INVESTMENT QUALITY. Securities acquired by the Low Duration Bond Portfolio and Intermediate Government Bond Portfolio will be rated in the highest rating cat- egory at the time of purchase or, if unrated, of comparable quality as deter- mined by the Portfolios' sub-adviser. Securities acquired by the other Portfo- lios will be rated investment grade at the time of purchase (within the four highest voting categories by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services, Inc.) or, if unrated, of comparable quality as determined by a Port- folio's sub-adviser. Securities rated "Baa" on "BBB" are generally considered to be investment grade although they have speculative characteristics. If a security's rating is reduced below the minimum rating that is permitted for a Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio should continue to hold the security.

INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Intermediate Government Bond Portfolio will invest at least 65% of its total assets in obligations is- sued or guaranteed by the U.S. Government, its agencies or instrumentalities and related repurchase agreements during normal market conditions. Under normal market conditions, the International Bond Portfolio will invest at least 65% of its total assets in the debt obligations of foreign issuers located in at least three different foreign countries. The Pennsylvania Tax-Free Income Portfolio, New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to- gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo- lios") will invest, during normal market conditions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and posses- sions of the United States, the District of Columbia and their political sub- divisions, agencies, instrumentalities and authorities and related tax-exempt derivative securities the interest on which is exempt from regular Federal in- come tax and is not an item of tax preference for purposes of the Federal al- ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe- cific Tax-Free Portfolio intends to invest at least 65% of its net assets in Municipal Obligations of issuers located in the particular state indicated by its name. The Tax-Free Income Portfolio intends to invest no more than 25% of its net assets in Municipal Obligations of issuers located in the same state. During temporary defensive periods each Tax-Free Portfolio may invest without limitation in securities that are not Municipal Obligations and may hold with- out limitation uninvested cash reserves.

FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in foreign securities and currencies. The Managed Income Portfolio may invest up to 10% of its total assets in debt securities of foreign issuers and may hold from time to time various foreign currencies pending investment or conversion into U.S. dollars. Investing in securities of foreign issuers involves consid- erations not typically associated with investing in securities of companies or- ganized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Portfolio that invests in foreign securities will be affected favorably or unfavorably by changes in currency exchange rates.

A Portfolio's investments in foreign securities may also be adversely affected by changes in foreign political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitations on the removal of funds or assets, or imposition of (or change in) exchange control regulations. In addi- tion, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Portfolio's operations. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. While the volume of transactions effected on foreign stock exchanges has increased in recent years, it remains appreciably below that of the New York Stock Exchange. Accordingly, a Portfo- lio's foreign investments may be less liquid and their prices may be more vola- tile than comparable investments in securities in U.S. companies. In addition, there is generally less government supervision and regulation of securities ex- changes, brokers and issuers in foreign countries than in the United States.

Foreign investments may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities, instrumentalities or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank, Asian Development Bank, European Investment Bank, and European Economic Commu- nity; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of domestic banks and corporations issued in foreign curren- cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may include loan participations and assignments, convertible securities and zero- coupon securities.

Because the securities markets in these countries are highly developed, the In- ternational Bond Portfolio may invest more than 25% of its total assets in the securities of issuers located in Canada, France, Germany, Japan and the United Kingdom. Investments of 25% or more of the Portfolio's total assets in a par- ticular country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries.

To maintain greater flexibility, the International Bond Portfolio may invest in instruments which have the characteristics of futures contracts. These instru- ments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the value of a currency or com- modity at a future point in time. The risks of such investments could reflect the risks of investing in futures, currencies and securities, including vola- tility and illiquidity.

The expense ratio of the International Bond Portfolio can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as higher investment research costs, higher foreign custody costs, higher commission costs and additional costs arising from delays in settlements of transactions involving foreign securities.

MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga- tions are "general obligation" securities and "revenue" securities. General ob- ligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue se- curities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as the user of the facility being fi- nanced. Revenue securities include private activity bonds which are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved. Municipal Obligations may also in- clude "moral obligation" bonds, which are normally issued by special purpose public authorities. If the issuer of moral obligation bonds is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.

Also included within the general category of Municipal Obligations are partici- pation certificates in a lease, an installment purchase contract, or a condi- tional sales contract ("lease obligations") entered into by a state or politi- cal subdivision to finance the acquisition or construction of equipment, land, or facilities. Although lease obligations are not general obligations of the issuer for which the state or other governmental body's unlimited taxing power is pledged, certain lease obligations are backed by a covenant to appropriate money to make the lease obligation payments. However, under certain lease obli- gations, the state or governmental body has no obligation to make these pay- ments in future years unless money is appropriated on a yearly basis. Although "non-appropriation" lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult. These securities represent a relatively new type of financing that is not yet as marketable as more conventional securities.

Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac- tivity bonds the interest on which is an item of tax preference for purposes of the Federal alternative minimum tax ("AMT Paper") when added together with any other taxable investments held by the Portfolio. In addition, each Tax-Free Portfolio may invest 25% or more of its assets in Municipal Obligations the in- terest on which is paid solely from revenues of similar projects. To the extent a Portfolio's assets are invested in Municipal Obligations payable from the revenues of similar projects or are invested in private activity bonds, the Portfolio will be subject to the particular risks presented by the laws and economic conditions relating to such projects and bonds to a greater extent than it would be if its assets were not so invested.

The Tax-Free Income Portfolio is classified as a diversified portfolio, and the State-Specific Tax-Free Portfolios are classified as non-diversified portfo- lios, under the 1940 Act. Investment returns on a non-diversified portfolio typically are dependent upon the performance of a smaller number of securities relative to the number held in a diversified portfolio. Consequently, the change in value of any one security may affect the overall value of a non-di- versified portfolio more than it would a diversified portfolio.

Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu- nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to purchase, at the Portfolio's option, specified Municipal Obligations at a spec- ified price. The acquisition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligations to which the commit- ment relates.

The amount of information regarding the financial condition of issuers of Mu- nicipal Obligations may be less extensive than the information for public cor- porations, and the secondary market for Municipal Obligations may be less liq- uid than that for taxable obligations. In addition, Municipal Obligations pur- chased by the Portfolios include obligations backed by letters of credit and other forms of credit enhancement issued by domestic and foreign banks, as well as other financial institutions. Changes in the credit quality of these insti- tutions could cause loss to a Municipal Portfolio and affect its share price.

