FIRST FUNDS, 485BPOS, 1998-10-27

FIRST FUNDS
485BPOS, 1998-10-27

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<PAGE>

As filed with the Securities and Exchange Commission on October 26, 1998

FILE NOs. 811-6589
33-46374
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
- --------------------------------------------------------------------------------
FORM N-1A
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
POST EFFECTIVE AMENDMENT NO. 16 [X]
And
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. __
- --------------------------------------------------------------------------------
FIRST FUNDS
(Exact name of registrant as specified in its charter)

370 17/th/ Street, Suite 3100
Denver, Colorado 80202
(Address of principal executive offices)(Zip Code)

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

James V. Hyatt, Secretary
First Funds
370 17/th/ Street, Suite 3100
Denver, Colorado 80202
(Name and address of agent for service)

Copy to:
Charles T. Tuggle, Jr., Esq.
Baker, Donelson, Bearman & Caldwell
165 Madison Avenue, Suite 2100
Memphis, TN 38103

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
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)(i)
[_] on (date) pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a) (ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485
IF APPROPRIATE; CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of securities being registered: Shares of Beneficial Interest, $1.00 par
value.

Registrant registered an indefinite number of shares pursuant to regulation
24f-2 under the Investment Company Act of 1940 on September 25, 1998.

================================================================================
<PAGE>

FIRST FUNDS

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

Form N-1A Item Number
- ---------------------
<TABLE>
<CAPTION>
<S> <C>
Part A Prospectus Caption
- ------ ------------------
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......................................................................................................*
</TABLE>
* Not Applicable
<PAGE>

FIRST FUNDS

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

Form N-1A Item Number
- ---------------------
<TABLE>
<CAPTION>
<S> <C>
Part A Prospectus Caption
- ------ ------------------
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.......................................................................................................*
</TABLE>
* Not Applicable

<PAGE>

FIRST FUNDS

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

Form N-1A Item Number
- ---------------------
<TABLE>
<CAPTION>
<S> <C>

Part A Prospectus Caption
- ------ ------------------
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.........................................................................................*
</TABLE>

* Not Applicable

<PAGE>

FIRST FUNDS

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

Form N-1A Item Number
- ---------------------
<TABLE>
<CAPTION>
<S> <C>

Part A Prospectus Caption
- ------ ------------------
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.............................................................................................*
</TABLE>
* Not Applicable

<PAGE>

FIRST FUNDS

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

Form N-1A Item Number
- ---------------------
<TABLE>
<CAPTION>
<S> <C>
Part A Prospectus Caption
- ------ ------------------
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.............................................................................................*
</TABLE>

* Not Applicable
<PAGE>

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

* 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
- ---------------------
<TABLE>
<CAPTION>
<S> <C>
Part B 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, 1998
........................for Class I, II and III of each Portfolio is filed herein as Item 24
</TABLE>

* 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
- ---------------------
<TABLE>
<CAPTION>
<S> <C>
Part B 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, 1998
....................for Class I, II andIII of the Portfolio is filed herein as Item 24
</TABLE>

* 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.........................................................................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.........................................................................................Performance
b...................................................................................................*
23.......................................Financial Information for the annual period ended June 30, 1998
....................................for Class I, II and III of each Portfolio is filed herein as Item 24
</TABLE>
* Not Applicable
<PAGE>

[FIRST FUNDS LOGO]

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

- --------------------------------------------------------------------------------
PROSPECTUS FOR CLASSES I, II, AND III
October 26, 1998
- --------------------------------------------------------------------------------

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 26, 1998) 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, 1998 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.

FFG&I-pro-1098
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----

Summary Of Portfolio Expenses.............................................3

Financial Highlights......................................................4

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?......................7

How Is Performance Calculated?...........................................15

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, 1998. 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
(as a percentage of original purchase
price or redemption proceeds, as
applicable) None None 1.00%*
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 .28% .63% .62%
---- ---- ----

Total Portfolio Operating Expenses** .78% 1.13% 1.87%
==== ===== =====

* Applied to redemptions made during the first year after purchase. No deferred
sales charges are imposed on redemptions after one year from date of
purchase.
** 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 .93% 1.28% 2.02%

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. 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 $ 8 $ 68* $ 19
3 years $25 $ 92* $ 59
5 years $43 $116* $102
10 years $97 $188* $221

*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, 1998 and has been audited by PricewaterhouseCoopers 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.

<TABLE>
<CAPTION>
GROWTH & INCOME PORTFOLIO
CLASS I
--------------------------------------------------------
For the Year Ended June 30,
--------------------------------------------------------
1998 1997 1996 1995 1994**
-------- -------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 17.03 $ 14.12 $ 12.22 $ 10.53 $ 10.00
--------------------------------------------------------
Income from investment operations:
Net investment income 0.17 0.18 0.19 0.23 0.17
Net realized and unrealized gain on investments 5.25 3.75 2.58 2.21 0.57
--------------------------------------------------------
Total from investment operations 5.42 3.93 2.77 2.44 0.74
--------------------------------------------------------
Distributions:
Net investment income (0.17) (0.18) (0.19) (0.23) (0.17)
Net realized gain (0.72) (0.84) (0.68) (0.52) (0.04)
--------------------------------------------------------
Total distributions (0.89) (1.02) (0.87) (0.75) (0.21)
--------------------------------------------------------
Net asset value, end of period $ 21.56 $ 17.03 $ 14.12 $ 12.22 $ 10.53
========================================================
TOTAL RETURN+ 32.55% 28.83% 23.54% 24.20% 7.39%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $651,363 $221,136 $ 159,146 $ 114,000 $82,751
Ratio of expenses to average daily net assets(1) 0.82% 0.83% 0.76% 0.47% 0.34%*
Ratio of net investment income to average net assets 0.78% 1.19% 1.40% 2.12% 1.83%*
Portfolio turnover rate 7% 25% 41% 33% 83%*

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.97% 0.98% 1.00% 0.99% 1.05%*
</TABLE>

4
<PAGE>
<TABLE>
<CAPTION>
CLASS II
------------------------------------

For the Year Ended June 30,
------------------------------------
1998 1997 1996**
-------- ---------- -------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 17.05 $ 14.12 $ 13.05
Income from investment operations: ------------------------------------
Net investment income 0.10 0.13 0.09
Net realized and unrealized gain on investments 5.27 3.76 1.74
------------------------------------
Total from investment operations 5.37 3.89 1.83
Distributions: ------------------------------------
Net investment income (0.12) (0.12) (0.08)
Net realized gain (0.72) (0.84) (0.68)
------------------------------------
Total distributions (0.84) (0.96) (0.76)
------------------------------------
Net asset value, end of period $ 21.58 $ 17.05 $ 14.12
====================================
TOTAL RETURN+ 32.17%*** 28.48%*** 14.71%#***

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 46,863 $ 16,514 $ 1,918
Ratio of expenses to average daily net assets(1) 1.13% 1.14% 1.06%*
Ratio of net investment income to average net assets 0.47% 0.88% 1.10%*
Portfolio turnover rate 7% 25% 41%

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
Such waivers not occurred is as follows. 1.28% 1.29% 1.30%*
</TABLE>

<TABLE>
<CAPTION>
CLASS III
--------------------------------------------------------

For the Year Ended June 30,
--------------------------------------------------------
1998 1997 1996 1995 1994**
-------- -------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 16.99 $ 14.11 $ 12.23 $ 10.51 $ 10.60
--------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.04) 0.02 0.03 0.06 0.06
Net realized and unrealized gain (loss) on
investments 5.24 3.74 2.60 2.24 (0.05)
--------------------------------------------------------
Total from investment operations 5.20 3.76 2.63 2.30 0.01
--------------------------------------------------------
Distributions:
Net investment income 0.00 (0.04) (0.07) (0.06) (0.06)
Net realized gain (0.72) (0.84) (0.68) (0.52) (0.04)
--------------------------------------------------------
Total distributions (0.72) (0.88) (0.75) (0.58) (0.10)
--------------------------------------------------------
Net asset value, end of period $ 21.47 $ 16.99 $ 14.11 $ 12.23 $ 10.51
========================================================
TOTAL RETURN+ 31.16% 27.44% 22.19% 22.61% 0.08%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 79,360 $ 50,178 $ 36,892 $ 19,363 $ 2,094
Ratio of expenses to average daily net assets(1) 1.87% 1.94% 1.87% 1.72% 1.83%*
Ratio of net investment income to average net assets (0.28)% 0.08% 0.29% 0.87% 0.34%*
Portfolio turnover rate 7% 25% 41% 33% 83%*

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 2.02% 2.09% 2.11% 2.26% 6.03%*
</TABLE>
* Annualized.
** Class 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.

5
<PAGE>
- --------------------------------------------------------------------------------
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. Highland believes that companies with superior financial
characteristics bought at attractive valuation levels, have produced superior
results over time. To find such characteristics, Highland's analysts search for
companies producing consistent earnings and growth over a full market cycle.
The portfolio managers use this research to select stocks for purchase or sale
by the Portfolio.

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 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.

6
<PAGE>

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.

YEAR 2000 RISKS. The Portfolio, as with other financial and business
organizations in the United States and around the world, could be adversely
affected if computer systems used by the Portfolio's service providers,
including its investment advisers, fail to correctly interpret and process date
information concerning dates occurring on and after January 1, 2000. The
Portfolio's service providers, including its investment advisers, have taken and
continue to take steps to address this issue. However, there is no assurance
that these steps will be sufficient to avoid an adverse impact on the Portfolio
as a result of this issue.

- --------------------------------------------------------------------------------
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.

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.

7
<PAGE>

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 ( the Transfer Agent). If an order is received by
the Transfer Agent 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 the Transfer Agent 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 the Transfer Agent. 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 the Transfer Agent 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 the
Transfer Agent 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.

Institutional Investors may make redemptions by wire provided they have
established a wire account with the Transfer Agent. Please call 1-800-442-1941,
(option 2) to advise the Transfer Agent 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 the Transfer Agent. 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 the Transfer Agent
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.

8
<PAGE>

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 the Transfer Agent 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 the
Transfer Agent 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.

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.

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 the Transfer Agent 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 the Transfer Agent
before 4:00 p.m. Eastern Time in order for you to receive that day's share
price. The Transfer Agent must receive payment within three business days after
an order is placed. Otherwise, the purchase order may be canceled and you

9
<PAGE>

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
the Transfer Agent 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 First Funds, 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 the Transfer
Agent 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 the Transfer Agent. 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.

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
the Transfer Agent 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.

10
<PAGE>

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 the Transfer Agent 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 the Transfer Agent. 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 First Funds 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 the Transfer Agent by telephone (for example,
during times of unusual market activity), consider placing your order by mail
directly to the Transfer Agent. 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 calling the Transfer Agent 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. The Transfer Agent 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).

11
<PAGE>

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:

<TABLE>
<CAPTION>
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.

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, 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).

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<PAGE>

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."

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."

DEFERRED SALES CHARGES. A contingent deferred sales charge (CDSC) of 1.00% is
imposed on redemptions of Class III shares within the first year after purchase,
based on the lower of the shares' cost and the current net asset value. Any
shares acquired by reinvestment of distributions will be redeemed without a
CDSC. In addition, shares purchased prior to October 30, 1998 are not subject
to the CDSC.

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.

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<PAGE>

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.

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

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<PAGE>

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, 1998 was 7%.

- --------------------------------------------------------------------------------
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 quarterly.

FEDERAL TAXES. Distributions of gains from the sale of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. 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 October, November or
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.

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<PAGE>

REDEMPTIONS AND EXCHANGES. 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 shareholder or, if
Class I, the Institutional Investor, and the IRS annually. However, the tax
treatment also depends on the purchase price and your personal tax position.

"BUYING A DIVIDEND." On the record date for a distribution of income or
capital gains, 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 $16 billion in assets under administration
(including nondiscretionary accounts) and $4 billion in assets under management
as of June 30, 1998, as well as experience in supervising sub-advisers.

Highland, 6077 Primacy Parkway, Memphis, TN, 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 $4.3 billion in assets under management as of
June 30, 1998. 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.

16
<PAGE>

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. (the Transfer Agent), provides transfer agent and
related services for the Portfolio. Chase Manhattan Bank, N.A. is Custodian of
the Portfolio's assets.

PRICING AND ACCOUNTING. Chase Global Funds Services Company 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 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

Edward J. Goldstein, one of the Portfolio Managers for the Portfolio, is a
Director and 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.

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<PAGE>
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.

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.

18
<PAGE>
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 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.

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.

19
<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>

[FIRST FUNDS LOGO]

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

- -------------------------------------------------------------------------------
PROSPECTUS FOR CLASSES I, II, AND III
October 26, 1998
- -------------------------------------------------------------------------------

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 26, 1998) for the
Portfolio has been filed with the Securities and Exchangailable free upon
request from ALPS Mutual Funds Services, Inc., (ALPS), the Portfolio's
Distributor. The Annual Report for the fiscal period ended June 30, 1998 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.

FFCA-pro-1098
<PAGE>
- ----------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>

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................ 5

What Are The Portfolio's Investment Policies And Limitations?............ 6

How Are Investments, Exchanges And Redemptions Made?..................... 6

How Is Performance Calculated?...........................................14

Portfolio Transactions...................................................14

What Is The Effect Of Federal Income Tax On This Investment?.............14

What Advisory And Other Fees Does The Portfolio Pay?.....................15

How Is The Portfolio Organized?..........................................16

Investment Instruments, Transactions, Strategies And Risks...............16
- ----------------------------------------------------------------------------
</TABLE>

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 period ended June 30, 1998. This
expense information should be considered along with other important information,
such as the Portfolio's investment objective.

A. EXPENSE SUMMARY

<TABLE>
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO
--------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
-------- --------- ----------
<S> <C> <C> <C>
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
(as a percentage of original purchase
price or redemption proceeds, as
applicable) None None 1.00%*
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 .46% .82% .83%
-------- --------- ----------

Total Portfolio Operating Expenses** 1.16% 1.52% 2.28%
======== ========= ==========
</TABLE>
* Applied to redemptions made during the first year after purchase. No
deferred sales charges are imposed on redemptions after one year from
date of purchase.
** 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. 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. Total Portfolio Operating Expenses would be
as follows:

CAPITAL APPRECIATION PORTFOIO
-----------------------------
CLASS I CLASS II CLASS III
------- -------- ----------
Total Portfolio Operating Expenses 1.31% 1.67% 2.43%

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:

<TABLE>
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO
------------------------------
CLASS I CLASS II CLASS III
------- --------- ---------
<S> <C> <C> <C>
1 year $12 $72* $23
3 years $33 $99* $68
</TABLE>
*Reflects imposition of maximum sales charge at the beginning of the period.

