------------

The Chase Manhattan Bank, N.A., ("Chase") is the Custodian of the First Funds
IRA. This Disclosure Statement should be read in conjunction with the First
Funds Individual Retirement Account Custodial Agreement.

While this Disclosure Statement sets forth certain restrictions and limitations
to which individual retirement accounts in general and the First Funds IRA in
particular are subject, it does not restate the specific terms of the First
Funds IRA itself. IN THE EVENT OF ANY CONFLICT BETWEEN THE PROVISIONS OF THIS
DISCLOSURE STATEMENT AND THE TERMS OF THE FIRST FUNDS IRA, THE LATTER SHALL
CONTROL.

Internal Revenue Service regulations require that you be given this Disclosure
Statement to make certain that you fully understand the nature of an individual
retirement account. Please read this Disclosure Statement carefully.

A. RIGHT OF REVOCATION

If you establish a First Funds IRA, you may revoke it by notifying the Custodian
in writing by first class mail, postmarked within seven days after the date on
which you established your First Funds IRA. Such notice must be sent to the
following address:

First Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

In the event of revocation, all contributions made under the First Funds IRA
will be returned to you, without adjustment for administrative expenses or for
fluctuation in market value.

B. OPERATION AND TAX TREATMENT OF THE FIRST FUNDS IRA

1. WHAT IS A FIRST FUNDS IRA?

A First Funds IRA is a custodial account which allows you, if you are an
eligible individual described in Question 2, to save for your retirement more
rapidly than is possible with investments that are not tax-deferred. More rapid
saving is possible because, if an IRA is qualified under the Internal Revenue
Code (the "Code"), (i) contributions to it (except for rollover contributions
and direct transfers discussed in Question 10) may be deductible from your gross
income for the taxable year for which you make the contribution, and (ii) an
IRA, including earnings, is generally exempt from taxation until distributions
from it occur.

2. WHO IS ELIGIBLE TO CONTRIBUTE?

You may make a contribution described in Question 4 to a First Funds IRA
only if you do not attain age 70-1/2 before the close of your taxable year for
which the contribution is made (except in the case of contributions for your
non-working spouse under the age of 70-1/2--see Question 8) and if you receive

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<PAGE>

compensation during your taxable year (see Question 4). The fact that you are
covered under any other type of retirement plan will not prevent you from making
contributions to an IRA.

3. TO WHAT EXTENT MAY CONTRIBUTIONS BE DEDUCTED?

If neither you nor your spouse is an active participant (a person is an
"active participant" if he or she is covered by a retirement plan-see (a)
below), you may make a contribution of up to the lesser of $2,000 (or $2,250 in
the case of a spousal IRA-see Question 8) or 100% of compensation and take a
deduction for the entire amount contributed. If you or your spouse is an active
participant but your combined adjusted gross income ("AGI") is at or below a
certain level (see (b) below), you may also make a fully deductible
contribution. If, however, you or your spouse is an active participant and your
combined AGI is above the specified level, the amount of the deductible
contribution you may make to an IRA is phased down and eventually eliminated.

(a) Active Participant. You are an "active participant" for a year
if you are covered by a retirement plan. You are covered by a "retirement
plan" for a year if your employer or union has a retirement plan under
which money is added to your account or if you are eligible to earn
retirement credits. For example, if you are covered under a profit-sharing
plan, certain government plans, a salary reduction arrangement (such as
tax-sheltered annuity arrangement or a 401(k) plan), a simplified employee
pension plan ("SEP") or a plan which promises you a retirement benefit
which is based upon the number of years of service you have with the
employer, you are likely to be an active participant. Your Form W-2
for the year should indicate your participation status.

You are an active participant for a year even if you aren't yet vested in
your retirement benefit. Also, if you make required contributions or
voluntary employee contributions to a retirement plan, you are an active
participant. In certain plans you may be an active participant even if you
were only with the employer for part of the year.

You are not considered an active participant if you are covered in a plan
only because of your service as (i) an Armed Forces Reservist for less than
90 days of active service, or (ii) a volunteer firefighter covered for fire
fighting service by a government plan. Of course, if you are also covered
in any other plan, these exceptions do not apply.

If you and your spouse live apart at all times during a taxable year and
file separate returns for the taxable year, you and your spouse will not be
treated as married for purposes of these rules.

(b) Adjusted Gross Income ("AGI"). If you are an active participant,
you must look at your AGI for the year (if you and your spouse file a joint
tax return, use your combined AGI) to determine whether you can make a
deductible contribution to a First Funds IRA. Your tax return will show
you how to calculate your AGI for this purpose. If you are at or below a
certain AGI level, called the "threshold level," you are treated as if you
were not an active participant and can make a deductible contribution under
the same rules as a person who is not an active participant.