The Tax-Free Portfolios may invest in tax-exempt derivative securities relating to Municipal Obligations, including tender option bonds, participations, bene- ficial interests in trusts and partnership interests. The amount of information regarding the financial condition of issuers of Municipal Obligations may not be as extensive as that which is made available by public corporations and the secondary market for Municipal Obligations may be less liquid than that for taxable fixed-income securities. Accordingly, the ability of a Tax-Free Portfo- lio to buy and sell tax-exempt securities may, at any particular time and with respect to any particular securities, be limited.

Opinions relating to the validity of Municipal Obligations and to the exemption of interest thereon from Federal and state income tax are rendered by counsel to the respective issuers and sponsors of the obligations at the time of issu- ance. The Fund and its service providers will rely on such opinions and will not review independently the underlying proceedings relating to the issuance of Municipal Obligations, the creation of any tax-exempt derivative securities, or the bases for such opinions.

MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax- Free Portfolios) may make significant investments in mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, install- ment sale contracts, credit card receivables or other assets) issued by govern- mental entities and private issuers.

The Portfolios may acquire several types of mortgage-related securities, in- cluding guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage- related securities ("ARMs") and collateralized mortgage obligations ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as pass-through entities known as real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in a variety of ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no

principal payments will be made on a CMO class until all other classes having an earlier stated maturity date are paid in full. The classes may include ac- crual certificates (also known as "Z-Bonds"), which only accrue interest at a specified rate until other specified classes have been retired and are con- verted thereafter to interest-paying securities. They may also include planned amortization classes ("PACs") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and gener- ally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws many of which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the pur- chaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. There- fore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may be prepaid at any time be- cause the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of a Portfolio, the maturity of mortgage-related and other asset-backed securities will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In gener- al, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substan- tial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by a Portfolio will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that a Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Portfolio's principal investment to the extent of premium paid.

The Portfolios may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (or Sears

Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-related securities containing loans or mortgages originated by PNC Bank or its affiliates. It is possible that under some cir- cumstances, PNC Mortgage Securities Corp. or its affiliates could have inter- ests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage Securities Corp. or its affiliates.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in- vestment objectives, the Portfolios may purchase Treasury receipts and other "stripped" securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obliga- tions. These participations, which may be issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions, are issued at a discount to their "face value," and may include stripped mortgage-backed securities ("SMBS"). Stripped securities, par- ticularly SMBS, may exhibit greater price volatility than ordinary debt securi- ties because of the manner in which their principal and interest are returned to investors. The International Bond Portfolio also may purchase "stripped" se- curities that evidence ownership in the future interest payments or principal payments on obligations of foreign governments.

SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mort- gage-backed obligations. A common type of SMBS will have one class receiving all of the interest, while the other class receives all of the principal. How- ever, in some cases, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment. The market value of SMBS can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that re- ceives all or most of the interest are generally higher than prevailing market yields on other mortgage-related obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

Each Portfolio may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest pay- ments.

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt obligations of domestic or foreign corporations and banks, and may acquire com- mercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer. Bank obligations may include certificates of deposit, notes, bankers' acceptances and fixed time deposits. These obliga- tions may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific obligation or by gov- ernment regulation. The Portfolios may also make interest-bearing savings de- posits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest rates, maturities and times of issuance. Obligations of certain agencies and instrumentalities of the U.S. Government such as the GNMA are supported by the United States' full faith and credit; others such as those of the FNMA and the Student Loan Marketing Association are supported by the right of the issuer to borrow from the Treasury; others such as those of the Federal Farm Credit Banks or the FHLMC are supported only by the credit of the instrumentality. No assur- ance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law.

INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfo- lios expect to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration management technique or to protect against an increase in the price of securi- ties a Portfolio anticipates purchasing at a later date. The Portfolios intend to use these transactions as a hedge and not as a speculative investment.

Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of inter- est on a notional principal amount from the party selling such interest rate floor.

In addition, the International Bond Portfolio may engage in foreign currency exchange transactions to protect against uncertainty in the level of future ex- change rates. The Portfolio may engage in foreign currency exchange transac- tions in connection with the purchase and sale of portfolio securities (trans- action hedging) and to protect the value of specific portfolio positions (posi- tion hedging). The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency, and may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts (futures contracts). The Portfolio may also purchase ex- change-listed and over-the-counter call and put options on futures contracts and on foreign currencies, and may write covered call options on up to 100% of the currencies in its portfolio. In order to protect against currency fluctua- tions, the International Bond Portfolio may enter into currency swaps. Currency swaps involve the exchange of the rights of the Portfolio and another party to make or receive payments in specified currencies.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio may write covered call options, buy put options, buy call options and write secured put options for the purpose of hedging or earn- ing additional income, which may be deemed speculative or, with respect to the International Bond Portfolio, cross-hedging. These options may relate to par- ticular securities, securities indices, or the yield differential between

two securities or, in the case of the International Bond Portfolio, foreign currencies, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding op- tions exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its mem- bers if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts for hedging pur- poses or to maintain liquidity. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately afterwards the aggregate amount of margin deposits on its existing futures positions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of certain securities, the cash value of a securities index or a stated quan- tity of a foreign currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. A Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may utilize futures contracts in anticipation of changes in the composition of its holdings or in currency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru- ments held by a Portfolio and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the re- sulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; and (d) a sub-adviser's inability to predict correctly the direction of securities pric- es, interest rates, currency exchange rates and other economic factors. For further discussion of risks involved with domestic and foreign futures and op- tions, see Appendix B in the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance companies. Under these contracts, a Portfolio makes cash contributions to a de- posit fund of the insurance company's general account. The insurance company then credits to the Portfolio, on a monthly basis, interest which is based on an index (such as the Salomon Brothers CD Index), but is guaranteed not to be less than a certain minimum rate. Each Portfolio does not expect to invest more than 5% of its net assets in GICs at any time during the current fiscal year.

SECURITIES LENDING. A Portfolio may seek additional income by lending securi- ties on a short-term basis. The securities lending agreements will require that the loans be secured by collateral in cash, U.S. Government securities or ir- revocable bank letters of credit maintained on a current basis equal in value to at least the market value of the loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of the value of its total assets. Securities loans involve risks of delay in receiving additional collateral or in recover- ing the loaned securities, or possibly loss of rights in the collateral if the borrower of the securities becomes insolvent.

VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The Portfolios may invest up to 10% of their total assets in leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate of an inverse floater resets in the opposite direction from the market rate of inter- est to which it is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that ex- ceeds the magnitude of the change in the index rate of interest. The higher de- gree of leverage inherent in inverse floaters is associated with greater vola- tility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for a Portfolio. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for a Portfolio to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Portfolio is not entitled to exercise its demand rights.

REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities.

Borrowings may be made through reverse repurchase agreements under which a Portfolio sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. The Portfolios may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolios (except the Tax-Free Portfolios) may use reverse re- purchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. This use of reverse repurchase agree- ments may be regarded as leveraging and, therefore, speculative. Reverse repur- chase agreements involve the risks that the interest income earned in the in- vestment of the proceeds will be less than the interest expense, that the mar- ket value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obligated to repurchase and that the securities may not be returned to the Portfolio. During the time a reverse repurchase agreement is outstanding, a Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liq- uid debt securities having a value at least equal to the repurchase price. A Portfolio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an ad- ditional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act. As a share- holder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that each Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the value of its net assets in securities that are illiquid. GICs, variable and floating rate instruments that cannot be disposed of within seven days, and re- purchase agreements and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to this 15% limit. Each Portfolio may purchase securities which are not registered un- der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual- ified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by a Portfolio's sub-adviser that an adequate trading market exists for that secu- rity. This investment practice could have the effect of increasing the level of illiquidity in a Portfolio during any period that qualified institutional buy- ers become uninterested in purchasing these restricted securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se- curities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These transactions involve a commitment by a Port- folio to purchase or sell particular securities with payment and delivery tak- ing place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a security that it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and for

ward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield avail- able in the market when the securities delivery takes place. Each Portfolio's when-issued purchases and forward commitments are not expected to exceed 25% of the value of its total assets absent unusual market conditions.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, each Portfolio (except the Tax- Free Portfolios) may enter into dollar roll transactions. A dollar roll trans- action involves a sale by the Portfolio of a mortgage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar secu- rity at a later date at an agreed-upon price. The securities that are repur- chased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepay- ment histories than those sold. During the period between the sale and repur- chase, a Portfolio will not be entitled to receive interest and principal pay- ments on the securities sold. Proceeds of the sale will be invested in addi- tional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the in- come, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of a Portfolio compared with what the per- formance would have been without the use of dollar rolls. At the time a Port- folio enters into a dollar roll transaction, it will place in a segregated ac- count maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including ac- crued interest) and will subsequently monitor the account to ensure that its value is maintained. A Portfolio's dollar rolls, together with its reverse re- purchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties a Portfolio is required to purchase may decline below the agreed upon re- purchase price of those securities. If the broker/dealer to whom a Portfolio sells securities becomes insolvent, the Portfolio's right to purchase or repur- chase securities may be restricted. Successful use of mortgage dollar rolls may depend upon a sub-adviser's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully em- ployed.

SHORT SALES. The Portfolios may only make short sales of securities "against- the-box." A short sale is a transaction in which a Portfolio sells a security it does not own in anticipation that the market price of that security will de- cline. The Portfolios may make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain portfolio flexibility. In a short sale "against-the-box," at the time of sale, the Portfolio owns or has the immediate and unconditional right to ac- quire the identical security at no additional cost. When selling short "against-the-box," a Portfolio forgoes an opportunity for capital appreciation in the security.

PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios are set forth above under "What Are the Portfolios' Financial Highlights?" A Portfolio's annual portfolio turnover rate will not, however, be a factor pre- venting a sale or purchase when the sub-adviser

believes investment considerations warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates will generally result in higher transaction costs to a Portfolio.

INTEREST RATE RISK. The value of fixed income securities in the Portfolios can be expected to vary inversely with changes in prevailing interest rates. Fixed income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The Portfolios are not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securi- ties, and the average maturity of a Portfolio's assets will vary within the limits stated above under "What Are the Differences Among the Portfolios?" based upon its sub-adviser's assessment of economic and market conditions.

STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen- tration of investments by the State-Specific Tax-Free Portfolios in state-spe- cific Municipal Obligations raises special investment considerations. In par- ticular, changes in the economic condition and governmental policies of a state and its political subdivisions could adversely affect the value of a Portfo- lio's shares. Certain matters relating to the states in which the State-Spe- cific Tax-Free Portfolios invest are described below. For further information, see "Special Considerations Regarding State-Specific Municipal Obligations" in the Statement of Additional Information.

Pennsylvania. Although the General Fund of the Commonwealth (the principal op- erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases and spending decreases resulted in surpluses the following three years; as of June 30, 1994, the General Fund had a surplus of $892.9 million. The deficit in the Commonwealth's unreserved/undesignated funds also have been eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris- ing unemployment, a relatively high proportion of persons 65 and older in the Commonwealth and court ordered increases in healthcare reimbursement rates place increased pressures on the tax resources of the Commonwealth and its mu- nicipalities. The Commonwealth has sold a substantial amount of bonds over the past several years, but the debt burden remains moderate. The recession has af- fected Pennsylvania's economic base, with income and job growth at levels below national averages. Employment growth has shifted to the trade and service sec- tors, with losses in more high-paid manufacturing positions. A new governor took office in January, 1995, but the Commonwealth is likely to continue to show fiscal restraint.

New Jersey. The State of New Jersey generally has a diversified economic base consisting of, among others, commerce and service industries, selective commer- cial agriculture, insurance, tourism, petroleum refining and manufacturing, al- though New Jersey's manufacturing industry has experienced a downward trend in the last few years. New Jersey is a major recipient of Federal assistance and, of all the states, is among the highest in the amount of Federal aid received. Therefore, a decrease in Federal financial assistance may adversely affect the financial condition of New Jersey and its political subdivisions and instrumen- talities. While New Jersey's economic base has become more diversified over time and thus its economy appears to be less vulnerable during recessionary pe- riods, a recurrence of high levels of unemployment could adversely affect New Jersey's overall economy and the ability of New Jersey and its political subdi- visions and instrumentalities to meet their financial obligations. In addition, New

Jersey maintains a balanced budget which restricts total appropriation in- creases to only 5% annually with respect to any municipality or county, the balanced budget plan may actually adversely affect a particular municipality's or county's ability to repay its obligations.