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

CAPITAL APPRECIATION PORTFOLIO
<TABLE>
<CAPTION>

CLASS I CLASS II CLASS III
For the Period For the Period For the Period
Ended June 30**, Ended June 30,** Ended June 30,**
----------------- ----------------- -----------------
1998 1998 1998
---- ---- ----
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.00 $ 10.51 $ 10.51
----------------- ----------------- -----------------
Income from investment operations:
Net investment loss (0.03) (0.05) (0.10)
Net realized and unrealized gain on
investments 0.77 0.25 0.23
----------------- ----------------- -----------------
Total from investment operations 0.74 0.20 0.13
----------------- ----------------- -----------------
Net asset value, end of period $ 10.74 $ 10.71 $ 10.64
================= ================= =================
TOTAL RETURN+ 7.40%# 1.90%#*** 1.24%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 37,014 $ 1,400 $ 590
Ratio of expenses to average daily net assets(1) 1.16%* 1.52%* 2.28%*
Ratio of net investment loss to average net assets (0.54)%* (0.90)%* (1.65)%*
Portfolio turnover rate 44%* 44%* 44%*

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 1.36%* 1.72%* 2.47%*
</TABLE>
* Annualized.
** Class I commenced operations on September 2, 1997 and Classes II and III
commenced operations on October 2, 1997.
*** 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.

4
<PAGE>
- -------------------------------------------------------------------------------
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. IAI uses
fundamental research and analysis when selecting securities for purchase or sale
by the Portfolio. This includes meetings with senior management, on site
examinations of operations, and analysis of a company's market, competition,
customers and vendors. 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 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.

The 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.

- -------------------------------------------------------------------------------
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.

5
<PAGE>

correlate well with the Portfolio's investment strategy. 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.

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.

Class I
- -------

Who May Invest?

6
<PAGE>

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 (the Transfer Agent). If an order is received by
the Transfer Agent 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 the Transfer Agent 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 the
Transfer Agent. 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 the Transfer Agent 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?

7
<PAGE>

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
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 the
Transfer Agent 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.

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 the Transfer Agent 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 the Transfer Agent
before 4:00 p.m. Eastern time in order for you to receive that day's share
price. The Transfer Agent must receive payment within three business days after
an order is placed. Otherwise, the purchase order may be canceled and you

8
<PAGE>

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
the Transfer Agent 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 the
Transfer Agent 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:

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.

9
<PAGE>

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 the Transfer Agent. 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 First Funds at 73 Tremont Street, Boston, Massachusetts,
02108.

How Do I Invest Through My Investment Professional?

SYSTEMATIC INVESTING PROGRAM

SYSTEMATIC WITHDRAWAL PLAN

ADDITIONAL INFORMATION

10
<PAGE>

CLASS II
- --------

PUBLIC OFFERING PRICE

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>

QUANTITY DISCOUNTS

11
<PAGE>

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. I f
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.

- 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?

12
<PAGE>

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.

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

13
<PAGE>

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. The Portfolio's turnover rate for the fiscal period ended
June 30, 1998 was 44%.

14
<PAGE>

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 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, foundations, religious,
educational and charitable institutions, trusts, municipalities and individuals,
having total assets in excess of $7 billion as of June 30, 1998. 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 P.O. Box 357, Minneapolis, Minnesota
55440-0357.

15
<PAGE>

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.

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. Chase Global Funds Services Company 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?
- --------------------------------------------------------------------------------

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.

16
<PAGE>

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. 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.

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.

17
<PAGE>

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 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.

18
<PAGE>
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19
<PAGE>

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

First Tennessee Bank National Association
Memphis, TN

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

Investment Advisers, 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>

[FIRST FUNDS 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 26, 1998) 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, 1998 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.

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.

<PAGE>
- -------------------------------------------------------------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>

Summary Of Portfolio Expenses............................................ 3

Financial Highlights..................................................... 4

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 Federal Income Tax On This Investment?............. 16

What Advisory And Other Fees Does The Portfolio Pay?..................... 16

How Is The Portfolio Organized?.......................................... 18

Investment Instruments, Transactions, Strategies And Risks............... 18
- -------------------------------------------------------------------------------
</TABLE>
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, 1998 adjusted to
reflect the waiver of 12b-1 fees for Class III (see discussion under "Annual
Portfolio Operating Expenses" below). This expense information should be
considered along with other important information such as the Portfolio's
investment objective.

<TABLE>
<CAPTION>
A. EXPENSE SUMMARY

BOND PORTFOLIO
--------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
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 Load
(as a percentage of original purchase
price or redemption proceeds, as
applicable) None None 1.00%*
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% .50%
Other Expenses .34% .69% .77%
------- ------- --------
Total Portfolio Operating Expenses** .49% .84% 1.42%
======= ======= ========
</TABLE>
* Applied to redemptions made during the first year after purchase. No
deferred sales charges are imposed on redemptions after one year from
date of purchase.
** After expense waivers or limitations.

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. In addition, the Board of Trustees has
limited the payment of 12b-1 fees under the Distribution Plan to .50% (see "What
Advisory and Other Fees Does the Portfolio Pay - Distribution Plan and
Shareholder Servicing Plans"). Absent these waivers and limitations, Total
Portfolio Operating Expenses would be as follows:

BOND PORTFOLIO
----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Total Portfolio Operating Expenses .89% 1.24% 1.82%

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 shares of the Portfolio
to ALPS for services and expenses in connection with distribution. Shareholder
Servicing Fees are paid by Class II and III shares 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. 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:

<TABLE>
<CAPTION>
BOND PORTFOLIO
-----------------------------

CLASS I CLASS II CLASS III
------- --------- ---------
<S> <C> <C> <C>
1 year $ 5 $ 46* $ 25
3 years $16 $ 63* $ 45
5 years $27 $ 83* $ 78
10 years $62 $138* $171
</TABLE>
*Reflects imposition of maximum sales charge at the beginning of the period.

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

BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
----------------------------------------------------------
For the Year Ended June 30,
----------------------------------------------------------
1998 1997 1996 1995 1994**
-------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.84 $ 9.73 $ 9.91 $ 9.41 $ 10.00
----------------------------------------------------------
Income from investment operations:
Net investment income 0.61 0.61 0.60 0.57 0.45
Net realized and unrealized gain (loss) on
investments 0.45 0.11 (0.18) 0.50 (0.57)
----------------------------------------------------------
Total from investment operations 1.06 0.72 0.42 1.07 (0.12)
----------------------------------------------------------
Distributions:
Net investment income (0.61) (0.61) (0.60) (0.57) (0.46)
Net realized gain - - - - (0.01)
----------------------------------------------------------
Total distributions (0.61) (0.61) (0.60) (0.57) (0.47)
----------------------------------------------------------
Net asset value, end of period $ 10.29 $ 9.84 $ 9.73 $ 9.91 $ 9.41
==========================================================

TOTAL RETURN+ 11.02% 7.58% 4.23% 11.87% (1.38)%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $219,088 $123,184 $ 107,832 $ 90,574 $ 75,686
Ratio of expenses to average daily net assets (1) 0.49% 0.49% 0.41% 0.35% 0.36%*
Ratio of net investment income to average net assets 5.98% 6.20% 5.99% 6.07% 5.07%*
Portfolio turnover rate 26% 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% 0.89% 0.91% 0.91% 0.96%*
</TABLE>

4
<PAGE>
<TABLE>
<CAPTION>
CLASS II
-----------------------------------
For the Year Ended June 30,
-----------------------------------
1998 1997 1996**
-------- --------- -----------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.81 $ 9.71 $ 10.18
-----------------------------------
Income from investment operations:
Net investment income 0.57 0.57 0.29
Net realized and unrealized gain (loss) on
investments 0.46 0.10 (0.47)
-----------------------------------
Total from investment operations 1.03 0.67 (0.18)
-----------------------------------
Distributions:
Net investment income (0.58) (0.57) (0.29)
-----------------------------------
Total distributions (0.58) (0.57) (0.29)
-----------------------------------
Net asset value, end of period $ 10.26 $ 9.81 $ 9.71
===================================

TOTAL RETURN+ 10.72%*** 7.12%*** (1.75)%#***

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 1,801 $ 841 $ 67
Ratio of expenses to average daily net assets(1) 0.84% 0.90% 0.80%*
Ratio of net investment income to average net assets 5.63% 5.79% 5.61%*
Portfolio turnover rate 26% 56% 56%

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 1.24% 1.30% 1.30%*
</TABLE>

<TABLE>
<CAPTION>
CLASS III
----------------------------------------------------------

For the Year Ended June 30,
----------------------------------------------------------
1998 1997 1996 1995 1994**
-------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.82 $ 9.71 $ 9.89 $ 9.40 $ 10.04
----------------------------------------------------------
Income from investment operations:
Net investment income 0.48 0.49 0.49 0.43 0.21
Net realized and unrealized gain (loss) on
investments 0.46 0.11 (0.18) 0.49 (0.62)
----------------------------------------------------------
Total from investment operations 0.94 0.60 0.31 0.92 (0.41)
----------------------------------------------------------
Distributions:
Net investment income (0.49) (0.49) (0.49) (0.43) (0.22)
Net realized gain - - - - (0.01)
----------------------------------------------------------
Total distributions (0.49) (0.49) (0.49) (0.43) (0.23)
----------------------------------------------------------
Net asset value, end of period $ 10.27 $ 9.82 $ 9.71 $ 9.89 $ 9.40
==========================================================

TOTAL RETURN+ 9.72% 6.37% 3.11% 10.12% (4.19)%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 2,113 $ 2,553 $ 3,445 $ 1,916 $ 923
Ratio of expenses to average daily net assets(1) 1.67% 1.63% 1.49% 1.84% 1.82%*
Ratio of net investment income to average net assets 4.80% 5.07% 4.92% 4.58% 3.61%*
Portfolio turnover rate 26% 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. 2.07% 2.03% 1.99% 3.35% 6.36%*
</TABLE>
* Annualized.
** Class 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.

5
<PAGE>
- -------------------------------------------------------------------------------
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 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 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. Highland's investment management process includes an initial
analysis of the economy's business cycle as a means of evaluating inflation
levels. The portfolio managers use this evaluation to help guide their
selection of fixed income securities.

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,

6
<PAGE>

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.

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

(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.

7
<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 (the Transfer Agent). If an order is received by
the Transfer Agent 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 the Transfer Agent 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 the Transfer Agent. 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 the Transfer Agent 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.

8
<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 the
Transfer Agent 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 the Transfer Agent. Please call 1-800-442-1941
(option 2) to advise the Transfer Agent 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 the Transfer Agent. 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 the Transfer Agent
at 73 Tremont Street, Boston, Massachusetts, 02108.

If transactions by telephone cannot be executed (for example, during times of
unusual market activity), orders may be placed by mail to the Transfer Agent.
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

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 the
Transfer Agent for instructions.

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

WHO MAY INVEST?

INVESTMENT REQUIREMENTS

9
<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.

HOW DO I SET UP AN ACCOUNT?

HOW DO I INVEST DIRECTLY?

Investments may be made in several ways:

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 the Transfer Agent 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*

10
<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 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.

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

11
<PAGE>

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 the Transfer Agent 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>

12
<PAGE>

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.

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 3.50% 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.

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

13
<PAGE>

- 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.

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:

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?

14
<PAGE>

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.

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?
- --------------------------------------------------------------------------------

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.

15
<PAGE>
- -------------------------------------------------------------------------------
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. The Bond Portfolio's portfolio turnover rate for the fiscal year
ended June 30, 1998 was 26%.

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

FEDERAL TAXES. Distributions of gains from the sale of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. Distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except that
distributions declared in October, November or 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.

REDEMPTIONS AND EXCHANGES. 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 shareholder or, if
Class I, the Institutional Investor and the IRS annually. However, the tax
treatment also depends on the purchase price and your personal tax position.

"BUYING A DIVIDEND." On the record date for a distribution of income or
capital gains, 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.

- -------------------------------------------------------------------------------
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 .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.

16
<PAGE>

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, 6077 Primacy Parkway, Memphis, TN, 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 $4.3 billion in assets under management as of June 30, 1998. 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. (the Transfer Agent) 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. Chase Global Funds Services Company 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; however, the Trustees have
limited such fees to .50% of Class III's average net assets. All or a portion
of these fees will in turn be paid to Service Organizations 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 Investment Professionals 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.

17
<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 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.

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.

18
<PAGE>

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.

19
<PAGE>

could have the effect of increasing the level of Portfolio illiquidity if
qualified institutional buyers become, for a time, uninterested in purchasing
these securities.

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. 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.

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.

20
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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>

[FIRST FUNDS 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
six 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 26, 1998) 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. The Annual Report for the
fiscal period ended June 30, 1998 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

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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>

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.................. 5

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..................................................... 15

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?............................................ 17

Investment Instruments, Transactions, Strategies And Risks................. 17

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</TABLE>

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, 1998 adjusted to
reflect the waiver of 12b-1 fees for Class III (see discussion under "Annual
Portfolio Operating Expenses" below). This expense information should be
considered along with other important information such as the Portfolio's
investment objective.

<TABLE>
<CAPTION>
A. EXPENSE SUMMARY
INTERMEDIATE BOND PORTFOLIO
------------------------------

SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
------- -------- ---------
<S> <C> <C> <C>
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
(as a percentage of original purchase
price or redemption proceeds, as
applicable) None None 1.00%*
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% .50%
Other Expenses .37% .65% .65%
------- ------- ------

Total Portfolio Operating Expenses** .37% .65% 1.15%
</TABLE>
* Applied to redemptions made during the first year after purchase. No deferred
sales charges are imposed on redemptions after one year from date of
purchase.
** After expense waivers or limitations.

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. 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. In addition, the Board of Trustees has
limited payments of 12b-1 fees under the Distribution Plan to .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, Total Portfolio Operating Expenses would be as
follows:

INTERMEDIATE BOND PORTFOLIO
----------------------------
CLASS I CLASS II CLASS III
------- -------- ---------
Total Portfolio Operating Expenses .87% 1.15% 1.90%

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

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<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 shares of the Portfolio
to ALPS for services and expenses in connection with distribution. Shareholder
Servicing Fees are paid by Class II and III shares 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. 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:
<TABLE>
<CAPTION>
INTERMEDIATE BOND PORTFOLIO
-----------------------------

CLASS I CLASS II CLASS III
------- --------- ---------
<S> <C> <C> <C>
1 year $ 4 $44* $22
3 years $13 $60* $40
</TABLE>
*Reflects imposition of maximum sales charge at the beginning of the period.

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FINANCIAL HIGHLIGHTS
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INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS I CLASS II CLASS III
--------------------------------------------------------------
For the Period For the Period For the Period
Period Ended June 30**, Ended June 30,** Ended June 30,**
--------------------------------------------------------------
1998 1998 1998
------------------------ ----------------- -----------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.00 $ 9.99 $ 9.99
--------------------------------------------------------------
Income from investment operations:
Net investment income 0.19 0.18 0.06
Net realized and unrealized gain (loss) on
investments 0.02 0.03 0.03
--------------------------------------------------------------
Total from investment operations 0.21 0.21 0.09
--------------------------------------------------------------
Distributions:
Net investment income (0.19) (0.18) (0.06)
--------------------------------------------------------------
Total distributions (0.19) (0.18) (0.06)
--------------------------------------------------------------
Net asset value, end of period $ 10.02 $ 10.02 $ 10.02
==============================================================

TOTAL RETURN+ 2.17%# 2.07%#*** 0.92%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $199,872 $ 923 $ 17
Ratio of expenses to average daily net assets(1) 0.37%* 0.65%* 1.35%*
Ratio of net investment income to average net assets 5.87%* 5.59%* 4.89%*
Portfolio turnover rate 9%* 9%* 9%*

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.87%* 1.16%* 1.86%*
</TABLE>
* Annualized.
** Class I, II and III commenced operations on March 2, 1998, March 9, 1998
and May 19, 1998, 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 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 Martin & Company, Inc. (Martin), to act as
Sub-Adviser to the Portfolio. Subject to First Tennessee's supervision, Martin
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 six 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 Martin. 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.