If you are single, your threshold level is $25,000. The threshold level if
you are married and file a joint tax return is $40,000, and if you are
married but file a separate return, the threshold level is $0.

If your AGI is less than $10,000 above your threshold level, you will still
be able to make a deductible contribution but it will be limited in amount.
The amount by which your AGI exceeds your threshold level (AGI - threshold
level) is called your "excess AGI." The maximum allowable deduction is
$2,000 (or $2,250 for a spousal IRA). You can estimate your deduction by
calculating it as follows:

$10,000 - Excess AGI x Maximum Allowable Deduction = Deduction Limit
---------------------
$10,000

Round up the result to the next highest $10 level (the next highest number
which ends in zero). For example, if the result is $1,525, round it up to
$1,530. If the final result is below $200 but above zero, your deduction
limit is $200. Your deduction limit cannot, in any event, exceed 100% of
your compensation. Here are two examples which illustrate how this formula
works:

Excess AGI = $4,000 ($29,000 - $25,000)

($10,000 - $4,000) x $2,000 = Deductible Limit
-----------------
$10,000

.60 x $2,000 = $1,200

Example 2: If you are married, file jointly, and have adjusted gross
income of $47,000, the deductible limit would be $600, determined as
follows:

Excess AGI = $7,000 ($47,000 - $40,000)

($10,000 - $7,000) x $2,000 = Deductible Limit
------------------
$10,000

.30 x $2,000 = $600

(c) Nondeductible Contributions to IRAs. Even if you are above the
threshold level and thus may not make a deductible contribution of $2,000
($2,250 for a spousal IRA), you may still contribute up to the lesser of
100% of compensation or $2,000 to a First Funds IRA ($2,250 for a spousal
IRA). The amount of your contribution which is not deductible will be a
nondeductible contribution to the IRA. You may also choose to make a
contribution nondeductible even if you could have deducted part or all of
the contributions. Interest or other earnings on your IRA contribution,
whether from deductible or nondeductible contributions, will not be taxed
until taken out of your IRA and distributed to you.

If you make a nondeductible contribution to an IRA, you must report the
amount of the nondeductible contribution to the IRS as part of your tax
return for the year. You are responsible for identifying and tracking all
nondeductible contributions to your IRA.

You may make a $2,000 contribution at any time during the year, if your
compensation for the year will be at least $2,000, without having to know
how much will be deductible. When you fill out your tax return, you may
then figure out how much is deductible.You may withdraw an IRA contribution
made for a year any time before the due date for filing your federal tax
return for that year (including extensions). If you do so, you must also
withdraw earnings attributable to that portion and report the earnings as
income for the year for which the contribution was made (see Question 15
about distributions before age 59-1/2). If some portion of your
contribution is not deductible, you may decide either to withdraw the
nondeductible amount, or leave it in the IRA and designate that portion as
a nondeductible contribution on your tax return.

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<PAGE>

4. WHAT AMOUNT MAY I CONTRIBUTE?

As discussed in Question 2, you may generally contribute to your First
Funds IRA up to the lesser of (i) $2,000 or (ii) 100% of your compensation for
any taxable year. "Compensation" includes salaries, wages, professional fees,
self-employment income (reduced by contributions to certain pension plans which
are deductible in computing adjusted gross income), and other income for
personal services includable in your gross income. Compensation does not
include any amount received as a pension or annuity and does not include any
amount received as deferred compensation. Income from property, such as
dividends, interest, and rent also does not qualify as compensation.
Compensation does include any amounts includable in gross income with respect to
a divorce or separation instrument described in section 71(b) (2) (A) of the
Code. Except for rollover contributions and direct transfers as described in
Question 9, and SEP contributions as described in Question 11, contributions may
not be accepted from you or on your behalf if they exceed $2,000 for any taxable
year.

If a husband and wife each receive compensation, as defined in the
preceding paragraph, during a taxable year and are otherwise eligible to
contribute to an IRA, each may establish his or her own First Funds IRA. The
percentage and dollar limitations of the preceding paragraph and the deduction
limitations described in Question 3 are applicable to the separate compensation
of each spouse.

For special contribution and deduction information relating to an IRA
established for the benefit of a nonworking spouse, see Question 8.

5. HOW WILL MY CONTRIBUTIONS BE INVESTED AND HELD?

Contributions to your First Funds IRA are held in a Custodial Account for
your exclusive benefit and that of your beneficiaries, which may include your
estate or any other persons or legal entity you may designate in writing
delivered to First Funds. Your IRA will be identified as your property and will
not be commingled with the property of any other investor. The Custodian will
invest the Funds in your IRA in shares of one or more of the investment
portfolios of First Funds in accordance with your direction as indicated in the
Application.

No part of the Funds held in an IRA may be invested in life insurance
contracts or in collectibles (i.e., any work of art, rug, antique, metal, gem,
stamp, coin-other than certain gold and silver coins minted by the United States
or coins issued under the laws of any state, alcoholic beverage, or other type
of tangible personal property specified by the Internal Revenue Service).