Ohio. While diversifying more into the service and other non-manufacturing areas, the economy of Ohio continues to rely in part on durable goods manufac- turing largely concentrated in motor vehicles and equipment, steel, rubber products and household appliances. As a result, general economic activity in Ohio, as in many other industrially developed states, tends to be more cyclical than in some other states and in the nation as a whole. Agriculture is an im- portant segment of the Ohio economy with over half the State's area devoted to farming and approximately 15% of total employment in agribusiness. In prior years, the State's overall unemployment rate was commonly somewhat higher than the national figure. For example, the reported 1990 average monthly State rate was 5.7%, compared to the 5.5% national figure. However, for the last four years the State rates were below the national rates (5.5% versus 6.1% in 1994). The unemployment rate and its effects vary among particular geographic areas of the State. There can be no assurance that future national, regional or state- wide economic difficulties and the resulting impact on State or local govern- ment finances generally will not adversely affect the market value of Ohio Mu- nicipal Obligations held in the Portfolio or the ability of particular obligors to make timely payments of debt service on (or lease payments relating to) those obligations.

TRUSTEES      The business and affairs of the Fund are managed under the di-
              rection of its Board of Trustees. The following persons cur-
              rently serve on the Board:

                William O. Albertini--Executive Vice President and Chief Fi-
                nancial Officer of Bell Atlantic Corporation.

                Raymond J. Clark--Treasurer of Princeton University.

                Robert M. Hernandez--Vice Chairman and Chief Financial Officer
                of USX Corporation.

                Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
                versity of Pennsylvania.

                David R. Wilmerding, Jr.--President of Gates, Wilmerding,
                Carper & Rawlings, Inc.

ADVISER AND   The Adviser to the Compass Capital Funds is PNC Asset Management
SUB-          Group ("PAMG"). Each of the Portfolios within the Compass Capi-
ADVISERS      tal Fund family, except the International Bond Portfolio, is
              managed by a specialized portfolio manager who is a member of
              PAMG's fixed income portfolio management subsidiary, BlackRock
              Financial Management, Inc. ("BlackRock"). The sub-adviser of the
              International Bond Portfolio is Morgan Grenfell Investment Serv-
              ices Limited ("Morgan Grenfell").

              The ten portfolios and their investment sub-advisers and portfo-

lio managers are as follows:

                             INVESTMENT
COMPASS CAPITAL PORTFOLIO   SUB-ADVISER            PORTFOLIO MANAGER
- -------------------------  -------------- ------------------------------------
Low Duration Bond          BlackRock(/1/) Robert S. Kapito; Vice Chairman of
                                          BlackRock since 1988; Portfolio co-
                                          manager since its inception.

                                          Michael P. Lustig; Vice President of
                                          BlackRock since 1989; Portfolio co-
                                          manager since 1994.

                                          Scott Amero; Managing Director of
                                          BlackRock since 1990; Portfolio co-
                                          manager since its inception.

                                INVESTMENT
COMPASS CAPITAL PORTFOLIO      SUB-ADVISER               PORTFOLIO MANAGER
- -------------------------  -------------------- ------------------------------------
Intermediate Government          BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
 Bond                                           and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.

Intermediate Bond                BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
                                                and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.

Core Bond                        BlackRock(/1/) Scott Amero (see above); Mr. Amero
                                                has been Portfolio manager since its
                                                inception.

Managed Income                   BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
                                                and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.

International Bond         Morgan Grenfell(/2/) Martin A. Hall; Director of Morgan
                                                Grenfell since 1991; Portfolio
                                                manager since 1991.

Tax-Free Income                  BlackRock(/1/) Kevin Klingert; portfolio manager at
                                                BlackRock since 1991; prior to
                                                joining BlackRock, Assistant Vice
                                                President, Merrill, Lynch, Pierce,
                                                Fenner & Smith; Portfolio manager
                                                since 1995.

Pennsylvania Tax-Free            BlackRock(/1/) Kevin Klingert (see above);
 Income                                         Portfolio manager since 1995.

New Jersey Tax-Free In-          BlackRock(/1/) Kevin Klingert (see above);
 come                                           Portfolio manager since 1995.

Ohio Tax-Free Income             BlackRock(/1/) Kevin Klingert (see above);
                                                Portfolio manager since 1995.

(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York 10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM, 1NB England.

PAMG was organized in 1994 to perform advisory services for in- vestment companies, and has its principal offices at 1835 Market Street, Philadelphia, Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company. Morgan Grenfell is an indirect wholly-owned subsidiary of Deutsche Bank, A.G., a German financial services conglomer- ate.

For their investment advisory and sub-advisory services, PAMG and the Portfolios' sub-advisers are entitled to fees, computed daily on a Portfolio-by-Portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are The Expenses Of The Portfolios?" PAMG and the sub-advisers intend to waive a portion of their fees during the current fis- cal year. All sub-advisory fees are paid by PAMG, and do not represent an extra charge to the Portfolios.

                              EACH PORTFOLIO
                         EXCEPT THE INTERNATIONAL
                              BOND PORTFOLIO       INTERNATIONAL BOND PORTFOLIO
                         ------------------------- ----------------------------------
AVERAGE DAILY NET         INVESTMENT  SUB-ADVISORY   INVESTMENT         SUB-ADVISORY
ASSETS                   ADVISORY FEE     FEE       ADVISORY FEE            FEE
- -----------------        ------------ ------------ --------------      --------------
first $1 billion             .500%        .350%                  .550%               .400%
$1 billion--$2 billion       .450         .300                   .500                .350
$2 billion--$3 billion       .425         .275                   .475                .325
greater than $3 billion      .400         .250                   .450                .300

For the twelve months ended September 30, 1996, the Portfolios paid investment advisory fees at the following annual rates (ex- pressed as a percentage of average daily net assets) after vol- untary fee waivers: Intermediate Government Bond Portfolio, .30%; Intermediate Bond Portfolio, .30%; Managed Income Portfo- lio, .35%; Tax-Free Income Portfolio, 30%; Pennsylvania Tax-Free Income Portfolio, .30%; and Ohio Tax-Free Income Portfolio, 30%. For the period from April 1, 1996 through September 30, 1996, the Low Duration Bond and Core Bond Portfolios paid investment advisory fees, after voluntary fee waivers, at the annual rates of % and % of their respective average daily net assets. For the periods from February 1, 1996 and February 13, 1996, respec- tively, through September 30, 1996, the New Jersey Tax-Free In- come and International Bond Portfolios paid investment advisory fees, after voluntary fee waivers, at the annual rates of % and % of their respective average daily net assets.