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. The Sub-Adviser believes
that the intermediate maturity sector of the bond market provides returns almost
equal to longer maturities over a full market cycle, with less volatility. The
portfolio construction process involves an analysis of real return potential for
bonds, establishment of a target duration, yield curve and sector spread
analysis, and a seven factor risk analysis for individual securities.

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

5
<PAGE>

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. Martin 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 Martin 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.

Martin believes that by lessening the effect of bond market declines,
investors should experience greater overall returns; accordingly, Martin 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. Martin 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:

(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.

6
<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 (the Transfer Agent). If an order is received by
the Transfer Agent 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 the Transfer Agent 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 the
Transfer Agent. 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 the Transfer Agent 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.

7
<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 the
Transfer Agent 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

In order to allow Martin 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 the Transfer Agent 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 the
Transfer Agent for instructions.

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

WHO MAY INVEST?

INVESTMENT REQUIREMENTS

8
<PAGE>

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.

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 the Transfer Agent 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 the Transfer Agent
before 4:00 p.m. Eastern time in order for you to receive that day's share
price. The Transfer Agent 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 First Funds, 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 the
Transfer Agent 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. 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*

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<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 the Portfolio
is open for business. Shares will be redeemed at the NAV next calculated after
the Transfer Agent 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 the Transfer Agent. 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 First Funds at 73 Tremont Street, Boston, Massachusetts,
02108.

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

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<PAGE>

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 the Transfer Agent 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

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>

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<PAGE>

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.

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<PAGE>

- 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.

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 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?

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<PAGE>

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.

STATEMENTS AND REPORTS

- --------------------------------------------------------------------------------
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.

14
<PAGE>
- -------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------

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 of gains from the sale of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. Distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except that
distributions declared in October, November or 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.

"BUYING A DIVIDEND." On the record date for a distribution of income or
capital gains, 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 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.

15
<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.

Martin 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. In January 1998, Martin became an
investment advisory subsidiary of First Tennessee National Corporation, which
also owns First Tennessee. Martin and its predecessors have been in the
investment advisory business for over 8 years and have considerable experience
in securities selection, including expertise in the selection of fixed-income
securities. Martin has not previously advised or sub-advised a registered
investment company such as First Funds, although Martin is subject to the
supervision of First Tennessee, which has a history of investment management
since 1929 and has served as the investment adviser to First Funds since its
inception in 1992. Martin has a total of $1.6 billion in assets under
management as of June 30, 1998.

First Tennessee is obligated to pay Martin a monthly sub-advisory fee at the
annual rate of 0.30% of the Portfolio's average net assets. The Portfolio is
not responsible for paying any portion of Martin's sub-advisory fee. Martin has
agreed to voluntarily waive its sub-advisory fee, although this waiver could be
discontinued in whole or in part at any time. Martin's principal office is
located at Two Centre Square, Suite 200, 625 South Gay Street, Knoxville, TN
37902.

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.

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. Chase Global Funds Services Company 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. 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; however, the Trustees have
limited such fees to .50% 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 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.

16
<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

Ralph W. Herbert, Vice President and Fixed Income Portfolio Manager with
Martin, is a co-manager for the Intermediate Bond Portfolio. Mr. Herbert has
over 19 years of experience in the financial services industry and specializes
in fixed-income securities. Mr. Herbert is a 1977 graduate of The University of
Tennessee.

Ted L. Flickinger, Jr., Senior Vice President and Fixed Income Portfolio
Manager with Martin, co-manages the Intermediate Bond Portfolio with Mr.
Herbert. Mr. Flickinger is a Chartered Financial Analyst and has over 20 years
of experience in the investment management industry, at least 8 of which have
been with Martin concentrating on fixed-income securities. Mr. Flickinger is a
1977 graduate of The University of Tennessee.

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

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 Martin determines they are
consistent with the Portfolio's investment objective and policies.

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.

17
<PAGE>

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. Martin 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 Martin 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.

ILLIQUID SECURITIES. Under guidelines established by the Board of Trustees,
Martin, 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.

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 (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 Martin
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, Martin 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.

19
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INVESTMENT ADVISER
------------------

First Tennessee Bank National Association
Memphis, TN

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

Martin & Company, Inc.
Knoxville, 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>

[FIRST FUNDS 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.

<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>

Summary Of Portfolio Expenses.............................................. 3

Financial Highlights....................................................... 4

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?.............. 8

How Are Investments, Exchanges And Redemptions Made?....................... 9

How Is Performance Calculated?............................................. 16

Portfolio Transactions..................................................... 16

What Is The Effect Of Income Tax On This Investment?....................... 17

What Advisory And Other Fees Does The Portfolio Pay?....................... 17

How Is The Portfolio Organized?............................................ 19

Investment Instruments, Transactions, Strategies and Risks................. 19

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

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, 1998 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

<TABLE>
<CAPTION>
TENNESSEE TAX-FREE PORTFOLIO
-------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS I CLASS II CLASS III
-------- --------- ----------
<S> <C> <C> <C>
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
(as a percentage of original purchase
price or redemption proceeds, as
applicable) None None 1.00%*
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** .35% .41% .40%
------- ------- -------

Total Portfolio Operating Expenses** .35% .41% .65%
</TABLE>
* Applied to redemptions made during the first year after purchase. no deferred
sales charges are imposed on redemptions after one year from date of
purchase.
** After expense waivers, limitations 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 waiver
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 .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:

<TABLE>
<CAPTION>
TENNESSEE TAX-FREE PORTFOLIO
-------------------------------
CLASS I CLASS II CLASS III
-------- --------- ----------
<S> <C> <C> <C>
Other Expenses .35% .66% .65%
Total Portfolio Operating Expenses .85% 1.16% 1.90%
</TABLE>

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:

<TABLE>
<CAPTION>
TENNESSEE TAX-FREE PORTFOLIO
-----------------------------
CLASS I CLASS II CLASS III
------- --------- ---------
<S> <C> <C> <C>
1 year $ 4 $42* $ 7
3 years $11 $50* $21
5 years $20 $60* $36
10 years $44 $87* $81
</TABLE>
*Reflects imposition of maximum sales charge at the beginning of the period.

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

TENNESSEE TAX-FREE PORTFOLIO
<TABLE>
<CAPTION>

CLASS I
------------------------------------
For the Year Ended June 30,
------------------------------------
1998 1997 1996**
--------- --------- ------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.99 $ 9.71 $ 10.00
------------------------------------
Income from investment operations:
Net investment income 0.48 0.50 0.23
Net realized and unrealized gain (loss) on
investments 0.32 0.28 (0.29)
------------------------------------
Total from investment operations 0.80 0.78 (0.06)
------------------------------------
Distributions:
Net investment income (0.48) (0.50) (0.23)
------------------------------------
Total distributions (0.48) (0.50) (0.23)
------------------------------------
Net asset value, end of period $ 10.31 $ 9.99 $ 9.71
====================================
TOTAL RETURN+ 8.16% 8.26% (0.65)%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 176,884 $ 8,935 $ 5,925
Ratio of expenses to average daily net assets (1) 0.31% 0.07% 0.50%*
Ratio of net investment income to average net assets 4.71% 5.09% 4.31%*
Portfolio turnover rate 15% 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. 0.85% 1.14% 1.42%*
</TABLE>
4
<PAGE>

CLASS II
------------------------------------
For the Year Ended June 30,
------------------------------------
1998 1997 1996**
--------- --------- ------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.01 $ 9.73 $ 10.06
------------------------------------
Income from investment operations:
Net investment income 0.48 0.51 0.21
Net realized and unrealized gain (loss) on
investments 0.33 0.28 (0.33)
------------------------------------
Total from investment operations 0.81 0.79 (0.12)
------------------------------------
Distributions:
Net investment income (0.48) (0.51) (0.21)
------------------------------------
Total distributions (0.48) (0.51) (0.21)
------------------------------------
Net asset value, end of period $ 10.34 $ 10.01 $ 9.73
====================================
TOTAL RETURN+ 8.22%*** 8.37%*** (1.25)%#***

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 8,973 $ 5,941 $ 1,875
Ratio of expenses to average daily
Net assets (1) 0.37% 0.12% 0.49%*
Ratio of net investment income to average net assets 4.65% 5.03% 4.32%*
Portfolio turnover rate 15% 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. 0.91% 1.14% 1.42%*
</TABLE>

CLASS III
------------------------------------
For the Year Ended June 30,
------------------------------------
1998 1997 1996**
--------- --------- ------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.00 $ 9.72 $ 10.00
------------------------------------
Income from investment operations:
Net investment income 0.45 0.50 0.19
Net realized and unrealized gain (loss) on
investments 0.32 0.28 (0.28)
------------------------------------
Total from investment operations 0.77 0.78 (0.09)
------------------------------------
Distributions:
Net investment income (0.45) (0.50) (0.19)
------------------------------------
Total distributions (0.45) (0.50) (0.19)
------------------------------------
Net asset value, end of period $ 10.32 $ 10.00 $ 9.72
====================================

TOTAL RETURN+ 7.86% 8.20% (0.87)%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 9,270 $ 5,750 $ 896
Ratio of expenses to average daily
net assets (1) 0.61% 0.23% 0.98%*
Ratio of net investment income to average net assets 4.41% 4.93% 3.83%*
Portfolio turnover rate 15% 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. 1.65% 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.

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 Martin & Company, Inc., the Portfolio's Sub-Adviser
(Martin) 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 Martin 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 dollar-weighted average maturity
of the Portfolio since inception has been between 5 and 15 years. At the
beginning of March, 1998, assets were transferred in-kind into the Portfolio,
which shortened the dollar-weighted average maturity of the Portfolio from
approximately 9.4 years to approximately 6.6 years. In addition, Martin became
Sub-Adviser to the Portfolio effective March 2, 1998. As a fixed-income
securities adviser, Martin has historically favored securities with a maturity
range between 3 and 10 years. Consequently, the Portfolio's average maturity
may decrease further over time. Martin's investment philosophy includes
evaluating bond type, bond quality, and bond maturity allocation based on
economic trends and historic yield comparisons.

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. Martin 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

6
<PAGE>

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 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 1997 averaged 5.4% which was
higher than the national average of 4.95% in 1997. In 1996, however, the State
unemployment rate of 5.2% was lower than the 1996 national average of 5.4%. Per
capita income has steadily increased and in 1997 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 1997.

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 was completed in fiscal year 1997-1998.

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
$345 million in 1997. The State economy remains moderately strong. 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 "AAA," "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

7
<PAGE>

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.

(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.

Martin defines the issuer of a security depending on its terms and conditions.
In identifying the issuer, Martin 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.

8
<PAGE>

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.

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 (the Transfer Agent). If an order is received by
the Transfer Agent 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 the Transfer Agent 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 the Transfer Agent. 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 the Transfer Agent 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.

9
<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 the
Transfer Agent 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 the Transfer Agent. Please call 1-800-442-1941
(option 2) to advise the Transfer Agent 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 the Transfer Agent. 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 the Transfer
Agent, 73 Tremont Street, Boston, Massachusetts, 02108. Shares redeemed will
earn dividends declared, if any, through the date of redemption.

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 the Transfer Agent.
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

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

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 the Transfer Agent for instructions.

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

10
<PAGE>

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.

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?

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 the
Transfer Agent 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).

11
<PAGE>

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:

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 the Transfer Agent. 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 First Funds at 73 Tremont Street, Boston, Massachusetts,
02108.

HOW DO I INVEST THROUGH MY INVESTMENT PROFESSIONAL?

SYSTEMATIC INVESTING PROGRAM

12
<PAGE>

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 the Transfer Agent 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

CLASS II
- --------

PUBLIC OFFERING PRICE

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 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>

13
<PAGE>

QUANTITY DISCOUNTS

- 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
- ---------

14
<PAGE>

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.

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 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, Martin 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 Martin'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.

15
<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?
- --------------------------------------------------------------------------------

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.

16
<PAGE>
- -------------------------------------------------------------------------------
WHAT IS THE EFFECT OF INCOME TAX ON THIS INVESTMENT?
- -------------------------------------------------------------------------------

FEDERAL TAXES. Distributions of gains from the sale of assets held by the
Portfolio for more than one year generally are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of how long they
have owned their Portfolio shares. Distributions from other sources generally
are taxed as ordinary income. Distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except that
distributions declared in October, November or 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 from the sale of tax-free bonds held by the Portfolio for more
than one year 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.

REDEMPTIONS AND EXCHANGES. 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 shareholder or, if
Class I, each Institutional Investor and the IRS annually. However, the tax
treatment also depends on the purchase price and the shareholder's personal tax
position .

"BUYING A DIVIDEND." On the record date for a distribution of income of
capital gains, 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 (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 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,

17
<PAGE>

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.

Martin serves as Sub-Adviser subject to the supervision of First Tennessee and
pursuant to the authority granted to it under its Sub-Advisory Agreement with
First Tennessee. In January 1998, Martin became an investment advisory
subsidiary of First Tennessee National Corporation, which also owns First
Tennessee. Martin and its predecessors have been in the investment advisory
business for over 8 years and have considerable experience in securities
selection, including expertise in the selection of fixed-income securities.
Martin has not previously advised or sub-advised a registered investment company
such as First Funds, although Martin is subject to the supervision of First
Tennessee, which has a history of investment management since 1929 and has
served as the investment adviser to First Funds since its inception in 1992.
Martin has a total of $1.6 billion in assets under management as of June 30,
1998.

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 waive one half of the .50% 12b-1 fee applicable to Class III of
the Portfolio or .25% of that Class' average net assets. ALPS reserves the
right to modify or terminate this waiver of 12b-1 expense at any time.

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.

18
<PAGE>
- --------------------------------------------------------------------------------
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 Fixed Income Portfolio Manager with
Martin, is a co-manager for the Tennessee Tax-Free Portfolio. Mr. Herbert has
over 19 years of experience in the financial services industry and specializes
in fixed-income securities. Mr. Herbert is a 1977 graduate of The University of
Tennessee.

Ted L. Flickinger, Jr., Senior Vice President and Fixed Income Portfolio
Manager with Martin, co-manages the Tennessee Tax-Free Portfolio with Mr.
Herbert. Mr. Flickinger is a Chartered Financial Analyst and has over 20 years
of experience in the investment management industry, at least 8 of which have
been with Martin concentrating on fixed-income securities. Mr. Flickinger is a
1977 graduate of the University of Tennessee.

- --------------------------------------------------------------------------------
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.

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.

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, Martin
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.

19
<PAGE>

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, Martin
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 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.