6. AM I VESTED IN MY CONTRIBUTIONS?

The Funds in your First Funds IRA are nonforfeitable, subject to applicable
taxes, expenses, and fees.

7. WHEN MUST MY CONTRIBUTION BE MADE?

Contributions to your First Funds IRA for a particular taxable year may be
made up until the initial date you are required to file your federal income tax
return for that year (April 15, if you figure your taxes on a calendar-year
basis). (For the time to make SEP contributions, see Question 11.)

8. CAN MY NON-WORKING SPOUSE HAVE AN IRA?

If you are an eligible individual described in Question 2, file a joint
federal income tax return with your spouse for a taxable year, and your spouse
has no compensation (as described in Question 4) or elects to be treated as
having no compensation for such taxable year, you may make contributions to a
separate First Funds IRA for that year on behalf of your spouse as well as your
own IRA. The overall contributions on behalf of both of you and your spouse for
any year may not exceed the lesser of:

(i) Your compensation for the taxable year, or
(ii) $2,250.

In no event, however, may the contribution to either your IRA or your
spouse's IRA exceed $2,000.

You are not required to divide the contributions equally between your IRA
and your spouse's IRA. If you have attained age 70-1/2 before the close of the
taxable year, you may nevertheless contribute to a separate IRA for your
nonworking spouse, provided the nonworking spouse is under age 70-1/2.

9. CAN I ROLL OVER CONTRIBUTIONS AND/OR DIRECTLY TRANSFER CONTRIBUTIONS TO
AN IRA?

(a) Rollover Contributions from One IRA to Another. You may
generally move assets from another IRA (including an individual retirement
annuity) to your First Funds IRA or from your IRA without incurring federal
income tax at the time of distribution to you. Such a tax-free move is
called a "rollover contribution". You may elect not to have federal income
tax withheld on the rollover contributions at the time of the rollover (see
Question 19). You may make a rollover contribution from one IRA to another
IRA only if you have made no other rollover contribution from the IRA to
another within a one-year period measured from the date of distribution to
the date of the next distribution. This rule applies to each separate IRA
you own. You may roll over all or any portion of the money or other
property distributed from an IRA. However, the amount to be rolled over
must be reinvested, within 60 days of the date it is received, in another
IRA. The limitations on contributions the Custodian may accept for any
taxable year on your behalf does not apply to rollovers from one IRA to
another.

A beneficiary other than your surviving spouse is prohibited by law from
rolling over his or her beneficial interest in your IRA to another IRA. If
your beneficiary is your surviving spouse and he or she elects to treat his
or her interest in your IRA as his or her own IRA (see Question 13(b)), he
or she may make a rollover contribution as described in the previous
paragraph.

(b) Direct Transfers from one IRA to Another. The Internal Revenue
Service has ruled that the Funds in an IRA may be moved to another IRA more
frequently than the limitation on the frequency of rollover contributions
described above (once a year) provided that the Funds are transferred
directly from the trustee or custodian of the first IRA to the trustee or
custodian of the IRA established in its place, so that the Funds are at no
time within the control or use of the IRA owner. The limitations on
contributions the Custodian may accept for any taxable year on your behalf
do not apply to direct transfers from one IRA to another.

As a First Funds IRA owner, you may at any time request the Custodian to
transfer the assets in your IRA directly to the trustee or custodian of
another IRA established or maintained by you, provided that the other
trustee or custodian has indicated its willingness to accept the direct
transfer in a written communication addressed to the current Custodian.
Federal income tax will not be withheld on the direct transfer at the time
of the direct transfer.

(c) Qualifying Rollover Distributions from Certain Employer
Retirement Plans to an IRA. All or any part of an eligible rollover
distribution" from certain employer retirement plans may be moved to a
First Funds IRA and qualify for tax-free rollover treatment for federal
income tax purposes. Generally, an "eligible rollover distribution" is a
distribution of all or any portion of your benefit in a qualified plan or a
tax-sheltered annuity

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<PAGE>

arrangement other than (i) payments made in the form of a joint and
survivor annuity, a life annuity or installments over a period of 10 or
more years, (ii) required minimum payments made because you have attained
age 70-1/2, or (iii) payments or portions of payments which are a return of
nondeductible employee contributions.

There are two methods for making rollover distributions to an IRA: direct
rollovers and regular rollovers. In a direct rollover, you instruct your
employer's or former employer's plan not to pay the eligible rollover
distribution to you, but rather to pay the distribution directly to the
trustee or custodian of your IRA (or to give you a check payable to the
IRA trustee or custodian which you then deliver to the trustee or
custodian). The advantage of a direct rollover is that federal income
tax (under the 20% income tax withholding requirement described below)
will not be withheld from the amount of your eligible rollover
distribution which is directly rolled over.