The sub-advisers to each Portfolio strive to achieve best execu- tion on all transactions. Infrequently, brokerage transactions for the Portfolios may be directed through registered broker/dealers who have entered into dealer agreements with Com- pass Capital's distributor, subject to the requirements of best execution.

ADMINISTRATORS  Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
                Compass Distributors, Inc. ("CDI") (the "Administrators")
                serve as the Fund's co-administrators. CCG and PFPC are indi-
                rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
                wholly-owned subsidiary of Provident Distributors, Inc.
                ("PDI"). A majority of the outstanding stock of PDI is owned
                by its officers and the remaining outstanding stock is owned
                by Pennsylvania Merchant Group Ltd.

                The Administrators generally assist the Fund in all aspects of
                its administration and operation, including matters relating
                to the maintenance of financial records and fund accounting.
                As compensation for these services, CCG is entitled to receive
                a fee, computed daily and payable monthly, at an annual rate
                of .03% of each Portfolio's average daily net assets, and PFPC
                and CDI are entitled to receive a combined fee, computed daily
                and payable monthly, at an annual rate of .20% of the first
                $500 million of each Portfolio's average daily net assets,
                .18% of the next $500 million of each Portfolio's average
                daily net assets, .16% of the next $1 billion of each Portfo-
                lio's average daily net assets and .15% of each Portfolio's
                average daily net assets in excess of $2 billion. From time to
                time the Administrators may waive some or all of their admin-
                istration fees from a Portfolio.

                For information about the operating expenses the Portfolios
                paid for the most recent fiscal year, see "What Are the Ex-
                penses of the Portfolios?"

TRANSFER        PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT,          as their transfer agent and dividend disbursing agent.

 SHAREHOLDER    The Fund intends to enter into service arrangements with in-
SERVICING       stitutional investors ("Institutions") (including PNC Bank,
                National Association and its affiliates) which provide that
                the Institutions will render support services to their custom-
                ers who are the beneficial owners of Service Shares. These
                services are intended to supplement the services provided by
                the Fund's Administrators and transfer agent to the Fund's
                shareholders of record. In consideration for payment of a
                shareholder processing fee of up to .15% (on an annualized ba-
                sis) of the average daily net asset value of Service Shares
                owned beneficially by their customers, Institutions may pro-
                vide one or more of the following services: processing pur-
                chase and redemption requests from customers and placing or-
                ders with the Fund's transfer agent or the distributor;
                processing dividend payments from the Fund on behalf of cus-
                tomers; providing sub-accounting with respect to Service
                Shares beneficially owned by customers or the information nec-
                essary for sub-accounting; and provid

              ing other similar services. In consideration for payment of a
              separate shareholder servicing fee of up to .15% (on an
              annualized basis) of the average daily net asset value of Serv-
              ice Shares owned beneficially by their customers, Institutions
              may provide one or more of these additional services to such
              customers: responding to customer inquiries relating to the
              services performed by the Institution and to customer inquiries
              concerning their investments in Service Shares; assisting cus-
              tomers in designating and arranging dividend options, account
              designations and addresses; and providing other similar share-
              holder liaison services. Customers who are beneficial owners of
              Service Shares should read this Prospectus in light of the terms
              and fees governing their accounts with Institutions.

              Conflict-of-interest restrictions may apply to the receipt of
              compensation paid by the Fund in connection with the investment
              of fiduciary funds in Portfolio shares. Institutions, including
              banks regulated by the Comptroller of the Currency, Federal Re-
              serve Board and state banking commissions, and investment advis-
              ers and other money managers subject to the jurisdiction of the
              SEC, the Department of Labor or state securities commissions,
              are urged to consult their legal counsel before entering into
              agreements with the Fund.

              The Glass-Steagall Act and other applicable laws, among other
              things, prohibit banks from engaging in the business of under-
              writing securities. It is intended that the services provided by
              Institutions under their service agreements will not be prohib-
              ited under these laws. Under state securities laws, banks and
              financial institutions that receive payments from the Fund may
              be required to register as dealers.

EXPENSES      Expenses are deducted from the total income of each Portfolio
              before dividends and distributions are paid. Expenses include,
              but are not limited to, fees paid to PAMG and the Administra-
              tors, transfer agency and custodian fees, trustee fees, taxes,
              interest, professional fees, shareholder servicing and process-
              ing fees, fees and expenses in registering and qualifying the
              Portfolios and their shares for distribution under Federal and
              state securities laws, expenses of preparing prospectuses and
              statements of additional information and of printing and dis-
              tributing prospectuses and statements of additional information
              to existing shareholders, expenses relating to shareholder re-
              ports, shareholder meetings and proxy solicitations, insurance
              premiums, the expense of independent pricing services, and other
              expenses which are not expressly assumed by PAMG or the Fund's
              service providers under their agreements with the Fund. Any gen-
              eral expenses of the Fund that do not belong to a particular in-
              vestment portfolio will be allocated among all investment port-
              folios by or under the direction of the Board of Trustees in a
              manner the Board determines to be fair and equitable.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other companies that receive fees from the Fund to make payments relating to distri- bution and sales support activities out of their past profits or other sources available to them. The Fund is not required or permitted under the Plan to make distribution payments with respect to Service Shares.

PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu- tions acting on behalf of their customers, as well as certain persons who were shareholders of Compass Capital Group of Funds at the time of its combination with the PNC(R) Fund during the first quarter of 1996. Service Shares will nor- mally be held of record by Institutions or in the names of nominees of Institu- tions. Share purchases are normally effected through a customer's account at an Institution through procedures established in connection with the requirements of the account. In these cases, confirmations of share purchases and redemp- tions will be sent to the Institutions. Beneficial ownership of shares will be recorded by the Institutions and reflected in the account statements provided by such Institutions to their customers. Investors wishing to purchase shares should contact their Institutions.

Service Shares are sold at their net asset value per share next computed after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern Time) on a Business Day are priced the same day. A "Business Day" is any week- day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open for business. Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Business Day.