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, Martin must find
the creditworthiness of the other party to the transaction satisfactory.

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.

20
<PAGE>

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.

21
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INVESTMENT ADVISER AND CO-ADMINISTRATOR
---------------------------------------

First Tennessee Bank National Association
Memphis, TN

SUB-INVESTMENT ADVISER
----------------------

Martin & Company, Inc.
Knoxville, 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>

[FIRST FUNDS 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 26, 1998
- --------------------------------------------------------------------------------

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 26, 1998) 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, 1998 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.

<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----

Summary Of Portfolio Expenses.....................................3

Financial Highlights..............................................5

What Is The Investment Objective Of Each Portfolio?...............9

Are The Portfolios Suitable Investments? Investment Risks........10

What Are The Portfolios' Investment Policies And Limitations?....11

How Are Investments, Exchanges And Redemptions Made?.............13

How Is Performance Calculated?...................................18

Portfolio Transactions...........................................19

What Is The Effect Of Federal Income Tax On This Investment?.....19

What Advisory And Other Fees Do The Portfolios Pay?..............20

How Are The Portfolios Organized?................................21

Investment Instruments, Transactions, Strategies and Risks.......21
- --------------------------------------------------------------------------------

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, 1998. 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
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* .35% .52% .27% .25% .55% .30%
--- --- --- --- --- ---

Total Portfolio Operating Expenses* .45% .62% .62% .35% .65% .65%
=== === === === === ===

MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
---------------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
-------- -------- --------- ------- ------------ ----------
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* .28% .53% .28% .26% .50% .25%
--- --- --- --- --- ---

Total Portfolio Operating Expenses* .38% .63% .63% .36% .60% .60%
=== === === === === ===
</TABLE>
*After expense waivers or limitations.

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 each Portfolio.

If the waivers were not in effect, Management Fees would be .25% 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:

3
<PAGE>
<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>
Other Expenses .38% .55% .30% .28% .58% .33%
Total Portfolio Operating Expenses .63% .80% 1.00% .53% .83% 1.03%

MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
------------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
Other Expenses .31% .56% .31% .29% .53% .28%
Total Portfolio Operating Expenses .56% .81% 1.01% .54% .78% .98%
</TABLE>

There is no guarantee that any waivers or limitations 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 Class III of each Portfolio to ALPS
for services and expenses in connection with distribution. Shareholder
Servicing Fees are paid by Class II of each Portfolio 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 $ 5 $ 6 $ 6 $ 4 $ 6 $ 6
3 years $14 $20 $20 $11 $21 $21
5 years $25 $35 $35 $20 $36 $36
10 years $57 $78 $78 $44 $81 $81

MUNICIPAL MONEY CASH RESERVE
MARKET PORTFOLIO PORTFOLIO
------------------------------------------------------------------
CLASS I CLASS II CLASS III CLASS I CLASS II CLASS III
------- -------- --------- ------- -------- ---------
1 year $ 4 $ 6 $ 6 $ 4 $ 6 $ 6
3 years $12 $20 $20 $12 $19 $19
5 years $21 $35 $35 $20 $34 $34
10 years $48 $79 $79 $46 $75 $75

</TABLE>

4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The tables that follow are included in the Annual Report for the Portfolios
dated June 30, 1998 and have been audited by PricewaterhouseCoopers 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
--------------------------------------------------

For The Year Ended June 30,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<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 0.050 0.052 0.050 0.030
--------------------------------------------------
Distributions:
Net investment income (0.051) (0.050) (0.052) (0.050) (0.030)
--------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==================================================
TOTAL RETURN+ 5.19% 5.09% 5.30% 5.10% 3.06%

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $19,314 $ 6,141 $75,703 $67,377 $100,868
Ratio of expenses to average net assets (1) 0.45% 0.37% 0.36% 0.36% 0.33%
Ratio of net investment income to average net assets 5.09% 5.01% 5.19% 5.00% 3.04%

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

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

For the Year Ended June 30,
--------------------------------------------------
1998 1997 1996**
------- ------- -------
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------
Income from investment operations:
Net investment income 0.049 0.047 0.044
--------------------------------------------------
Distributions:
Net investment income (0.049) (0.047) (0.044)
--------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
==================================================
TOTAL RETURN+ 5.03% 4.84% 4.47%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $42,288 $61,135 $ 3,528
Ratio of expenses to average net assets (1) 0.62% 0.62% 0.62%*
Ratio of net investment income to average net assets 4.92% 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. 0.80% 0.80% 0.82%*
</TABLE>
* Annualized.
** Class III commenced operations on August 8, 1995.
+ 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>
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>

CLASS I
-------------------------------------------------

For the Year Ended June 30,
-------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<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 0.052 0.051 0.053 0.053 0.032
-------------------------------------------------
Distributions:
Net investment income (0.052) (0.051) (0.053) (0.053) (0.032)
-------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=================================================
TOTAL RETURN+ 5.37% 5.23% 5.37% 5.39% 3.23%

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $88,255 $94,541 $88,111 $88,057 $67,854
Ratio of expenses to average net assets (1) 0.35% 0.35% 0.33% 0.31% 0.28%
Ratio of net investment income to average net assets 5.24% 5.11% 5.28% 5.27% 3.18%

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

<TABLE>
<CAPTION>
CLASS III
-----------------------------
For the Year Ended June 30,
-----------------------------
1998 1997 1996**
------- ------- -------
<S> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
-----------------------------
Income from investment operations:
Net investment income 0.049 0.048 0.044
-----------------------------
Distributions:
Net investment income (0.049) (0.048) (0.044)
-----------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
=============================
TOTAL RETURN+ 5.05% 4.91% 4.49%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 2,513 $ 3,486 $ 228
Ratio of expenses to average net assets (1) 0.65% 0.65% 0.65%*
Ratio of net investment income to average net assets 4.94% 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. 0.82% 0.83% 0.85%*
</TABLE>
* Annualized.
** Class III commenced operations on August 8, 1995.
+ 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>
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET PORTFOLIO

CLASS I
-------------------------------------------------

For The Year Ended June 30,
-------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<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 0.033 0.033 0.035 0.034 0.024
-------------------------------------------------
Distributions:
Net investment income (0.033) (0.033) (0.035) (0.034) (0.024)
-------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=================================================

TOTAL RETURN+ 3.33% 3.32% 3.52% 3.48% 2.40%

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $36,279 $45,988 $71,665 $94,078 $76,231
Ratio of expenses to average net assets (1) 0.38% 0.35% 0.32% 0.30% 0.28%
Ratio of net investment income to average net assets 3.28% 3.25% 3.50% 3.44% 2.39%

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.56% 0.53% 0.52% 0.57% 0.55%
</TABLE>

<TABLE>
<CAPTION>
CLASS III
-----------------------------

For the Year Ended June 30,
-----------------------------
1998 1997 1996**
------- ------- -------
<S> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
-----------------------------
Income from investment operations:
Net investment income 0.030 0.030 0.030
-----------------------------
Distributions:
Net investment income (0.030) (0.030) (0.030)
-----------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
=============================
TOTAL RETURN+ 3.06% 3.03% 3.03%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $ 3,929 $12,886 $ 2,905
Ratio of expenses to average net assets (1) 0.63% 0.62% 0.58%*
Ratio of net investment income to average net assets 3.03% 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. 0.81% 0.79% 0.78%*
</TABLE>
* Annualized.
** class III commenced operations on July 28, 1995.
+ 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.

7
<PAGE>

CASH RESERVE PORTFOLIO
<TABLE>
<CAPTION>
CLASS I
---------------------------------------

For the Year Ended June 30,
---------------------------------------
1998 1997 1996 1995**
------- ------- ------- -------
<S> <C> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.053 0.051 0.053 0.042

Distributions:
Net investment income (0.053) (0.051) (0.053) (0.042)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00

TOTAL RETURN+ 5.46% 5.23% 5.39% 4.27%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $40,242 $14,241 $16,369 $15,460
Ratio of expenses to average net assets (1) 0.36% 0.40% 0.42% 0.43%*
Ratio of net investment income to average net assets 5.33% 5.13% 5.22% 5.48%*

(1) During the period, various fees were waived.
The ratio of expenses to average net assets had
such waivers not occurred is as follows. 0.54% 0.57% 0.61% 0.70%*
</TABLE>

<TABLE>
<CAPTION>
CLASS III
------------------------------
For the Year Ended June 30,
------------------------------
1998 1997 1996**
---- ---- ------
<S> <C> <C> <C>
SELECTED PER - SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
------------------------------
Income from investment operations:
Net investment income 0.051 0.049 0.047
------------------------------
Distributions:
Net investment income (0.051) (0.049) (0.047)
------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
==============================
TOTAL RETURN+ 5.21% 5.00% 4.78%#

RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (thousands) $58,243 $35,592 $24,190
Ratio of expenses to average net assets (1) 0.60% 0.64% 0.62%*
Ratio of net investment income to average net assets 5.09% 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. 0.77% 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.

8
<PAGE>
- --------------------------------------------------------------------------------
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 BlackRock
Institutional Management Corporation (BIMC or the Sub-Adviser) to act as Sub-
Adviser to each Portfolio. Subject to First Tennessee's supervision, BIMC 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).

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.

9
<PAGE>

by letters of credit furnished by domestic or foreign banks. BIMC monitors the
financial condition of parties (including insurance companies, banks, and
corporations) whose creditworthiness is relied upon in determining the credit
quality of securities the Portfolio may purchase.

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 BIMC 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 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.

10
<PAGE>

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 BIMC
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.

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 BIMC.

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 BIMC to determine eligibility on the
basis of that higher rating. Based on procedures adopted by the Trustees, BIMC,
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) With respect to 100% of its total assets, each Portfolio may not
invest more than 5% of its total assets in the securities (other than U.S.
government securities) of any single issuer.

(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

11
<PAGE>

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 22 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 BIMC 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 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.

BIMC defines the issuer of a security depending on its terms and conditions.
In identifying the issuer, BIMC 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, BIMC or their affiliates have lending
relationships.

12
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE INVESTMENTS, EXCHANGES AND REDEMPTIONS MADE?
- --------------------------------------------------------------------------------

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 (the Transfer Agent). If investment instructions
are received by the Transfer Agent 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 the Transfer Agent 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 the Transfer Agent. 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
the Transfer Agent 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.

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 the
Transfer Agent 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 the Transfer Agent. Please call 1-800-442-1941
(option 2) to advise the Transfer Agent 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 the Transfer Agent. 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 the Transfer Agent, 73
Tremont Street, Boston, Massachusetts, 02108. Shares redeemed will receive the
accrued dividends through the day prior to redemption.

13
<PAGE>

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 the Transfer Agent. 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 the Transfer Agent 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 the
Transfer Agent 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

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

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<PAGE>

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 the Transfer Agent 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 the
Transfer Agent before 2:00 p.m. Eastern Time and the funds must be received by
the Transfer Agent 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 First Funds, 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 the
Transfer Agent 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 the Transfer Agent 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*

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 the
Transfer Agent 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:

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.

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<PAGE>

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 the Transfer Agent. 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 First Funds, 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 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

16
<PAGE>

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 the Transfer Agent 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. The Transfer Agent 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 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).

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.

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<PAGE>

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 the Transfer Agent. You may execute exchange transactions by
calling the Transfer Agent 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 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 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 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.

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- --------------------------------------------------------------------------------
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.

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. You 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.

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<PAGE>
- --------------------------------------------------------------------------------
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 $16 billion in assets under administration
(including non-discretionary accounts) and $4 billion in assets under management
as of June 30, 1998, as well as experience in supervising sub-advisers.

BIMC (formerly known as PNC Institutional Management Corporation), 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.
BIMC is a wholly-owned subsidiary of PNC Bank National Association (PNC Bank).
BIMC was organized in 1973 to perform advisory services for investment
companies. BIMC changed its name in 1998 following a reorganization of its
investment management operations. 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. BIMC advises or manages approximately 48 short-term
liquid asset portfolios, including money market portfolios, with total assets of
approximately $44 billion as of September 30, 1998. BIMC 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
BIMC through $500 million, .06% of the next $500 million, and .05% on such
assets equalling $1 billion or more.

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.

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.

TRANSFER AGENT AND CUSTODIAN. Chase Global Funds Services Company (the
Transfer Agent), 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. Chase Global Funds Services Company also serves as
the Fund Accountant and thereby calculates the NAV and dividends of each Class
and maintains the Portfolio and general accounting records.

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<PAGE>

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.

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 AND WHEN-ISSUED 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

21
<PAGE>

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, BIMC,
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. BIMC 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, BIMC,
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 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.

22
<PAGE>

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 BIMC 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 BIMC to be of
good standing. Furthermore, they will only be made if, in BIMC's judgment, the
consideration to be earned from such loans would justify the risk.

BIMC 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 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
BIMC.

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.

23
<PAGE>

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

First Tennessee Bank National Association
Memphis, TN

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

BlackRock 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

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>

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 26, 1998

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 (Portfolios) dated October
26, 1998, as it may be amended or supplemented from time to time. Please retain
this Statement for future reference. The financial statements and financial
highlights of the Portfolios, included in the Annual Report for the fiscal year
ended June 30, 1998, are incorporated herein by reference. 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>
<CAPTION>

TABLE OF CONTENTS PAGE
<S> <C>

INVESTMENT RESTRICTIONS AND LIMITATIONS 2
INVESTMENT INSTRUMENTS 3
PORTFOLIO TRANSACTIONS 10
VALUATION OF PORTFOLIO SECURITIES 11
PERFORMANCE 12
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 14
DISTRIBUTIONS AND TAXES 15
TRUSTEES AND OFFICERS 16
INVESTMENT ADVISORY AGREEMENTS 18
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS 19
DESCRIPTION OF THE TRUST 21
FINANCIAL STATEMENTS 24
APPENDIX 24
</TABLE>

Investment Adviser (Growth & Income, Bond and Intermediate Bond Portfolios)
- ------------------
First Tennessee Bank National Association (First Tennessee)

Sub-Adviser (Growth & Income and Bond Portfolios)
- -----------
Highland Capital Management Corp. (Highland or a Sub-Adviser)

Sub-Adviser (Intermediate Bond Portfolio)
- -----------
Martin & Company, Inc.(Martin or a 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)

1
<PAGE>

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)

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;

2
<PAGE>

(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.

(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. (Highland or a Sub-Adviser) to act as
Sub-Adviser to the Growth & Income and Bond Portfolios, and has engaged Martin &
Company, Inc. (Martin or a Sub-

3
<PAGE>

Adviser) as Sub-Adviser to the Intermediate Bond Portfolio. First Tennessee and
Investment Advisers, Inc. (IAI) act as Co-Advisers to the Capital Appreciation
Portfolio. The activities of the Sub-Advisers 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 AND WHEN-ISSUED 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.

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.

4
<PAGE>

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 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 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

5
<PAGE>

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 the appropriate Sub-
Adviser's or IAI'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 appropriate Sub-
Adviser or IAI 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 appropriate
Sub-Adviser or IAI 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 the appropriate Sub-Adviser's or IAI'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 appropriate 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, a
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 appropriate 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

6
<PAGE>

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).