In a regular rollover, the distribution from your employer's or former
employer's plan is paid to you; not to the trustee or custodian of your
IRA. Unlike a direct rollover, your employer or former employer must
withhold federal income tax in the amount of 20% of your eligible rollover
distribution at the time of your distribution even though you reinvest the
distribution into an IRA within 60 days. No portion of the gain or loss on
the sale will be recognized for federal income tax purposes, provided the
entire amount of the gain or loss on the sale (less the portion of the
proceeds consisting of nondeductible employee contributions, if any) is
included in the rollover. If you receive property other than cash in an
eligible rollover distribution, you may sell the property and roll over the
cash received, provided it is not in excess of the value of the property
received in the distribution. The amount of the eligible rollover
distributions which you wish to qualify for tax-free rollover treatment for
federal income tax purposes must be reinvested into an IRA within 60 days
of your receipt of the distribution. For example, if you receive an
eligible rollover distribution of $1,000, and you want the entire $1,000
distribution to be excluded from your income for federal income tax
purposes, you must find other money to replace the $200 which was
automatically withheld at the time of the distribution. The $200 which was
withheld will offset other income tax liabilities for the year.

With certain exceptions, any cash or property received in the distribution
which is not rolled over will be taxed for federal income tax purposes as
ordinary income in the year it is received.

(d) Rollover from IRA to Certain Employer Retirement Plans. If you
have set up a rollover IRA, you may be able to roll over Funds from it into
certain employer retirement plans if (i) the original source of the
rollover IRA was from a qualified plan, qualified annuity or tax-sheltered
annuity; (ii) your rollover IRA contains only the money from your original
distribution, plus earnings to date; (iii) the employer retirement plan
allows such contributions; and (iv) your original distribution was not made
to you from your spouse's plan as a result of your spouse's death.

If your rollover IRA meets the requirements outlined above, you have 60
days from the receipt of Funds from the IRA to complete the rollover to the
retirement plan. All or any part of the balance to your credit in your
rollover IRA may be distributed to you; you may then roll over to the
employer retirement plan all or any part of the distribution. You may
elect not to have federal income tax withheld on the rollover at the time
of the rollover (see Question 19). Of course, any part not rolled over
will generally be taxed for federal income tax purposes as ordinary income
in the year it is received.

If your original distribution came from a tax-sheltered annuity, you may
roll over the Funds only to another tax-sheltered annuity.

(e) Separate Accounting for Certain Rollover Contributions and Direct
Transfers. Any rollover contribution or direct transfer consisting of
Funds which you have derived, directly or through another IRA, from an
employer retirement plan will be held in a separate First Funds IRA which
consists only of that rollover contribution or direct transfer and the
earnings thereon.

(f) No Rollover or Transfer of Required Distributions. You may not
roll over or transfer any assets attributable to a required minimum
distribution (see Questions 13 and 16) without potential adverse tax
consequences.

10. WHY SHOULD I MAKE A DIRECT ROLLOVER FROM MY EMPLOYER'S OR FORMER
EMPLOYER'S RETIREMENT PLAN TO AN IRA?

As discussed in Question 9(c), if you directly roll over an eligible
rollover distribution from your employer's or former employer's plan to an IRA,
it is not subject to the 20% mandatory withholding requirement. In addition,
distributions from an IRA are not subject to the 20% withholding requirement
even if you do not roll them over (although they are subject to federal income
tax--see Question 14). Therefore, if you are unsure of what you want to do with
your eligible rollover distribution, you should consider a direct rollover to an
IRA so that the 20% withholding requirement can be avoided.

11. CAN I PARTICIPATE IN A SEP-IRA?

An employer who adopts a simplified employee pension plan (a "SEP") may
make contributions on behalf of its employees to their separate First Funds
IRAs. If your employer has adopted a SEP, your employer may make SEP
contributions directly to your IRA each year in an amount up to the lesser of
$30,000 or 15% of your compensation (if you are self-employed, up to an amount
equal to 13.043% of your net earnings before the contribution). Of course, you
must meet the eligibility requirements of your employer's SEP in order to be
entitled to contributions. Your employer can tell you what the eligibility
requirements are. The following considerations apply only to SEPs:

(a) Contributions After Age 70-1/2. Your employer may make
contributions on your behalf to your IRA through a SEP even after you have
attained age 70-1/2.

(b) Excess Contributions. If your employer makes SEP contributions
to your IRA in excess of the applicable limits, you may be subject to the
6% excise tax on excess contributions discussed in Question 12.

(c) Active Participant. As discussed in Question 3, you will
generally be considered an active participant in a retirement plan for a
year if you are covered by your employer's SEP in that year. As an active
participant, the amount of deductible contributions you may make to the IRA
may be limited as discussed in Question 4.