Payment for Service Shares must normally be made in Federal funds or other funds immediately available to the Fund's custodian. Payment may also, in the discretion of the Fund, be made in the form of securities that are permissible investments for the respective Portfolios. For further information, see the Statement of Additional Information. The minimum initial investment is $5,000; however, Institutions may set a higher minimum for their customers. There is no minimum subsequent investment requirement.

Compass Capital may in its discretion waive the minimum investment amount and may in its discretion reject any order for Service Shares.

REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in accordance with the procedures applicable to their accounts with the Institu- tions. These procedures will vary according to the type of account and the In- stitution involved, and customers should consult their account managers in this regard. It is the responsibility of Institutions to transmit redemption orders to PFPC and credit their customers' accounts with redemption proceeds on

a timely basis. In the case of shareholders holding share certificates, the certificates must accompany the redemption request.

Institutions may place redemption orders by telephoning PFPC at (800) 441-7450. Shares are redeemed at their net asset value per share next determined after PFPC's receipt of the redemption order. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions com- municated by telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures.

Payment for redeemed shares for which a redemption order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal funds wired to the redeeming Institution on the next Business Day, provided that the Fund's custodian is also open for business. Payment for redemption or- ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo- dian is closed is normally wired in Federal funds on the next Business Day fol- lowing redemption on which the Fund's custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven days after receiv- ing a redemption order if, in the judgment of PAMG, an earlier payment could adversely affect a Portfolio. No charge for wiring redemption payments is im- posed by the Fund, although Institutions may charge their customer accounts for redemption services. Information relating to such redemption services and charges, if any, should be obtained by customers from their Institutions.

During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at 400 Bellevue Parkway, Wilmington, DE 19809.

The Fund may redeem Service Shares in any Portfolio account if the account bal- ance drops below $5,000 as the result of redemption requests and the share- holder does not increase the balance to at least $5,000 upon thirty days' writ- ten notice. If a customer has agreed with an Institution to maintain a minimum balance in his or her account with the Institution, and the balance in the ac- count falls below that minimum, the customer may be obligated to redeem all or part of his or her shares in the Portfolios to the extent necessary to maintain the minimum balance required.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsibili- ties under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

INVESTMENT QUALITY. Securities acquired by the Low Duration Portfolio, Interme- diate Government Bond Portfolio and Government Income Portfolio will be rated in the highest rating category at the time of purchase or, if unrated, of com- parable quality as determined by the Portfolios' sub-adviser. Securities ac- quired by the other Portfolios will be rated investment grade at the time of purchase (within the four highest voting categories by Standard & Poor's Rat- ings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services, Inc.) or, if unrated, of comparable quality as determined by a Portfolio's sub-adviser. Securities rated "Baa" on "BBB" are generally considered to be investment grade although they have specu- lative characteristics. If a security's rating is reduced below the minimum rating that is permitted for a Portfolio, the Portfolio's sub-adviser will con- sider whether the Portfolio should continue to hold the security.

INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Intermediate Government Bond Portfolio and Government Income Portfolio (the "Government Portfolios") will invest at least 65% of their total assets in obligations issued or guaran- teed by the U.S. Government, its agencies or instrumentalities and related re- purchase agreements during normal market conditions. Under normal market condi- tions, the International Bond Portfolio will invest at least 65% of its total assets in the debt obligations of foreign issuers located in at least three different foreign countries. The Pennsylvania Tax-Free Income Portfolio, New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to- gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo- lios") will invest, during normal market conditions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and posses- sions of the United States, the District of Columbia and their political sub- divisions, agencies, instrumentalities and authorities and related tax-exempt derivative securities the interest on which is exempt from regular Federal in- come tax and is not an item of tax preference for purposes of the Federal al- ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe- cific Tax-Free Portfolio intends to invest at least 65% of its net assets in Municipal Obligations of issuers located in the particular state indicated by its name. The Tax-Free Income Portfolio intends to invest no more than 25% of its net assets in Municipal Obligations of issuers located in the same state. During temporary defensive periods each Tax-Free Portfolio may invest without limitation in securities that are not Municipal Obligations and may hold with- out limitation uninvested cash reserves.

FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in foreign securities and currencies. The Managed Income Portfolio may invest up to 10% of its total assets in debt securities of foreign issuers and may hold from time to time various foreign currencies pending investment or conversion into U.S. dollars. Investing in securities of foreign issuers involves consid- erations not typically associated with investing in securities of companies or- ganized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Portfolio that invests in foreign securities will be affected favorably or unfavorably by changes in currency exchange rates.

A Portfolio's investments in foreign securities may also be adversely affected by changes in foreign political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitations on the removal of funds or assets, or imposition of (or change in) exchange control regulations. In addi- tion, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Portfolio's operations. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. While the volume of transactions effected on foreign stock exchanges has increased in recent years, it remains appreciably below that of the New York Stock Exchange. Accordingly, a Portfo- lio's foreign investments may be less liquid and their prices may be more vola- tile than comparable investments in securities in U.S. companies. In addition, there is generally less government supervision and regulation of securities ex- changes, brokers and issuers in foreign countries than in the United States.

Foreign investments may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities, instrumentalities or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank, Asian Development Bank, European Investment Bank, and European Economic Commu- nity; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of domestic banks and corporations issued in foreign curren- cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may include loan participations and assignments, convertible securities and zero- coupon securities.

Because the securities markets in these countries are highly developed, the In- ternational Bond Portfolio may invest more than 25% of its total assets in the securities of issuers located in Canada, France, Germany, Japan and the United Kingdom. Investments of 25% or more of the Portfolio's total assets in a par- ticular country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries.

To maintain greater flexibility, the International Bond Portfolio may invest in instruments which have the characteristics of futures contracts. These instru- ments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the value of a currency or com- modity at a future point in time. The risks of such investments could reflect the risks of investing in futures, currencies and securities, including vola- tility and illiquidity.

The expense ratio of the International Bond Portfolio can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as higher investment research costs, higher foreign custody costs, higher commission costs and additional costs arising from delays in settlements of transactions involving foreign securities.

MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga- tions are "general obligation" securities and "revenue" securities. General ob- ligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue se- curities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as the user of the facility being fi- nanced. Revenue securities include private activity bonds which are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved. Municipal Obligations may also in- clude "moral obligation" bonds, which are normally issued by special purpose public authorities. If the issuer of moral obligation bonds is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.