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. 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 appropriate
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 appropriate 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 appropriate
Sub-Adviser or IAI to be of good standing. Furthermore, they will only be made
if, in the appropriate Sub-Adviser's or IAI's judgment, the consideration to be
earned from such loans would justify the risk.

First Tennessee, Highland, Martin 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.

7
<PAGE>

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 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
appropriate 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.

8
<PAGE>

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.

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

9
<PAGE>

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 Highland, Martin and IAI (collectively, the Advisers)
pursuant to authority contained in each Portfolio's 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 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.

10
<PAGE>

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, 1998 and 1997, the portfolio turnover rates
were 7% and 25% for the Growth & Income Portfolio, and 26% and 56% for the Bond
Portfolio. The Growth & Income Portfolio paid brokerage commissions in the
amounts of $167,413, $147,563 and $276,190 during the fiscal years ended June
30, 1998, 1997 and 1996, respectively. For the fiscal period ended June 30,
1998, the annualized portfolio turnover rate was 44% and 9% for the Capital
Appreciation and Intermediate Bond Portfolios, respectively. The Capital
Appreciation Portfolio paid brokerage commissions in the amount of $57,106 for
the fiscal period ended June 30, 1998. During the fiscal years ended June 30,
1998, 1997 and 1996, no brokerage commissions were paid by the Growth & Income
and Capital Appreciation Portfolios to an affiliated broker of the Trust. No
brokerage commissions were paid by the Bond and Intermediate Bond Portfolios
during the last three fiscal years.

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 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' 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.

11
<PAGE>

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, 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,
1998, the 30-day yields for Class I, II and III of the Bond Portfolio were
5.63%, 5.15% and 4.32%, respectively; and 5.59%, 5.12% and 4.57% for the
Intermediate Bond Portfolio, respectively.

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

12
<PAGE>

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, 1998 for each Class of the Growth & Income, Capital Appreciation,
Bond and Intermediate Bond Portfolios:
<TABLE>
<CAPTION>

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 32.55% 23.38% 24.57% 21.74% 31.16% 22.07%
Capital Appreciation N/A N/A N/A N/A N/A N/A
Bond Portfolio 11.02% 6.66% 6.59% 5.59% 9.72% 5.40%
Intermediate Bond N/A N/A N/A N/A N/A N/A
</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.

13
<PAGE>

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 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.

14
<PAGE>

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.

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. Distributions of gains from the sale of assets held
- ---------------------------
by a Portfolio for more than one year generally are taxable to shareholders of
that Portfolio at the applicable mid-term or long-term capital gains rate, as
designated by the Portfolio, regardless of how long the shareholders have owned
their Portfolio shares.

Short-term capital gains distributed by a 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.

15
<PAGE>

REDEMPTIONS AND EXCHANGES. A loss on the redemption or exchange of Portfolio
- --------------------------
shares may not be deductible if the shareholder invests in the Portfolio within
thirty days before or after the redemption. Any loss on the redemption or
exchange of Portfolio shares held for six months or less will be disallowed to
the extent of the amount of any tax-free dividends received on the shares.
Future Treasury Regulations may shorten this six-month period to 31 days. In
addition, loss on the redemption or exchange of Portfolio shares held for six
months or less will be treated as long-term capital loss to the extent of any
long-term capital gain distributions received on the shares.

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 federal tax rules
applicable to regulated investment companies. The Portfolio's principal place of
business is located in Denver, Colorado. The Portfolio intends to comply with
Colorado tax rules applicable to registered investment companies.

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.

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
(*).

THOMAS M. BATCHELOR, age 76, 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, age 62, 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).

16
<PAGE>

*L. R. JALENAK, Jr., age 68, 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, age 57, Trustee, 5114 Winton Place, Memphis, TN is President
of Smith & Nephew, Inc. (orthopedic division). 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, age 60, 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, age 28, Treasurer, is a Vice President and Director of Mutual
Fund Operations 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, age 47, 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.

Effective after the May 1998 meeting of the Board, the Trustees of the Trust
each receive from the Trust an annual fee of $6,000 and a fee in the amount of
$2,000 for attending each regularly scheduled quarterly meeting of the Trustees
and $500 for each unscheduled meeting. Previously, the Trustees of the Trust
each received 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, 1998:
<TABLE>
<CAPTION>

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 $9,500 $0 $0 $9,500
- ------------------------------------------------------------------------------------
John A. DeCell
Trustee $9,500 $0 $0 $9,500
- ------------------------------------------------------------------------------------
L.R. Jalenak, Jr.
Trustee $9,500 $0 $0 $9,500
- ------------------------------------------------------------------------------------
Larry W. Papasan
Trustee $7,000 $0 $0 $7,000
- ------------------------------------------------------------------------------------
Richard C. Rantzow
Trustee $9,500 $0 $0 $9,500
</TABLE>

17
<PAGE>

As of June 30, 1998, the officers and Trustees of the Trust owned less than 1%
of the outstanding shares of any Portfolio.

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 and Bond Portfolios. Martin & Company, Inc., Knoxville,
Tennessee, acts as Sub-Adviser to the Intermediate Bond Portfolio. Subject to
the direction of the Trustees and of First Tennessee, the Sub-Advisers 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. 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, 1998, 1997 and 1996, First Tennessee earned
$3,169,117, $1,520,039 and $1,076,198 from the Growth & Income Portfolio,
respectively, before waiving $731,335, $350,778 and $358,250 of its fees,
respectively. For the fiscal years ended June 30, 1998, 1997 and 1996, First
Tennessee earned $887,260, $658,049 and $563,748 from the Bond Portfolio,
respectively, before waiving $645,280, $478,581 and $482,559 of its fees,
respectively. For the fiscal period ended June 30, 1998, First Tennessee earned
$32,970 and $320,973, respectively, from the Capital Appreciation and
Intermediate Bond Portfolios before waiving these amounts. For the fiscal period
ended June 30, 1998, IAI earned $153,858 from the Capital Appreciation
Portfolio.

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. As Sub-Adviser, Highland 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 and .33% of Bond Portfolio's average net assets.
As Sub-Adviser, Martin is entitled to receive from First Tennessee a monthly
sub-advisory fee at the annual rate of .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-Advisers, 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'

18
<PAGE>

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-Advisers
and IAI keep First Tennessee informed of the developments materially affecting
each Portfolio. The Sub-Advisers are currently waiving some or all of the fees
they are entitled to receive from First Tennessee.

ADMINISTRATION AGREEMENT AND OTHER CONTRACTS

ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. 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.

For the fiscal years ended June 30, 1998, 1997 and 1996, ALPS earned
administration fees in the amount of $731,335, $350,778 and $248,353 from the
Growth & Income Portfolio. For the fiscal years ended June 30, 1998, 1997 and
1996, ALPS earned administration fees in the amount of $241,980, $179,468 and
$153,749 from the Bond Portfolio, respectively. For the fiscal period ended June
30, 1998, ALPS earned administration fees in the amount of $32,970 from the
Capital Appreciation Portfolio before waiving $10,780 of its fees. For the
fiscal year ended June 30, 1998, ALPS earned administration fees in the amount
of $96,292 from the Intermediate Bond Portfolio before waiving $5,595 of its
fees.

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, 1998, 1997 and 1996,
First Tennessee earned co-administration fees in the amount of $243,778,
$116,926 and $82,965 from the Growth & Income Portfolio, respectively before
waiving $0, $0 and $34,639 of its fees, respectively. For the fiscal years ended
June 30, 1998, 1997 and 1996, First Tennessee earned co-administration fees in
the amount of $80,660, $59,823 and $51,198 from the Bond Portfolio,
respectively, before waiving $0, $0 and $23,882, respectively. For the fiscal
period ended June 30, 1998, First Tennessee earned co-administration fees in the
amount of $10,990 and $32,087, from the Capital Appreciation and Intermediate
Bond Portfolios, 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. This fee may be limited from time to time by the Board of
Trustees. See "Administration Agreements and Other 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 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 .07% of each Class' average net assets through $50 million and .05% over $50
million plus out-of-pocket expenses. Chase Manhattan Bank 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

19
<PAGE>

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, although the Trustees may
limit such fees from time to time for one or more Portfolios (see the current
Prospectus for each Portfolio for information concerning such limitations).
(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.

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' 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, 1998, Class III of the Growth & Income,
Capital Appreciation, Bond and Intermediate Bond Portfolios paid distribution
fees in the amounts of $481,934, $2,508, 17,602 and $10, respectively. All of
these fees were paid as compensation to dealers.

20
<PAGE>

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, 1998, the Growth & Income, Bond, Intermediate
Bond and Capital Appreciation Portfolios paid shareholder servicing fees in the
following amounts:

<TABLE>
<CAPTION>
Growth & Income Capital Appreciation Bond Intermediate Bond
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Class II $76,175 $1,631 $3,587 $639
Class III $160,645 $836 $5,867 $3
</TABLE>

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 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, Bond Portfolio, Intermediate
- -------------------
Bond Portfolio and Capital Appreciation Portfolio are 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. The Declaration of Trust permits the Trustees to create
additional Portfolios and Classes. There are nine Portfolios of the Trust, each
with three Classes.

21
<PAGE>

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, 1998, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios:

<TABLE>
<CAPTION>
Total Shares
Name and Address Portfolio Class Total Shares Owned % of Class Held Outstanding in Class
- ---------------------------------- -------------------- ----- ------------------ ---------------- --------------------
<S> <C> <C> <C> <C> <C>
First Tennessee National Corp. Growth and Income I 5,038,219.143 16.80% 29,992,035
D/B Pension Plan Bond I 9,718,602.977 44.96% 21,615,878
Memphis, TN Capital Appreciation I 3,194,214.001 91.82% 3,478,595

First Tennessee National Corp. Growth and Income I 1,573,385.911 5.25% 29,992,035
401K Savings-Fund A
Memphis, TN

Memphis Commerce Square Growth and Income II 181,197.625 6.96% 2,602,687
FBO National Bank of Commerce
Memphis, TN

Wangs International 401K Growth and Income II 145,371.565 5.59% 2,602,687
P.O. Box 18447
Memphis, TN 38181

Jewish Foundation Bond II 74,341.538 24.53% 303,074
5118 Park Avenue, Suite 255
Memphis, TN 38117

Hickory Hill Family Med Bond II 48,059.253 15.86% 303,074
Philip G. Minz, MD
3530 Hickory Hill Rd
Memphis, TN 38117

Giobbi Turner Trust #1 Bond II 21,421.970 7.07% 303,074
1277 East Massey
Memphis, TN 38120
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
Total Shares
Name and Address Portfolio Class Total Shares Owned % of Class Held Outstanding in Class
- ---------------------------------- -------------------- ----- ------------------ ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Barbara A. Wilson Bond II 18,735.844 6.18% 303,074
Rollover IRT
4718 Gwynne Rd
Memphis, TN 38117

Baker Donelson Bond II 18,331.063 6.05% 303,074
Retirement Savings Plan
2000 First Tennessee Building
Memphis, TN 38103

Otto Kruse Capital Appreciation II 9,727.626 6.30% 154,483
5523 Hillsboro Rd.
Nashville, TN 38103

W.E. Davis Capital Appreciation III 3,663.004 8.12% 45,132
2406 Holly Springs Rd.
Hernando, MS 38832

Tim McConnell and Capital Appreciation III 2,383.222 5.28% 45,132
Shawna McConnell
JT TEN
3716 Southview Circle
Knoxville, TN 37920

Donald Thomas Moore Capital Appreciaiton III 2,325.581 5.15% 45,132
1356 Hidden Cove Rd.
Gallatin, TN 37066

Wangs International 401K Intermediate Bond II 110,145.256 45.75% 240,777
P.O. Box 18447
Memphis, TN 38181

Bedson Corp. Intermediate Bond II 40,647.204 16.88% 240,777
665 Oakleaf Office Ln
Memphis, TN 38117

Charles A. Loftiss, Jr. Intermediate Bond II 14,276.921 5.93% 240,777
3375 Amroth Cove
Collierville, TN 38017

John McDonnell Intermediate Bond II 13,850.741 5.75% 240,777
8275 Tournament Drive
Suite 100
Memphis, TN 38138

Resources Trust Company Intermediate Bond II 12,774.124 5.31% 240,777
P.O. Box 3865
Englewood, CO 80155

Deborah and AGEE Allen Morris Intermediate Bond II 12,366.501 5.14% 240,777
Laurenzi & Hamilton PC
200 Jefferson
Memphis, TN 38103

NFSC FEBO Intermediate Bond III 12,918.578 26.16% 49,385
Kathleen H. Hood
Knoxville, TN

Laura S. Holmes Intermediate Bond III 8,156.129 16.52% 49,385
1305 Brow Estates Dr.
Signal Mountain, TN 37377
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
Total Shares
Name and Address Portfolio Class Total Shares Owned % of Class Held Outstanding in Class
- ---------------------------------- -------------------- ----- ------------------ ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Evelyn S. Meyers Intermediate Bond III 8,156.129 16.52% 49,385
51 Cool Springs Rd.
Signal Mountain, TN 37377

John R. Stagmaier Intermediate Bond III 8,156.129 16.52% 49,385
1175 James Blvd.
Signal Mountain, TN 37377

Susan S. Garrett Intermediate Bond III 8,140.883 16.48% 49,385
1917 Suck Creek Rd.
Chattanooga, TN 37405
</TABLE>

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. PricewaterhouseCoopers 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, Capital Appreciation, Bond and Intermediate Bond
Portfolios' financial statements and financial highlights for the fiscal year
ended June 30, 1998 are included in the Trust's Annual Report which is a
separate report supplied independently of this Statement of Additional
Information. The Growth & Income, Capital Appreciation, Bond and Intermediate
Bond Portfolios' financial statements and financial highlights are incorporated
herein by reference.

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.

24
<PAGE>

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.

25
<PAGE>

FIRST FUNDS
TENNESSEE TAX-FREE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION FOR CLASS I, CLASS II, AND CLASS III
OCTOBER 26, 1998

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
26, 1998. 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, 1998, 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>
<CAPTION>

TABLE OF CONTENTS PAGE
<S> <C>

INVESTMENT RESTRICTIONS AND LIMITATIONS 2
INVESTMENT INSTRUMENTS 3
SPECIAL CONSIDERATIONS AFFECTING TENNESSEE 7
PORTFOLIO TRANSACTIONS 8
VALUATION OF PORTFOLIO SECURITIES 9
PERFORMANCE 9
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 12
DISTRIBUTIONS AND TAXES 13
TRUSTEES AND OFFICERS 15
INVESTMENT ADVISORY AGREEMENT 16
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS 17
DESCRIPTION OF THE TRUST 19
FINANCIAL STATEMENTS 21
APPENDIX 21
</TABLE>

Investment Adviser
- ------------------
First Tennessee Bank National Association (First Tennessee or the Investment
Adviser)

Sub Adviser
- -----------
Martin & Company, Inc. (Martin on 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)

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.

2
<PAGE>

(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.

(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 AND WHEN-ISSUED 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.

3
<PAGE>

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 Martin 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.