(d) Time of Contribution. Your employer's contributions to your IRA
for a particular taxable year of your employer may be made up until the
date your employer is required to file the federal income tax return for
that year (including extensions of that date). The contribution will be
deductible for your employer's taxable year with or within which the
calendar year ends (if the SEP is maintained on the basis of the calendar
year), or for your employer's taxable year (if the SEP is maintained on
the basis of your employer's taxable year).

12. WHAT HAPPENS IF I MAKE AN EXCESS CONTRIBUTION TO AN IRA?

An excess contribution is a contribution to an IRA in excess of the maximum
contribution amount or maximum amount permitted to be rolled over into an IRA
for that taxable year.

Excess contributions are subject under the Code to an annual federal excise
tax of 6% of the amount of the excess contribution until it is eliminated.
However, you can eliminate this excess in any one or more of the following three
ways:

8
<PAGE>

(a) Excess Contribution Distributed Before Federal Income Tax Return
Due Date. Excess contributions withdrawn from an IRA, together with all
earnings thereon, prior to the time for filing your federal income tax
return for such taxable year (including extensions) will not be subject to
the 6% federal excise tax, regardless of the total amount of the
contributions made during the taxable year. The earnings distributed must
be included in gross income for the taxable year in which the excess
contribution was made.

(b) Excess Contributions Distribution After Federal Income Tax Return
Due Date. If a distribution from an IRA takes place after the due date for
filing your federal income tax return (including extensions), the entire
distribution will be subject to the 6% federal excise tax, federal income
tax, and, if you have not reached age 59-1/2, will also be subject to a 10%
additional federal income tax on premature distributions. However, you may
receive a distribution of your excess contributions without being required
to include the amount of the distribution in your gross income or to pay the
10% additional federal income tax (but you will still be subject to the 6%
federal excise tax for the year of contribution), provided that you have
taken no federal income tax deduction for the amount of the excess
contribution distributed, and the total contribution, including the excess
contribution, for the taxable year in which the excess contribution was
made, did not exceed $2,250.

You may also withdraw the portion of an excess rollover contribution
(without any dollar limitation) caused by your having reasonably relied on
certain incorrect information required to be furnished to you by the
plan,trust, or institution making the distribution which was the subject of
the rollover.

(c) Elimination of Excess Contribution by Under-Contributing in
Subsequent Years. You may reduce or eliminate an excess contribution in
later taxable years for which you are eligible to contribute to an IRA if
you do not make the maximum allowable contribution for retirement savings
in the later year. Thus, if you contribute less than the maximum
contribution allowed for any year after the excess contribution was made,
the difference between the maximum contribution allowable and the amount
claimed can be used to reduce or eliminate the excess contribution. The
amount of the excess contribution so used will also reduce or eliminate
the amount subject to the 6% federal excise tax for the year in which so
used.

13. HOW WILL FUNDS BE DISTRIBUTED TO MY BENEFICIARY IF I DIE?

(a) General Rule. If you die before the entire Portfolio has been
distributed, the remaining Funds in your First Funds IRA must be
distributed in a single sum or installments to your designated beneficiary
by December 31 of the fifth year after the year of your death, except that
(i) if distributions commenced to you before your death over a fixed period
of time permitted by the Code and regulations thereunder, distribution may
continue over the unexpired portion of that period, even if it is longer
than five years, or (ii) if distributions commence to your designated
beneficiary by December 31 of the year after the year of your death and the
payments are to be made over a period not exceeding your beneficiary's life
expectancy, payments may be made over that period, even if it is longer
than five years. If your designated beneficiary is your surviving spouse,
the distributions described in (ii) in the preceding sentence do not have
to begin until the later of December 31 of the year after the year of your
death, or December 31 of the year you would have attained age 70-1/2.

(b) Exception. The distributions discussed in paragraph (a) above
need not be made if your designated beneficiary is your surviving spouse
and he or she elects to treat his or her interest in your First Funds IRA
as his or her own IRA. If your beneficiary is your surviving spouse and
he or she makes this election or is deemed to have made this election,
your beneficiary will become subject to all the terms, conditions and
restrictions of the IRA which are applicable to you. Thus, withdrawals
prior to age 59-1/2 may be subject to adverse tax consequences (see
Questions 14 and 15), distributions must commence on or before age 70-1/2
(see Question 16) and additional contributions may be made on a tax
deductible basis (see Questions 3, 6, 8, and 11).

14. HOW ARE WITHDRAWALS AND DISTRIBUTIONS TAXED?

Distributions from your First Funds IRA may be in the form of a single
payment or in monthly, quarterly, or annual payments over a period certain not
extending beyond your life expectancy or the joint life and last survivor
expectancy of you and your designated beneficiary. Any distribution instruction
must specify the reason for the distribution; for example, a premature
distribution (i.e., a distribution before age 59-1/2), a rollover, a
distribution on account of disability or death, a normal distribution (i.e,. a
distribution at age 59-1/2 or over), a return of excess contributions, etc.