Also included within the general category of Municipal Obligations are partici- pation certificates in a lease, an installment purchase contract, or a condi- tional sales contract ("lease obligations") entered into by a state or politi- cal subdivision to finance the acquisition or construction of equipment, land, or facilities. Although lease obligations are not general obligations of the issuer for which the state or other governmental body's unlimited taxing power is pledged, certain lease obligations are backed by a covenant to appropriate money to make the lease obligation payments. However, under certain lease obli- gations, the state or governmental body has no obligation to make these pay- ments in future years unless money is appropriated on a yearly basis. Although "non-appropriation" lease obligations are secured by the leased property, dis- position of the property in the event of foreclosure might prove difficult. These securities represent a relatively new type of financing that is not yet as marketable as more conventional securities.

Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac- tivity bonds the interest on which is an item of tax preference for purposes of the Federal alternative minimum tax ("AMT Paper") when added together with any other taxable investments held by the Portfolio. In addition, each Tax-Free Portfolio may invest 25% or more of its assets in Municipal Obligations the in- terest on which is paid solely from revenues of similar projects. To the extent a Portfolio's assets are invested in Municipal Obligations payable from the revenues of similar projects or are invested in private activity bonds, the Portfolio will be subject to the particular risks presented by the laws and economic conditions relating to such projects and bonds to a greater extent than it would be if its assets were not so invested.

The Tax-Free Income Portfolio is classified as a diversified portfolio, and the State-Specific Tax-Free Portfolios are classified as non-diversified portfo- lios, under the 1940 Act. Investment returns on a non-diversified portfolio typically are dependent upon the performance of a smaller number of securities relative to the number held in a diversified portfolio. Consequently, the change in value of any one security may affect the overall value of a non-di- versified portfolio more than it would a diversified portfolio.

Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu- nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to purchase, at the Portfolio's option, specified Municipal Obligations at a spec- ified price. The acquisition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligations to which the commit- ment relates.

The amount of information regarding the financial condition of issuers of Mu- nicipal Obligations may be less extensive than the information for public cor- porations, and the secondary market for Municipal Obligations may be less liq- uid than that for taxable obligations. In addition, Municipal Obligations pur- chased by the Portfolios include obligations backed by letters of credit and other forms of credit enhancement issued by domestic and foreign banks, as well as other financial institutions. Changes in the credit quality of these insti- tutions could cause loss to a Municipal Portfolio and affect its share price.

The Tax-Free Portfolios may invest in tax-exempt derivative securities relating to Municipal Obligations, including tender option bonds, participations, bene- ficial interests in trusts and partnership interests. The amount of information regarding the financial condition of issuers of Municipal Obligations may not be as extensive as that which is made available by public corporations and the secondary market for Municipal Obligations may be less liquid than that for taxable fixed-income securities. Accordingly, the ability of a Tax-Free Portfo- lio to buy and sell tax-exempt securities may, at any particular time and with respect to any particular securities, be limited.

Opinions relating to the validity of Municipal Obligations and to the exemption of interest thereon from Federal and state income tax are rendered by counsel to the respective issuers and sponsors of the obligations at the time of issu- ance. The Fund and its service providers will rely on such opinions and will not review independently the underlying proceedings relating to the issuance of Municipal Obligations, the creation of any tax-exempt derivative securities, or the bases for such opinions.

MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax- Free Portfolios) may make significant investments in mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, install- ment sale contracts, credit card receivables or other assets) issued by govern- mental entities and private issuers.

The Portfolios may acquire several types of mortgage-related securities, in- cluding guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage- related securities ("ARMs") and collateralized mortgage obligations ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as pass-through entities known as real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in a variety of ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no

principal payments will be made on a CMO class until all other classes having an earlier stated maturity date are paid in full. The classes may include ac- crual certificates (also known as "Z-Bonds"), which only accrue interest at a specified rate until other specified classes have been retired and are con- verted therafter to interest-paying securities. They may also include planned amortization classes ("PACs") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and gener- ally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured, and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may be prepaid at any time be- cause the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of a Portfolio, the maturity of mortgage-related and other asset-backed securities will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In gener- al, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substan- tial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by a Portfolio will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that a Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Portfolio's principal investment to the extent of premium paid.

The Portfolios may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-related securities contain- ing loans or mortgages originated by PNC Bank or its affiliates. It is possible that under some circumstances, PNC Mortgage Securities Corp. or its affiliates could have interests that are in conflict with the holders of these mortgage- backed securities, and such holders could have rights against PNC Mortgage Se- curities Corp. or its affiliates.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in- vestment objectives, the Portfolios may purchase Treasury receipts and other "stripped" securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obliga- tions. These participations, which may be issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions, are issued at a discount to their "face value," and may include stripped mortgage-backed securities ("SMBS"). Stripped securities, par- ticularly SMBS, may exhibit greater price volatility than ordinary debt securi- ties because of the manner in which their principal and interest are returned to investors. The International Bond Portfolio also may purchase "stripped" se- curities that evidence ownership in the future interest payments or principal payments on obligations of foreign governments.

SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mort- gage-backed obligations. A common type of SMBS will have one class receiving all of the interest, while the other class receives all of the principal. How- ever, in some cases, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment. The market value of SMBS can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that re- ceives all or most of the interest are generally higher than prevailing market yields on other mortgage-related obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

Each Portfolio may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest pay- ments.

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt obligations of domestic or foreign corporations and banks, and may acquire com- mercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer. Bank obligations may include certificates of deposit, notes, bankers' acceptances and fixed time deposits. These obliga- tions may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific obligation or by gov- ernment regulation. The Portfolios may

also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest rates, maturities and times of issuance. Obligations of certain agencies and instrumentalities of the U.S. Government such as the GNMA are supported by the United States' full faith and credit; others such as those of the FNMA and the Student Loan Marketing Association are supported by the right of the issuer to borrow from the Treasury; others such as those of the Federal Farm Credit Banks or the FHLMC are supported only by the credit of the instrumentality. No assur- ance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law.

INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfo- lios expect to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration management technique or to protect against an increase in the price of securi- ties a Portfolio anticipates purchasing at a later date. The Portfolios intend to use these transactions as a hedge and not as a speculative investment.

Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of inter- est on a notional principal amount from the party selling such interest rate floor.