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, Martin determines the
liquidity of Tennessee Tax-Free Portfolio's investments and, through reports
from Martin , the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Portfolio's investments, Martin 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 Martin 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,

4
<PAGE>

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 Martin.

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 Martin. As a 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.

5
<PAGE>

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, Martin 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.

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.

6
<PAGE>

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. 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 the past several years have built up a Fund balance of
$345 million by fiscal year end 1997. 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 (BEP). This increase has
since been made permanent and the BEP has been fully funded as of July 1997.
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 50% of all jobs in the State. 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 1997 averaged 5.4% which
was higher than the national average of 4.95% in 1997. In 1996, however, the
State unemployment rate of 5.2% was lower than the 1996 national average of
5.4%. 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 "AAA", "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.

7
<PAGE>

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of securities are placed on behalf of the
Portfolio by Martin pursuant to authority contained in the Portfolio's
Investment Advisory and Management Agreement. Martin 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,
Martin 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 Martin'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 Martin 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 Martin in carrying out its obligations
to the Portfolio. The receipt of such research has not reduced First
Tennessee's normal independent research activities; however, it enables Martin
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, Martin 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 Martin's overall responsibilities to the Portfolio and its other
clients. In reaching this determination, Martin 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.

Martin 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 Martin'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, 1998, 1997 and 1996, the portfolio
turnover rate was 15%, 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, 1998, 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.

8
<PAGE>

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 and Martin 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 and Martin 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 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.

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.

9
<PAGE>

As of June 30, 1998, the 30-day yield was 4.16%, 3.94% and 3.83% 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 1998:

1998 TAX RATES AND TAX-EQUIVALENT YIELDS
----------------------------------------
<TABLE>
<CAPTION>
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 - $ 25,350 $ 0 - $ 42,350 15% 2.35% 3.53% 4.71%
$ 25,351 - $ 61,400 $ 42,351 - $102,300 28% 2.78% 4.17% 5.56%
$ 61,401 - $128,100 $102,301 - $155,950 31% 2.90% 4.35% 5.80%
$128,101 - $278,450 $155,951 - $278,450 36% 3.13% 4.69% 6.25%
$278,451 - above $278,451 - above 39.6% 3.31% 4.97% 6.62%
</TABLE>

* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1998 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.

If your effective combined federal and Tennessee state tax rate in 1998 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

10
<PAGE>

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, 1998 for each Class of the Portfolio:

<TABLE>
<CAPTION>
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>
Tennessee Tax-Free 8.16% 6.13% 4.16% 4.58% 7.86% 5.90%
</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.

11
<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.

12
<PAGE>

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 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 provided that the Portfolio meets the investment and
distribution requirements for treatment as a "regulated investment company" and,
at the close of each quarter of the taxable year, at least 50% of the value of
its total assets consists of tax-exempt state or local bonds. The Portfolio
intends to meet these tests so that its federally tax-free interest will remain
federally tax-free when distributed. 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.

Interest on certain "specified private activity" 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 specified private activity
bonds 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
13
<PAGE>

specified private activity bonds 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 bonds issued after August 7, 1986 to benefit a
private or industrial user or to finance a private facility are affected by this
rule. A portion of the gain on bonds purchased at a discount after April 30,
1993 (other than original issue discount) and all 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.

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. Distributions of gains from the sale of assets held
- ---------------------------
by the Portfolio for more than one year generally are taxable to shareholders of
the Portfolio at the applicable mid-term or long-term capital gains rate, as
designated by the Portfolio, regardless of how long the shareholders have owned
their Portfolio shares.

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 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 federal tax rules applicable to regulated
investment companies. The Portfolio's principal place of business is located in
Denver, Colorado. The Portfolio intends to comply with Colorado tax rules
applicable to registered investment companies.

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.

14
<PAGE>

TRUSTEES AND OFFICERS

*L. R. JALENAK, JR., age 68, Trustee, 6094 Apple Tree Drive, Suite 11, Memphis,
TN was Chairman of the Board (1990 - 1993 (retired)), and President and CEO
(until 1990) of Cleo Inc. (manufacturer of gift wrap and related products), a
Gibson Greetings Company. Mr. Jalenak is also a Director of Perrigo Company
(1988 - present), and Dyersburg Corporation (1990 - present), and a Commissioner
of Memphis Light, Gas & Water Division (1993 present). He was a Director of
Gibson Greetings, Inc. from 1982 to 1991.

LARRY W. PAPASAN, age 57, Trustee, 5114 Winton Place, Memphis, TN is President
of Smith & Nephew, Inc. (orthopedic division). 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, age 60, President and Trustee, 8866 Darby Dan, Germantown,
TN. Formerly Vice President/Director, Ron Miller Associates, Inc.
(manufacturer). Mr. Rantzow was Managing Partner (until 1990) of the Memphis
office of Ernst & Young.

15
<PAGE>
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
- --------------------------------------------------------------------------------
Thomas M. Batchelor
Trustee $9,500 $0 $0 $9,500
- --------------------------------------------------------------------------------
John A. DeCell
Trustee $9,500 $0 $0 $9,500
- --------------------------------------------------------------------------------
L.R. Jalenak, Jr.
Trustee $9,500 $0 $0 $9,500
- --------------------------------------------------------------------------------
Larry W. Papasan,
Trustee $7,000 $0 $0 $7,000
- --------------------------------------------------------------------------------
Richard C. Rantzow
Trustee $9,500 $0 $0 $9,500

As of September 30, 1998, 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 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. Pursuant to a
Sub-Investment and Advisory Agreement, Martin, Knoxville, Tennessee, acts as
Sub-Adviser and day-to-day manager of the Portfolio.

In addition to the 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. Under its sub-advisory agreement, Martin is entitled to
receive a monthly fee at the annual rate of .30% of average net assets from
First Tennessee. First Tennessee and Martin voluntarily agreed to waive their
entire fees for the Portfolio. These fee waivers may be discontinued at any
time. For the fiscal years ended June 30, 1998, 1997 and 1996, First Tennessee
earned $398,898, $65,349 and $12,692, respectively, before waiving its entire
fee.

16
<PAGE>

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. ALPS has
voluntarily agreed to reimburse 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.

For the fiscal years ended June 30, 1998, 1997 and 1996, ALPS earned
administration fees in the amount of $119,670, 19,605 and $3,755 from the
Portfolio, respectively, before waiving $32,146, $19,605 and $3,755 of its fees,
respectively.

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

17
<PAGE>

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.

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, 1998, the Portfolio paid distribution fees in the amount of $45,138, 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

18
<PAGE>

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, 1998, 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.

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.

19
<PAGE>

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.

As of September 30, 1998, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolio:

<TABLE>
<CAPTION>
Total Shares
Name and Address Portfolio Class Total Shares Owned % of Class Held Outstanding in Class
- ---------------- ------------ -------- ----------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C>
Thomas L. Leonard Tennessee II 96,855.319 9.67% 1,001,759
Trustee
Terminable Interest Trust
Moon Pencil Co.
1800 Gina Lynn Drive
Lewisburg, TN 37091

Emmett N. Kennon Tennessee II 61,288.597 6.12% 1,001,759
Rose S. Kenno, JTWROS
1603 Tyne Blvd.
Nashville, TN 37215

NSFC FEBO Tennessee III 97,784.526 7.58% 1,289,542
John F. Miller
Celesta C. Miller
1228 Linville
Kingsport, TN 37660

James H. Quillen Tennessee III 91,343.758 7.08% 1,289,542
Cecile C. Quillen, JTWROS
1601 Fairridge Place
Kingsport, TN 37664

D. David Fite Tennessee III 78,430.687 6.08% 1,289,542
50 Security Drive
Jackson, TN 38305
</TABLE>

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.

20
<PAGE>

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.

INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers 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 Portfolio's financial statements and financial highlights for the fiscal
year ended June 30, 1998 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.

21
<PAGE>

MIG-2/VMIG-2 - This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

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:
- -----------------------------------------------------------------------

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.

22
<PAGE>

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 26, 1998

This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for each Class of First Funds (Trust): U.S. Treasury Money
Market Portfolio, U.S. Government Money Market Portfolio, Municipal Money Market
Portfolio, and Cash Reserve Portfolio dated October 26, 1998. 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, 1998, 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 8
PORTFOLIO TRANSACTIONS 13
VALUATION OF PORTFOLIO SECURITIES 14
PERFORMANCE 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 17
DISTRIBUTIONS AND TAXES 17
TRUSTEES AND OFFICERS 19
INVESTMENT ADVISORY AGREEMENTS 20
ADMINISTRATION AGREEMENT AND OTHER CONTRACTS 21
DESCRIPTION OF THE TRUST 24
FINANCIAL STATEMENTS 27
APPENDIX 27

Investment Adviser
- ------------------
First Tennessee Bank National Association (First Tennessee or the Investment
Adviser)

Sub-Adviser
- -----------
BlackRock Institutional Management Corporation (BIMC 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)

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 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

2
<PAGE>

(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.

(ii) 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.

(iii) 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.

(iv) 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.

(v) 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.

(vi) 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.

(vii) 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.

(viii) The Portfolio does not currently intend during the coming year to invest
in oil, gas, or other mineral exploration or development programs or
leases.

(ix) 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.

<PAGE>

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

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.

4
<PAGE>

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 make
loans, but this limitation does not apply to purchases of debt securities
to repurchase agreements or to loans of Portfolio securities.

(viii) 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 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
<PAGE>

(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;

(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.

(iv) 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.

6
<PAGE>

with, their underlying securities, and does not apply to securities that
incorporate features similar to options or futures contracts.

(viii) 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) 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

7
<PAGE>

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 the voting securities of any issuer.

(viii) 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 INSTRUMENTS

First Tennessee serves as Investment Adviser to the Portfolios, and with the
prior approval of the Board of Trustees (the Trustees), has engaged BlackRock
Institutional Management Corporation to act as Sub-Adviser to each of the
Portfolios, including providing investment research and credit analysis
concerning

8
<PAGE>

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 BIMC, pursuant to guidelines approved by the Trustees.

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.

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 BIMC 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.

9
<PAGE>

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.

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, BIMC, under the
supervision of First Tennessee, determines the liquidity of Municipal Money
Market Portfolio and Cash Reserve Portfolio's investments and, through reports
from BIMC, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Portfolios' investments, BIMC 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 BIMC to be illiquid.
Investments currently considered by Municipal Money Market Portfolio to be
illiquid include some restricted securities and municipal lease obligations
determined by BIMC 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.

10
<PAGE>

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.

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 BIMC.

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 BIMC. 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.

11
<PAGE>

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 will not affect the dollar-weighted average maturity of the
Portfolio, or the valuation of the securities underlying the commitments.

Issuers or financial intermediaries may obtain letters of credit or other
guarantees to support their ability to buy securities on demand. BIMC 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, BIMC 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.

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, 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, BIMC 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 securities have
interest rates that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value for
the VRDO or FRDO that approximates its par value.

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 BIMC's fund counsel.

12
<PAGE>

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 BIMC (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.

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

13
<PAGE>

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 BIMC'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.

14
<PAGE>

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 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, 1998 were as follows:
<TABLE>
<CAPTION>

Class I Class III
-------- ----------
<S> <C> <C>

U.S. Treasury Money Market 5.05% 4.80%
U.S. Government Money Market 5.24% 4.93%
Municipal Money Market 3.37% 3.05%
Cash Reserve 5.37% 5.12%
</TABLE>

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 1998:

15
<PAGE>

1998 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 - $ 25,350 $ 0 - $ 42,350 15% 2.35% 3.53% 4.71%
$ 25,351 - $ 61,400 $ 42,351 - $102,300 28% 2.78% 4.17% 5.56%
$ 61,401 - $128,100 $102,301 - $155,950 31% 2.90% 4.35% 5.80%
$ 128,101 - $278,450 $155,951 - $278,450 36% 3.13% 4.69% 6.25%
$ 278,451 - above $278,451 - above 39.6% 3.31% 4.97% 6.62%
</TABLE>
* Taxable income (gross income after all exemptions, adjustments, and
deductions) based on 1998 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.

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.

16
<PAGE>

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.

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.

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

17
<PAGE>

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.

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. The Portfolios also intend to comply with other federal
tax rules applicable to regulated investment companies. The Portfolios'
principal place of business is located in Denver, Colorado. The Portfolios
intend to comply with Colorado tax rules applicable to registered investment
companies.

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.

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

18
<PAGE>

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

*L. R. JALENAK, JR., age 68, 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, age 57, Trustee, 5114 Winton Place, Memphis, TN is President
of Smith & Nephew, Inc. (orthopedic division). 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.

*JAMES V. HYATT, age 47, 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.

19
<PAGE>

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 $9,500 $0 $0 $9,500
- ----------------------------------------------------------------------------------
John A. DeCell
Trustee $9,500 $0 $0 $9,500
- ----------------------------------------------------------------------------------
L.R. Jalenak, Jr.
Trustee $9,500 $0 $0 $9,500
- ----------------------------------------------------------------------------------
Larry W. Papasan,
Trustee $7,000 $0 $0 $7,000
- ----------------------------------------------------------------------------------
Richard C. Rantzow
Trustee $9,500 $0 $0 $9,500
</TABLE>

As of September 30, 1998, 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, 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. BlackRock Institutional Management Corporation, formerly
known as PNC Institutional Management Corporation, 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, 1998, First Tennessee earned $137,999,
$238,922, $131,526 and $166,825 from the U.S. Treasury

20
<PAGE>

Money Market, U.S. Government Money Market, Municipal Money Market and Cash
Reserve Portfolios, before waiving $82,799, $143,353, $78,915 and $100,095 for
the respective Portfolios. For the fiscal year ended June 30, 1997, First
Tennessee earned $206,512, $237,756, $196,108 and $122,479 from the U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio and the Cash Reserve Portfolio, 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, U.S. Government
Money Market, Municipal Money Market, and Cash Reserve Portfolios, respectively,
before waiving fees of $133,588, $155,065, $155,521, and $43,354 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, BIMC 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 BIMC, 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,
BIMC, 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, BIMC keeps First Tennessee informed of the developments materially
affecting each Portfolio.

ADMINISTRATION AGREEMENT AND OTHER CONTRACTS

ADMINISTRATOR AND DISTRIBUTOR. ALPS Mutual Funds Services, Inc. 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.

For each Portfolio's fiscal year ended June 30, 1998, ALPS earned administration
fees in the amount of $41,400, $71,676, $39,458 and 50,048 from the U.S.
Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Municipal Money Market Portfolio and the Cash Reserve Portfolio, respectively.
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.

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, 1998, First Tennessee earned co-administration fees in the amount of
$27,600, $47,784, $26,305 and $33,365 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

21
<PAGE>

waiving $13,800, $23,892, $13,153 and $16,682, respectively. 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 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, the Transfer
Agent 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 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 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

22
<PAGE>

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.

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 fiscal year ended June 30, 1998, 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 $117,407, $11,375, $23,088
and $120,021, 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.

23
<PAGE>

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 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, 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.