Distributions are, for federal income tax purposes, taxed in full to you or
your beneficiaries at ordinary income tax rates unless you have made
nondeductible contributions. Because nondeductible IRA contributions are made
using income which has already been taxed, the portion of the IRA distributions
consisting of nondeductible contributions will not be taxed again when received
by you. If you make any nondeductible IRA contributions, each distribution from
your IRA will consist of a nontaxable portion (return of nondeductible
contributions) and a taxable portion (return of deductible contributions, if
any, and account earnings). Thus, you may not take a distribution which is
entirely tax-free.

The following formula is used to determine the nontaxable portion of your
distributions for a taxable year:
<TABLE>
<CAPTION>
<S> <C> <C>
Remaining Nondeductible Contributions Total Distributions Nontaxable Distributions
- ------------------------------------- X (for the year) = ------------------------
Year-end total IRA Account Balances (for the year)
</TABLE>

To figure the year end total IRA account balance, you treat all of your
IRAs, including SEP-IRAs, rollover IRAs and transfer IRAs, as a single IRA. You
also add back the distributions during the year.

A single sum distribution from your IRA is not eligible for special five-
or ten-year income averaging or capital gains treatment sometimes available for
lump sum distributions from certain employer retirement plans.

15. WHAT IS PREMATURE DISTRIBUTION?

A First Funds IRA is intended to provide income to you when you retire.
For this reason, the law imposes certain restrictions on your right to withdraw
this money before your retirement. Funds generally cannot be withdrawn from
your IRA without adverse tax consequences prior to the date on which you attain
59-1/2. Any distributions prior to that time (except those described in
Questions 9, 12, and 13), including amounts considered to have been distributed
as a result of a prohibited transaction or the use of part or all of the IRA as
security for a loan (see Questions 17 and 18) are considered to be premature
distributions.

If you receive a premature distribution, the amount received is includable
in your gross income subject to federal income tax in the taxable year of
receipt (except to the extent the amount received is a return of your
nondeductible contribution -- see Question 14). In addition, your federal
income tax liability for that taxable year is increased by an amount equal to
10% of the premature distribution includable in your gross income.

The additional 10% tax on premature distributions does not apply in the
case of distributions after you die, become disabled, or attain age 59-1/2.
Also, this additional 10% tax does not apply to distributions you receive which
are part of a series of substantially equal periodic payments made over your
life expectancy or the joint life expectancy of you and your designated
beneficiary.

9
<PAGE>

16. WHAT IF I DO NOT RECEIVE SUFFICIENT AMOUNTS OR RECEIVE EXCESS
DISTRIBUTIONS FROM MY IRA?

(a) Insufficient Amounts. The Code requires that you begin to take
distributions from your First Funds IRA on or before April 1 of the
calendar year following the calendar year in which you attain age 70-1/2.
The Code further requires that no less than a minimum distribution be made
each year. This minimum distribution is based on your life expectancy or
the joint life expectancy of you and your designated beneficiary and is
computed under annuity tables published by the Internal Revenue Service. In
determining the amount of the minimum distribution from your IRA for
any year, any amounts withdrawn from your IRA for the purpose of making a
rollover or transfer to another IRA will be considered as part of your IRA
for such year.

In order to insure that the minimum amount required to be distributed after
you reach age 70-1/2 or after you die is in fact paid out to you or your
beneficiary, a 50% federal excise tax will be imposed on the difference
between the amount of the distribution actually made and the amount that
should have been distributed, except that the IRS may waive the penalty if
it finds that the minimum requirement has not been met because of a
reasonable error and appropriate steps are being taken to correct the
error.The minimum requirement discussed above applies to each of your IRAs.
However, under current IRS rules, the total minimum distributions from all
of your IRAs may be taken from the IRA(s) of your choice.

(b) Excess Distributions. A 15% federal excise tax will generally
apply to the extent your annual distributions exceed the greater of
$150,000 or $112,500 (indexed annually for inflation). However, special
rules are applied when calculating excess distributions. This tax is
reduced by any payment of the 10% additional tax on premature distributions
(see Question 15). All retirement plan distributions, including
distributions from IRAs, are totaled to determine whether excess annual
distributions have been paid.

17. WHAT IF I AM INVOLVED IN A PROHIBITED TRANSACTION?

If you (or your beneficiary) engage in a so-called "prohibited transaction"
(as described in section 4975 of the Code) (e.g., borrowing money from your IRA)
with respect to your IRA, your IRA will lose its exemption from tax as of the
first day of the year in which the prohibited transaction occurs. In this event
you must include the entire amount, other than the portion attributable to
non-deductible contributions, in your IRA in your gross income for federal
income tax purposes in the taxable year in which you (or your beneficiary)
engaged in the prohibited transaction. If you have not reached age 59-1/2, you
must also pay the 10% additional tax on premature distributions on this amount.