As of September 30, 1998, the following shareholders owned more than 5% of the
outstanding shares of the indicated Class of the Portfolios:

24
<PAGE>

<TABLE>
<CAPTION>
Total Shares
Name and Address Portfolio Class Total Shares Owned % of Class Held Outstanding in Class
- ---------------- --------- ----- ------------------ --------------- --------------------
<S> <C> <C> <C> <C> <C>
Elizabeth Dunscomb Lawler U.S. Treasury I 10,246,279.610 53.60% 19,115,044
644 South Belvedere Blvd
Memphis, TN 38104

Belz Investment Co U.S. Treasury I 2,897,810.540 15.16% 19,115,044
P.O. Box 3661
Memphis, TN 38173

John E. Marek and U.S. Treasury III 12,435,288.450 20.04% 62,045,529
Diane D. Marek
JT TEN
PO Box 309
Hixson, TN 37343

Erlanger Health System U.S. Treasury III 9,419,746.000 15.18% 62,045,529
975 East Third Street
Chatanooga, TN 37403

Volunteer State Student U.S. Treasury III 4,608,626.120 7.43% 62,045,529
Funding Corp.
252 North Peters Rd.
Suite 100
Knoxville, TN 37923

Mary Elizabeth Miller U.S. I 11,440,286.760 13.07% 87,547,645
First Tennessee Bank Building Government
Co-fiduciary for M.E. Miller
231 Public Square, 3rd Floor
Franklin, TN 37064

Martha R. Robinson U.S. I 4,869,874.000 5.56% 87,547,645
101 West Chickasaw Pkwy Government
Memphis, TN 38111

Enterprise Investment Partners U.S. I 8,745,553.920 9.99% 87,547,645
Attn: Frederick Smith, Government
Chairman of the Board
Federal Express Corp.
PO Box 727, Dept. 1841
Memphis, TN 38194-1841

Jackson-Madison County U.S. III 5,846,868.920 80.38% 7,273,901
General Hospital Government
708 W. Forest
Jackson, TN 38301

Vic Davis Construction, Inc. U.S. III 610,939.130 8.40% 7,273,901
905 West Center Government
Kingsport, TN 37660

Nuclear Fuel Services Municipal I 3,325,545.980 8.64% 38,500,951
Attn: Daniel Miller
1205 Bannerhill Rd.
Erwin, TN 37650

Agnes Turley Municipal I 2,574,734.160 6.69% 38,500,951
4207 Walnut Grove Rd
Memphis, TN 38117
</TABLE>

25
<PAGE>

<S> <C> <C> <C> <C> <C>
National Financial Services Corp. Municipal III 2,374,188.690 65.17% 3,643,187
P.O. Box 3752
Church Street Station
New York, NY 10008

Ruby Avenue Reality LLC Municipal III 265,566.620 7.29% 3,643,187
1794 Brooksedge Cove
Germantown, TN 38138

Charles Roger Blackwood Municipal III 249,123.210 6.84% 3,643,187
845 Crossover Lane
Memphis, TN 38117

Eugena F. Williams Estate Cash Reserve I 19,333,088.750 52.20% 37,036,901
800 South Gay St., 5th Floor
Knoxville, TN 37929

Mildred McDaniel Brindley Estate Cash Reserve I 1,949,607.140 5.26% 37,036,901
Asbury Acres D-17
2646 Seveirville Rd.
Maryville, TN 37804

National Financial Services Corp. Cash Reserve III 39,089,606.390 74.50% 52,468,480
P.O. Box 3752
Church Street Station
New York, NY 10008
</TABLE>

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. PricewaterhouseCoopers 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.

26
<PAGE>

FINANCIAL STATEMENTS

The Portfolios' financial statements and financial highlights for the fiscal
period ended June 30, 1998, 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.

27
<PAGE>

PART C. OTHER INFORMATION
-------------------------

Item 24. Financial Statements and Exhibits
---------------------------------

(a) Financial Statements for the fiscal year ended June 30, 1998 for each
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. (1)

(b) Supplement to the Declaration of Trust effective April 24, 1992.
(1)

(d) Supplement to the Declaration of Trust effective August 5, 1993.
(1)

(2) (a) Bylaws of the Trust. (1)

(b) Amendment to the Bylaws dated November 17, 1992. (1)

(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. (1)

(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. (1)

(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. (1)

(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, and between Provident Institutional Management
Corporation and First Tennessee Bank National Association on behalf
of Cash Reserve Portfolio, dated May 4, 1993. (1)

<PAGE>

(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 by
reference to Exhibit 5(e) to Post-Effective Amendment No. 9 to the
Trust's Registration Statement.

(f) Investment Advisory and Management Agreement between First Funds on
behalf of Capital Appreciation Portfolio and First Tennessee Bank
National Association dated August 29, 1997. (1)

(g) Investment Advisory and Management Agreement between First Funds on
behalf of Capital Appreciation Portfolio and Investment Advisers,
Inc. dated August 29, 1997. (1)

(h) Investment Advisory and Management Agreement between First Funds on
behalf of Intermediate Bond Portfolio and First Tennessee Bank
National Association dated August 29, 1997. (1)

(i) Sub-Advisory Agreement between First Tennessee Bank National
Association and Martin & Company, Inc. with respect to the
Intermediate Bond Portfolio dated March 2, 1998. (1)

(j) Sub-Advisory Agreement between First Tennessee Bank National
Association and Martin & Company, Inc. with respect to the Tennessee
Tax-Free Portfolio dated March 2, 1998. (1)

(6) (a)(1) General Distribution Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995. (1)

(a)(2) Amended and Restated General Distribution Agreement between First
Funds on behalf of all Portfolios, and ALPS Mutual Funds Services,
Inc., dated August 19, 1998. (1)

(b)(1) Administration Agreement between First Funds on behalf of all
Portfolios, and ALPS Mutual Funds Services, Inc., dated July 1,
1995. (1)

(b)(2) Amended and Restated Administration Agreement between First Funds on
behalf of all Portfolios, and ALPS Mutual Funds Services, Inc.,
dated November 19, 1997. (1)

(b)(3) Amended and Restated Administration Agreement between First Funds on
behalf of all Portfolios, and ALPS Mutual Funds Services, Inc.,
dated August 19, 1998. (1)

(d) Form of Servicing Agreement between ALPS Mutual Funds Services, Inc.
and an

<PAGE>

Agency Institution. (1)

(7) Not Applicable.

(8) (a) Mutual Fund Custody Agreement between the First Funds and Chase
Manhattan Bank of New York dated October 12, 1992. (1)

(b) Mutual Fund Transfer Agency Agreement between the First Funds and
United States Trust Company of New York dated November 10, 1992. (1)

(9) (a) Fund Accounting and Pricing Services Agreement between First Funds
and Chase Manhattan Bank of New York dated November 10, 1992. (1)

(b) Amendment to Exhibit 9(a) above dated July 28, 1995. (1)

(10) Not applicable.

(11)(a) Opinion and Consent of PricewaterhouseCoopers LLP, independent
accountants. (2)

(b) Opinion and Consent of Baker, Donelson, Bearman & Caldwell. (2)

(12) Not Applicable.

(13) Written assurances that purchase representing initial capital was
made for investment purposes without any present intention of
redeeming or reselling. (1)

(14) Form of Individual Retirement Account plan documents is incorporated
herein by reference to Exhibit 14 to Post-Effective Amendment No. 13
to the Trust's Registration Statement.

(15) (a) Distribution and Service Plan Agreements on behalf of all
Portfolios. (1)

(b) Shareholder Servicing Plan on behalf of Class II and III of each
Portfolio, dated March 20, 1993. (1)

(16) Schedule for Computation of Performance Calculations. (1)

(17) Not Applicable.

(18) Plan Providing for Multiple Classes of Shares pursuant to Rule 18f-
3. (1)

__________________
(1) Incorporated by reference to Post-Effective Amendment No. 15 to the Trust's
Registration Statement.

(2) Filed herein.

<PAGE>

Item 25. Persons Controlled by or Under Common Control with Registrant.
-------------------------------------------------------------

Not Applicable.

Item 26. Number of Holders of Securities
-------------------------------

July 31, 1998

<TABLE>
<CAPTION>
Title of Class: Shares of Beneficial Interest Number of Recordholders
- --------------------------------------------- -----------------------

Class I
- -------
<S> <C>
U.S. Treasury Money Market Portfolio 4
U.S. Government Money Market Portfolio 5
Municipal Money Market Portfolio 4
Cash Reserve Portfolio 3
Growth & Income Portfolio 8
Bond Portfolio 5
Tennessee Tax-Free Portfolio 2

Class II
- --------

Growth and Income Portfolio 486
Bond Portfolio 16
Tennessee Tax-Free Portfolio 87

Class III
- ---------

Growth & Income Portfolio 2,212
Bond Portfolio 234
Tennessee Tax-Free Portfolio 60
Treasury Money Market Portfolio 23
Government Money Market Portfolio 15
Municipal Money Market Portfolio 22
Cash Reserve Portfolio 116
</TABLE>

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

<PAGE>

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 to the
Registrant on behalf of each Portfolio. The directors and officers of the
Adviser have held, during the past two fiscal years, the following positions of
a substantial nature:

First Tennessee Bank Association (FTB)-Investment Adviser

<TABLE>
<CAPTION>
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, Unicom Corporation(4) Utility

Director George E. Cates Chairman of the Board and Chief Real estate investment
Executive Officer, Mid-America trust
Apartment 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 Mortgage company
Corporation(8)

Director, FT Mortgage Service, Inc.(9) Mortgage company

Director, Highland Capital Management Investment Adviser
Corp.(10)

Chairman and Director, "A" PLUS Consumer access/discount
Strategic Alliances, Inc.(11) card program and finder

Director, Corona National Life Credit life insurance
Insurance(12)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- ------------------- -------------------- ---------------------------------- ---------------------
<S> <C> <C> <C>
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, Pilot Retail operator of
Corporation(16) convenience stores
and travel centers

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(17)

Director, Harrah's Entertainment, Casino, entertainment
Inc.(18)

Director, Mid-America Apartment
Communities, Real estate investment
Inc.(5) trust

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(19)

Director, First Tennessee Equipment Equipment financing
Finance Corporation(38)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- ------------------- ------------------- --------------------------------------- --------------------------
<S> <C> <C> <C>
Director, First Tennessee Bank National National bank
Association Mississippi (17)

Director R. Brad Martin Chairman of the Board, Chief Retail
Executive Officer, Proffits, Inc.(20)

Director, Harrah's Entertainment, Casino, entertainment
Inc.(18)

Director, Pilot Corporation(16) Retail operator of
convenience stores and
travel centers

Director Joseph Orgill, III Chairman of the Board, West Union Distributor and
Corporation(21) manufacturer for
construction industry

Director, Chairman of the Board Wholesale hardware
Orgill, Inc.(22) distributor

Mallory Group(23) Warehousing, distribution
and transportation

Director Vicki R. Palmer Corporate Vice President and Treasurer Bottler of soft drink
of Coca Cola Enterprises, Inc.(24) products

Director Michael D. Rose Director, Promus Hotel Hotel franchisor and
Corporation(25) operator

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, FelCor Lodging Trust, Inc.(30) Hotel

Director, ResortQuest, Inc.(31) Vacation property
management
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- ----------- --------------------- --------------------------------------- ------------------------------
<S> <C> <C> <C>
Director William B. Sansom Chairman of the Board and Chief Wholesale distributor
Executive Officer, The H.T.
Hackney Company(32)

Director, Martin Marietta Materials(33) Construction aggregate
materials producer

Director, Astec Industries, Inc.(34) Construction aggregate
materials producer

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 Adviser

Director, Hickory Venture Venture Capital
Capital Corporation(35)

Director, Hickory Capital Venture Capital
Corporation(36)

Director, Martin & Co., Inc. Investment Adviser

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

Executive Vice Sarah Meyerrose 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
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------------------------------- --------------------- ------------------------------------- --------------------
<S> <C> <C> <C>
Executive Vice Charles Burkett Director, Highland Capital Management Investment Adviser
President, Affluent Corp.(10)
Market Manager

Executive Vice David L. Berry None
President

Executive Vice Carey H. Brown None
President

ExecutiveVice William E. Woodson Director, Martin & Co., Inc.(39) Investment Adviser
President

Senior Vice President Wayne C. Marsh None

Senior Vice President John Curtis 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 Steven J. McNally None

Senior Vice President Scott Bovee None

Senior Vice President Suzanne Donaldson None

Senior Vice President Maureen MacIver None

Senior Vice President Otis M. Clayton None

Vice President William J. Branta None

Vice President Edward C. Dellinger None

Vice President Claudette S. Sanders None
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Position Other Business Type of
with FTB Name connections* Business
- -------------------------------- --------------------- ------------------------------------- --------------------
<S> <C> <C> <C>
Vice President Rosemary Manning None

Vice President John Barringer None

Investment Analyst Karen Kruse None

Chairman and CEO Larry B. Martin Director, Martin & Co., Inc. (39) Investment Adviser
First Tennessee Bank-Knoxville

President, First Lew Weems Director, Martin & Co., Inc. (39) Investment Adviser
Tennessee Bank-Knoxville
</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) Unicom Corporation, 1 First National Plaza, Chicago, IL 60690

(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) First Tennessee Bank National Association Mississippi, 579 Goodman Road
East, Southaven, MS 38671

(18) Harrah's Entertainment, Inc., 1023 Cherry Road, Memphis, TN 38117

(19) First Tennessee Housing Corporation, 165 Madison Ave., Memphis, TN 38103

(20) Profitt's Inc., 5810 Shelby Oaks Drive, Memphis, TN 38134

(21) West Union Corporation, 35 Union Ave., Suite 300, Memphis, TN 38103

(22) Orgill, Inc., 2100 Latham Street, Memphis, TN 38109

(23) Mallory Group, 4294 Sweeney Road, Memphis, TN 38118

(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) FelCor Lodging Trust, Inc., 545 East John Carpenter Freeway, Suite
1300, Irving, TX 75062-3933

(31) ResortQuest, 530 Oak Court Drive, #360, Memphis, TN 38117

<PAGE>

(32) The H. T. Hackney Company, Fidelity Bldg., 502 S. Gay Street, Suite
300, Knoxville, TN 37902

(33) Martin Marietta Materials, P. O. Box 30013, Raleigh, NC 27622-0013

(34) Astec Industries, Inc., P O Box 72787, Chattanooga, TN 37407

(35) First Tennessee Brokerage, Inc., 5100 Poplar Avenue, Memphis, TN 38117

(36) Hickory Venture Capital Corporation, 200 West Court Square, Suite 100,
Huntsville, AL 35801

(37) Hickory Capital Corporation, 200 West Court Square, Suite 100, Huntsville,
AL 35801

(38) First Tennessee Equipment Finance Corporation, 165 Madison Ave., Memphis,
TN 38103

(39) Martin & Company, Inc., Two Centre Square, 625 S. Gay Street, Suite 200,
Knoxville, TN 37902-1669

Highland Capital Management Corp. (Highland)
6077 Primacy Parkway, Memphis, TN

<TABLE>
<CAPTION>
Position Other Business
with Highland Name Connections
------------------------------------- ------------------------------ ---------------
<S> <C> <C>
Director, President Edward J. Goldstein (1) None

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)(2) Director,
NexAir, LLC

Director J. Kenneth Glass see FTB listing

Director Charles Burkett see FTB listing
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Position Other Business
with Highland Name Connections
------------------------------------- ----------------------------- ---------------
<S> <C> <C>
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 products

Martin & Company, Inc. (Martin)
Two Centre Square, 625 S. Gay Street, Suite 200
Knoxville, TN 37902

<TABLE>
<CAPTION>
Position Other Business
with Martin Name Connections
----------------------------------- -------------------------- ---------------
<S> <C> <C>

Director, President A. David Martin(1) None

Vice President, Portfolio Manager Ted Flickinger, Jr.(2) None

Vice President, Portfolio Manager Paul Spitznagel(2) None

Vice President, Portfolio Manager Charles Stewart(3) None

Vice President Gary Hoemann(4) None

Director Larry B. Martin See FTB listing

Director GeorgeP. Lewis See FTB listing

Director J. Kenneth Glass See FTB listing

Director William F. Woodson, Jr. See FTB listing

Director Lew Weems See FTB listing
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Position Other Business
with Martin Name Connections
----------------------------------- ----------------------- ---------------
<S> <C> <C>
Portfolio Manager John C. Miller(5) None

Portfolio Manager David Zandstra(5) None

Portfolio Manager Ralph Herbert(5) None
</TABLE>

(1) Previously, President, Martin & Co., L.P., a registered investment
adviser, 625 S. Gay Street, Knoxville, TN 37902 ("Martin, L.P.)