18. WHAT IF I USE MY IRA AS SECURITY?

If you use all or any portion of your IRA as security for a loan, and even
if such transaction is not a "prohibited transaction" (as described in section
4975 of the Code), the taxable portion of the amount so used is nevertheless
considered to be distributed to you and must be included in your gross income.
In addition, if you have not attained age 59-1/2, you will have to pay the
additional 10% tax on the amount considered distributed to you and included in
your gross income.

19. WILL FEDERAL INCOME TAX BE WITHHELD FROM DISTRIBUTIONS TO ME?

Federal income tax will be withheld on any distributions you receive from
your IRA unless you elect not to have tax withheld. Generally, tax will be
withheld at the rate of 10% of each distribution. Notice of your right to elect
not to have federal income tax withheld will be given at the time you request a
withdrawal from your IRA. When distributions from your IRA have begun and are
being made on an annual, quarterly, or monthly basis, you will be provided with
a notice of your right to elect not to have tax withheld prior to the beginning
of each calendar year to which the notice relates.

20. WHAT ARE THE FEDERAL ESTATE AND GIFT TAX CONSEQUENCES FOR MY IRA?

(a) Gift Tax Consequences. Your designation of a beneficiary to
receive distributions from your IRA upon your death will not be considered
a transfer of property for federal gift tax purposes. (Contact a qualified
tax advisor for more information.)

(b) Estate Tax Consequences. Generally amounts remaining in your IRA
after your death will be includable in your gross estate for federal estate
tax purposes. However, there is an unlimited federal estate tax marital
deduction that is applicable when your spouse is your designated
beneficiary. You and your estate are also entitled to a unified credit for
federal transfer tax purposes. (Contact a qualified tax advisor for more
information.)

21. WHAT REPORTS MUST I MAKE TO THE IRS?

(a) You are not required to file Form 5329 (Return for Individual
Retirement Arrangement Taxes) with the IRS unless you owe one of the
penalty taxes for premature distributions, excess contributions, or under
distribution.

(b) You are required to file Form 8606 (Nondeductible IRA
Contributions, IRA Basis, and Nontaxable IRA Distributions) for any year
for which you choose to make nondeductible contributions.

22. HAS THE INTERNAL REVENUE SERVICE APPROVED THE IRA?

The First Funds IRA is derived from Internal Revenue Service Form 5305
which has been approved as to form by the IRS. IRS approval of such form does
not represent any opinion by the IRS as to the merits of a First Funds IRA.

23. WHERE CAN I OBTAIN FURTHER INFORMATION ABOUT IRAS?

Further information concerning IRAs may be obtained from any District
Office of the IRS.

24. HOW WILL MY IRA GROW?

The value of your First Funds IRA may increase or decrease as a result of
the investment performance of the Portfolio(s) in which your contributions are
invested. Thus, the rate of growth of your IRA cannot be guaranteed or
reasonably projected.

25. WHAT ARE THE CUSTODIAN'S CHARGES?

First Funds currently charges a $10 annual maintenance fee per IRA. The
annual maintenance fee is billed in November. If the fee is not paid by the
specified date in December, shares are redeemed to realize the fee.

Funds in which your IRA is invested may be subject to a 12b-1 Fee, an
investment adviser fee and other expenses of the Portfolio. These matters are
discussed in the prospectus(es) which you received prior to, or along with, this
pamphlet.

10
<PAGE>

C. QUALIFIED TAX ADVICE

The preceding is a general description of the manner in which IRAs are
taxed under the Internal Revenue Code. Because of the unfavorable tax
consequences which could result from improper establishment or use of a First
Funds IRA, you should consult with an attorney or other qualified tax advisor.
NEITHER FIRST FUNDS, FIRST TENNESSEE BANK NATIONAL ASSOCIATION, NOR ANY
PORTFOLIO OF FIRST FUNDS GIVES TAX OR OTHER LEGAL ADVICE OR ASSUMES ANY
LIABILITY FOR TAX OR OTHER CONSEQUENCES TO INVESTORS, THEIR SPOUSES, THEIR
BENEFICIARIES, OR ANY OTHER PARTIES ARISING FROM A FIRST FUNDS IRA.