(2) Previously, Vice President, Martin, L.P.

(3) Previously, Assistant Portfolio Manager, Martin, L.P.

(4) Previously, Senior Vice President, First Tennessee Bank, 800 S. Gay
Street, Knoxville, TN 37902 ("FTB")

(5) Previously, Vice President, FTB

Investment Advisers, Inc. (IAI)

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

<PAGE>

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
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:

<PAGE>

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

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, Financial Investors Trust, Stonebridge Growth Fund,
Inc., Stonebridge Aggressive Growth Fund, Inc., SPDR Trust, MidCap SPDR
Trust, and DIAMONDS Trust.

(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:

<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Positions and Offices
Business Address* Registrant with Underwriter
- --------------------------------------------------------------------------------------
<S> <C> <C>
W. Robert Alexander None Chairman, Chief Executive
Officer and Secretary

Arthur J. L. Lucey None President and Director

Thomas A. Carter None Chief Financial Officer

Edmund J. Burke None Executive Vice President
and Director

William N. Paston None Vice President

Jeremy May Treasurer Vice President

Chad Christensen None Vice President

James V. Hyatt Secretary General Counsel

John W. Hannon, Jr. None Director

Rick A. Pederson None Director
</TABLE>

<PAGE>

Chris Woessner None Director

* All addresses are 370 Seventeenth Street, Suite 3100, Denver, Colorado 80202.

Item 30. Location of Accounts and Records
--------------------------------

First Tennessee Bank National Association, located at 4990 Poplar Avenue,
Memphis, Tennessee, Highland Capital Management Corp., located at 6011 Privacy
Parkway, Suite 228, Memphis, Tennessee, BlackRock Institutional Management
Corporation, 103 Bellevue Parkway, Wilmington, Delaware, Investment Advisors,
Inc., located at 3700 First Bank Place, Minneapolis, Minnesota, Martin &
Company, Inc., located at Two Centre Square, Knoxville, Tennessee, and ALPS
Mutual Funds Services, Inc., located at 370 17th Street, Denver, Colorado, 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) 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
request and without charge, a copy of the Registrant's latest annual report
to shareholders.

<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. 16 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 26th day of October, 1998.

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 26, 1998
- ----------------------
Richard C. Rantzow

/c/Jeremy O. May Treasurer October 26, 1998
- ------------------
Jeremy O. May

/c/Thomas M. Batchelor* Trustee October 26, 1998
- -----------------------
Thomas M. Batchelor

/c/John A. DeCell* Trustee October 26, 1998
- ------------------
John A. DeCell

/c/Larry W. Papasan* Trustee October 26, 1998
- --------------------
Larry W. Papasan

* Signature affixed by Desiree M. Franklin pursuant to a power of attorney
dated September 25, 1998, filed herein.

<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) Opinion and Consent of PricewaterhouseCooper LLP, independent
accountants.

(b) Opinion and Consent of Baker, Donelson, Bearman & Caldwell.

(27) Financial Data Schedules

1) Growth & Income Portfolio Class I
2) Growth & Income Portfolio Class II
3) Growth & Income Portfolio Class III
4) Capital Appreciation Portfolio Class I
5) Capital Appreciation Portfolio Class II
6) Capital Appreciation Portfolio Class III
7) Intermediate Bond Portfolio Class I
8) Intermediate Bond Portfolio Class II
9) Intermediate Bond Portfolio Class III
10) Bond Portfolio Class I
11) Bond Portfolio Class II
12) Bond Portfolio Class III
13) Tennessee Tax-Free Portfolio Class I
14) Tennessee Tax-Free Portfolio Class II
15) Tennessee Tax-Free Portfolio Class III
16) U.S. Treasury Money Market Portfolio Class I
17) U.S. Treasury Money Market Portfolio Class III
18) U.S. Government Money Market Portfolio Class I
19) U.S. Government Money Market Portfolio Class III
20) Municipal Money Market Portfolio Class I
21) Municipal Money Market Portfolio Class III
22) Cash Reserve Portfolio Class I
23) Cash Reserve Portfolio Class III

(99.28) Power of Attorney dated September 25, 1998.

<PAGE>

EXHIBIT 11(A)

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. 16 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated August 21, 1998, relating to the financial
statements and financial highlights appearing in the June 30, 1998 Annual Report
to Shareholders for the Growth and Income Portfolio, the Capital Appreciation
Portfolio, the Bond Portfolio, the Intermediate Bond Portfolio, the Tennessee
Tax-Free Portfolio, the U.S. Treasury Money Market Portfolio, the U.S.
Government Money Market Portfolio, the Municipal Money Market Portfolio and the
Cash Reserve Portfolio, 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.

PricewaterhouseCoopers LLP
Boston, Massachusetts
October 26, 1998

<PAGE>

EXHIBIT 11(B)

Securities and Exchange Commission
October 26, 1997
Page 1

BAKER, DONSELSON, BEARMAN & CALDWELL
Twentieth Floor
First Tennessee Building
165 Madison Avenue
Memphis, Tennessee 38103

Desiree M. Franklin
Direct Dial: (901) 577- 2183

October 26, 1998

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. 16

Dear Sirs:

We serve as counsel to the above-referenced Trust. In that capacity, we
have reviewed the Post-Effective Amendment No. 16 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. 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, 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 26, 1997
Page 2

Further, we consent to the use of our name in the Registration Statement
under the caption of each prospectus entitled "What is the Effect of Income Tax
On This Investment?" and elsewhere it may appear.

Sincerely,

BAKER, DONELSON, BEARMAN & CALDWELL

Desiree M. Franklin

DMF/ms

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

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<OTHER-ITEMS-LIABILITIES> 1,077,125
<TOTAL-LIABILITIES> 1,962,940
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<PAID-IN-CAPITAL-COMMON> 502,991,638
<SHARES-COMMON-STOCK> 30,205,361
<SHARES-COMMON-PRIOR> 12,983,222
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,344,716
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 267,237,893
<NET-ASSETS> 777,585,407
<DIVIDEND-INCOME> 5,792,627
<INTEREST-INCOME> 1,982,416
<OTHER-INCOME> 0
<EXPENSES-NET> (4,759,301)
<NET-INVESTMENT-INCOME> 3,015,742
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<APPREC-INCREASE-CURRENT> 103,659,235
<NET-CHANGE-FROM-OPS> 117,602,300
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,843,865)
<DISTRIBUTIONS-OF-GAINS> (10,122,599)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20,698,525
<NUMBER-OF-SHARES-REDEEMED> (4,074,239)
<SHARES-REINVESTED> 597,853
<NET-CHANGE-IN-ASSETS> 489,757,598
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 9,818,576
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,169,117
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,490,636
<AVERAGE-NET-ASSETS> 488,301,713
<PER-SHARE-NAV-BEGIN> 17.03
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> 5.25
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

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<SHARES-COMMON-PRIOR> 968,266
<ACCUMULATED-NII-CURRENT> 11,160
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,344,716
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 267,237,893
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<DIVIDEND-INCOME> 5,792,627
<INTEREST-INCOME> 1,982,416
<OTHER-INCOME> 0
<EXPENSES-NET> (4,759,301)
<NET-INVESTMENT-INCOME> 3,015,742
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<APPREC-INCREASE-CURRENT> 103,659,235
<NET-CHANGE-FROM-OPS> 117,602,300
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (160,717)
<DISTRIBUTIONS-OF-GAINS> (1,037,908)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,425,388
<NUMBER-OF-SHARES-REDEEMED> (284,427)
<SHARES-REINVESTED> 61,918
<NET-CHANGE-IN-ASSETS> 489,757,598
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 5,490,636
<AVERAGE-NET-ASSETS> 488,301,713
<PER-SHARE-NAV-BEGIN> 17.05
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 5.27
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (0.72)
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<PER-SHARE-NAV-END> 21.58
<EXPENSE-RATIO> 1.13
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<PAGE>
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<TOTAL-LIABILITIES> 1,962,940
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 502,991,638
<SHARES-COMMON-STOCK> 3,696,416
<SHARES-COMMON-PRIOR> 2,953,667
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<DIVIDEND-INCOME> 33,209
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<NET-INVESTMENT-INCOME> (125,902)
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<EXPENSES-NET> (263,306)
<NET-INVESTMENT-INCOME> (125,902)
<REALIZED-GAINS-CURRENT> 884,892
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<NET-CHANGE-FROM-OPS> 965,062
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 139,460
<NUMBER-OF-SHARES-REDEEMED> (8,694)
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<NET-CHANGE-IN-ASSETS> 39,004,770
<ACCUMULATED-NII-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 307,056
<AVERAGE-NET-ASSETS> 26,094,609
<PER-SHARE-NAV-BEGIN> 10.51
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> CAPITAL APPRECIATION
<SERIES>
<NUMBER> 41
<NAME> CLASS III

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> INTERMEDIATE BOND PORTFOLIO
<SERIES>
<NUMBER> 91
<NAME> CLASS I

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> INTERMEDIATE BOND PORTFOLIO
<SERIES>
<NUMBER> 92
<NAME> CLASS II

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> INTERMEDIATE BOND PORTFOLIO
<SERIES>
<NUMBER> 93
<NAME> CLASS III

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> BOND PORTFOLIO
<SERIES>
<NUMBER> 51
<NAME> CLASS I

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> BOND PORTFOLIO
<SERIES>
<NUMBER> 52
<NAME> CLASS II

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> BOND PORTFOLIO
<SERIES>
<NUMBER> 53
<NAME> CLASS III

<S> <C>
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> TENNESSEE TAX-FREE PORTFOLIO
<SERIES>
<NUMBER> 71
<NAME> CLASS I

<S> <C>
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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>
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<NAME> TENNESSEE TAX-FREE PORTFOLIO
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<NUMBER> 73
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</TABLE>

<PAGE>
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<NAME> U.S. TREASURY MONEY MARKET PORTFOLIO
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<NAME> CLASS I

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</TABLE>

<PAGE>
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<CIK> 0000885092
<NAME> U.S. TREASURY MONEY MARKET PORTFOLIO
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<NUMBER> 13
<NAME> CLASS III

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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000885092
<NAME> U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<SERIES>
<NUMBER> 21
<NAME> CLASS I

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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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</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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<INVESTMENTS-AT-COST> 98,536,348
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<RECEIVABLES> 191,454
<ASSETS-OTHER> 3,818
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 98,731,620
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 246,450
<TOTAL-LIABILITIES> 246,450
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 98,488,378
<SHARES-COMMON-STOCK> 58,245,113
<SHARES-COMMON-PRIOR> 35,591,400
<ACCUMULATED-NII-CURRENT> 22
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,230)
<NET-ASSETS> 98,485,170
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,796,912
<OTHER-INCOME> 0
<EXPENSES-NET> (355,530)
<NET-INVESTMENT-INCOME> 3,441,382
<REALIZED-GAINS-CURRENT> (3,292)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3,438,090
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,444,181)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 139,344,010
<NUMBER-OF-SHARES-REDEEMED> (119,085,292)
<SHARES-REINVESTED> 2,394,995
<NET-CHANGE-IN-ASSETS> 48,652,406
<ACCUMULATED-NII-PRIOR> 22
<ACCUMULATED-GAINS-PRIOR> 62
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 166,825
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 472,307
<AVERAGE-NET-ASSETS> 66,727,903
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.051
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.051)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

EXHIBIT 99.28

POWER OF ATTORNEY

We, the undersigned Trustees of FIRST FUNDS (the "Funds"), an open-ended,
diversified, management investment company, organized as a Massachusetts
business trust, do hereby constitute and appoint Desiree Franklin, our true and
lawful attorney and agent to take any and all action and execute any and all
instruments which said attorney and agent may deem necessary or advisable to
enable the Funds to comply with:

(i) the Securities Act of 1933, as amended, and any rules, regulations,
orders or other requirements of the Securities and Exchange
Commission thereunder, in connection with the registration under such
Securities Act of 1933, as amended, of shares of beneficial interest
of the Funds to be offered by the Funds;

(ii) the Investment Company Act of 1940, as amended, and any rules,
regulations, orders or other requirements of the Securities and
Exchange Commission thereunder, in connection with the registration
of the Funds under the Investment Company Act of 1940, as amended;
and

(iii) state securities laws and any rules, regulations, orders or other
requirements of state securities commissions, in connection with the
registration under state securities laws of the Funds and with the
registration under state securities laws of shares of beneficial
interest of the Funds to be offered by the Funds;

including specifically, but without limitation of the foregoing, power and
authority to sign the name of the Funds in its behalf and to affix its seal, and
to sign the name of such Trustee in his behalf as such Trustee to any amendment
or supplement (including post-effective amendments) to the registration
statement or statements filed with the Securities and Exchange Commission under
such Securities Act of 1933, as amended, and to execute any instruments or
documents filed or to be filed as part of or in connection with such
registration statement or statements, and to execute any instruments or
documents filed or to be filed as a part of or in connection with compliance
with state securities laws, including, but not limited to, all state filings for
any purpose, state filings in connection with corporate or trust organization or
amending corporate or trust documentation, filings for purposes of state tax
laws and filings in connection with blue sky regulations; and the undersigned
hereby ratifies and confirms all that said attorneys and agents shall do or
cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned place their hands as of this 25th day
of September, 1998.

/s/ Richard Rantzow /s/ John DeCell
------------------------ ------------------------------
Richard Rantzow John DeCell

/s/ Thomas Batchelor /s/ Larry Papasan
------------------------ ------------------------------
Thomas Batchelor Larry Papasan

/s/ L.R. Jalenak
------------------------
L.R. Jalenak