D. MUTUAL FUND DISCLOSURE

FIRST FUNDS SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
FIRST TENNESSEE BANK NATIONAL ASSOCIATION (FIRST TENNESSEE) OR ITS AFFILIATES,
NOR ARE THEY INSURED BY THE FDIC OR ANY OTHER AGENCY. INVESTING IN FIRST FUNDS
INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED. FIRST FUNDS ARE MANAGED BY FIRST TENNESSEE, ONE OF ITS DIVISIONS,
GARLAND CAPITAL MANAGEMENT (GARLAND), PNC INSTITUTIONAL MANAGEMENT CORP. (PNC)
AND HIGHLAND CAPITAL MANAGEMENT CORP. (HIGHLAND). FIRST TENNESSEE AND HIGHLAND
ARE SUBSIDIARIES OF FIRST TENNESSEE NATIONAL CORPORATION. GARLAND SERVES AS
CO-ADMINISTRATOR TO FIRST FUNDS. ALPS MUTUAL FUNDS SERVICES, INC., 370 17TH
STREET, SUITE 2700, DENVER, CO 80202, THE DISTRIBUTOR OF FIRST FUNDS, IS NOT A
BANK, AND IS NOT AFFILIATED WITH FIRST TENNESSEE OR ANY OF ITS AFFILIATES.

FOR MORE COMPLETE INFORMATION ABOUT THE FIRST FUNDS FAMILY OF FUNDS, INCLUDING
CHARGES AND EXPENSES, OBTAIN A PROSPECTUS FROM ALPS MUTUAL FUNDS SERVICES, INC.,
MEMBER NASD, 370 17TH STREET, SUITE 2700, DENVER, CO 80202, OR CALL TOLL FREE
1-800-442-1941. READ IT CAREFULLY BEFORE INVESTING OR SENDING MONEY.

<PAGE>
<ARTICLE> 6
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<S> <C>
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<DISTRIBUTIONS-OF-INCOME> (2,145,885)
<DISTRIBUTIONS-OF-GAINS> (9,969,819)
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<NUMBER-OF-SHARES-SOLD> 1,875,264
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<GROSS-EXPENSE> 2,787,626
<AVERAGE-NET-ASSETS> 234,304,233
<PER-SHARE-NAV-BEGIN> 14.12
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> 3.75
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> (0.84)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.03
<EXPENSE-RATIO> 0.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
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<EXPENSES-NET> (2,435,513)
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<DISTRIBUTIONS-OF-GAINS> (309,364)
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<NUMBER-OF-SHARES-SOLD> 850,780
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</TABLE>

<PAGE>
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</TABLE>

<PAGE>
<ARTICLE> 6
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<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-END> JUN-30-1997
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<SHARES-COMMON-PRIOR> 11,082,542
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<INTEREST-INCOME> 8,012,928
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<EXPENSES-NET> (622,295)
<NET-INVESTMENT-INCOME> 7,390,633
<REALIZED-GAINS-CURRENT> 289,070
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<NET-CHANGE-FROM-OPS> 8,767,553
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,213,796)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,746,590
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<ACCUMULATED-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 1,104,859
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<PER-SHARE-NAV-BEGIN> 9.73
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> (0.61)
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</TABLE>

<PAGE>
<ARTICLE> 6
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 125,325,730
<INVESTMENTS-AT-VALUE> 124,854,001
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<NET-ASSETS> 126,578,701
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,012,928
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<REALIZED-GAINS-CURRENT> 289,070
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<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 78,480
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<ACCUMULATED-GAINS-PRIOR> 0
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<PER-SHARE-DIVIDEND> (0.57)
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<PER-SHARE-NAV-END> 9.81
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> BOND PORTFOLIO
<SERIES>
<NUMBER> 53
<NAME> CLASS III

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<PAGE>
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<CIK> 0000885092
<NAME> TENNESSEE TAX-FREE PORTFOLIO
<SERIES>
<NUMBER> 71
<NAME> CLASS I

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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> TENNESSEE TAX-FREE PORTFOLIO
<SERIES>
<NUMBER> 72
<NAME> CLASS II

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> TENNESSEE TAX-FREE PORTFOLIO
<SERIES>
<NUMBER> 73
<NAME> CLASS III

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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> U.S. TREASURY MONEY MARKET PORTFOLIO
<SERIES>
<NUMBER> 11
<NAME> CLASS I

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> U.S. TREASURY MONEY MARKET PORTFOLIO
<SERIES>
<NUMBER> 13
<NAME> CLASS III

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<SERIES>
<NUMBER> 21
<NAME> CLASS I

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<SERIES>
<NUMBER> 23
<NAME> CLASS III

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> MUNICIPAL MONEY MARKET PORTFOLIO
<SERIES>
<NUMBER> 31
<NAME> CLASS I

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> MUNICIPAL MONEY MARKET PORTFOLIO
<SERIES>
<NUMBER> 33
<NAME> CLASS III

<S> <C>
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<PERIOD-END> JUN-30-1997
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> CASH RESERVE PORTFOLIO
<SERIES>
<NUMBER> 61
<NAME> CLASS I

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> CASH RESERVE PORTFOLIO
<SERIES>
<NUMBER> 63
<NAME> CLASS III

<S> <C>
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</TABLE>