In addition, the International Bond Portfolio may engage in foreign currency exchange transactions to protect against uncertainty in the level of future ex- change rates. The Portfolio may engage in foreign currency exchange transac- tions in connection with the purchase and sale of portfolio securities (trans- action hedging) and to protect the value of specific portfolio positions (posi- tion hedging). The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency, and may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts (futures contracts). The Portfolio may also purchase ex- change-listed and over-the-counter call and put options on futures contracts and on foreign currencies, and may write covered call options on up to 100% of the currencies in its portfolio. In order to protect against currency fluctua- tions, the International Bond Portfolio may enter into currency swaps. Currency swaps involve the exchange of the rights of the Portfolio and another party to make or receive payments in specified currencies.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio may write covered call options, buy put options, buy call options and write

secured put options for the purpose of hedging or earning additional income, which may be deemed speculative or, with respect to the International Bond Portfolio, cross-hedging. These options may relate to particular securities, securities indices, or the yield differential between two securities or, in the case of the International Bond Portfolio, foreign currencies, and may or may not be listed on a securities exchange and may or may not be issued by the Op- tions Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary in- vestment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clear- ing Corporation, which performs the obligations of its members if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts for hedging pur- poses or to maintain liquidity. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately afterwards the aggregate amount of margin deposits on its existing futures positions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of certain securities, the cash value of a securities index or a stated quan- tity of a foreign currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. A Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may utilize futures contracts in anticipation of changes in the composition of its holdings or in currency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru- ments held by a Portfolio and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the re- sulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; and (d) a sub-adviser's inability to predict correctly the direction of securities pric- es, interest rates, currency

exchange rates and other economic factors. For further discussion of risks in- volved with domestic and foreign futures and options, see Appendix B in the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance companies. Under these contracts, a Portfolio makes cash contributions to a de- posit fund of the insurance company's general account. The insurance company then credits to the Portfolio, on a monthly basis, interest which is based on an index (such as the Salomon Brothers CD Index), but is guaranteed not to be less than a certain minimum rate. Each Portfolio does not expect to invest more than 5% of its net assets in GICs at any time during the current fiscal year.

SECURITIES LENDING. A Portfolio may seek additional income by lending securi- ties on a short-term basis. The securities lending agreements will require that the loans be secured by collateral in cash, U.S. Government securities or ir- revocable bank letters of credit maintained on a current basis equal in value to at least the market value of the loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of the value of its total assets. Securities loans involve risks of delay in receiving additional collateral or in recover- ing the loaned securities, or possibly loss of rights in the collateral if the borrower of the securities becomes insolvent.

VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The Portfolios may invest up to 10% of their total assets in leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate of an inverse floater resets in the opposite direction from the market rate of inter- est to which it is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that ex- ceeds the magnitude of the change in the index rate of interest. The higher de- gree of leverage inherent in inverse floaters is associated with greater vola- tility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for a Portfolio. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for a Portfolio to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Portfolio is not entitled to exercise its demand rights.

REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made through reverse repurchase agreements under which a Portfolio sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. The Portfolios may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolios (except the Tax-Free Portfolios) may use reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. This use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest expense, that the market value of the securi- ties sold by a Portfolio may decline below the price of the securities the Portfolio is obligated to repurchase and that the securities may not be re- turned to the Portfolio. During the time a reverse repurchase agreement is outstanding, a Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liquid debt securities having a value at least equal to the repurchase price. A Portfo- lio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In ad- dition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an addi- tional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act. As a share- holder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that each Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the value of its net assets in securities that are illiquid. GICs, variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agreements and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to this 15% limit. Each Portfolio may purchase securities which are not registered un- der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is deter- mined by a Portfolio's sub-adviser that an adequate trading market exists for that security. This investment practice could have the effect of increasing the level of illiquidity in a Portfolio during any period that qualified in- stitutional buyers become uninterested in purchasing these restricted securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se- curities on a "when-issued" basis and may purchase or sell securities on a "forward commitment"

basis. These transactions involve a commitment by a Portfolio to purchase or sell particular securities with payment and delivery taking place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a security that it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and forward com- mitment transactions involve the risk, however, that the price or yield ob- tained in a transaction may be less favorable than the price or yield available in the market when the securities delivery takes place. Each Portfolio's when- issued purchases and forward commitments are not expected to exceed 25% of the value of its total assets absent unusual market conditions.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, each Portfolio (except the Tax- Free Portfolios) may enter into dollar roll transactions. A dollar roll trans- action involves a sale by the Portfolio of a mortgage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar secu- rity at a later date at an agreed-upon price. The securities that are repur- chased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepay- ment histories than those sold. During the period between the sale and repur- chase, a Portfolio will not be entitled to receive interest and principal pay- ments on the securities sold. Proceeds of the sale will be invested in addi- tional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the in- come, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of a Portfolio compared with what the per- formance would have been without the use of dollar rolls. At the time a Portfo- lio enters into a dollar roll transaction, it will place in a segregated ac- count maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including ac- crued interest) and will subsequently monitor the account to ensure that its value is maintained. A Portfolio's dollar rolls, together with its reverse re- purchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties a Portfolio is required to purchase may decline below the agreed upon re- purchase price of those securities. If the broker/dealer to whom a Portfolio sells securities becomes insolvent, the Portfolio's right to purchase or repur- chase securities may be restricted. Successful use of mortgage dollar rolls may depend upon a sub-adviser's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully em- ployed.

SHORT SALES. The Portfolios may only make short sales of securities "against- the-box." A short sale is a transaction in which a Portfolio sells a security it does not own in anticipation that the market price of that security will de- cline. The Portfolios may make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain portfolio flexibility. In a short sale "against-the-box," at the time of sale, the Portfolio owns or has the immediate and unconditional right to ac- quire the identical security at no additional cost. When selling short "against-the-box," a Portfolio forgoes an opportunity for capital appreciation in the security.

PORTFOLIO TURNOVER RATES. Under normal market conditions it is expected that the annual portfolio turnover rate for the Government Income Portfolio will not exceed 300%. The past portfolio turnover rates of the other Portfolios are set forth above under "What Are the Portfolios' Financial Highlights?" A Portfo- lio's annual portfolio turnover rate will not, however, be a factor preventing a sale or purchase when the sub-adviser believes investment considerations war- rant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates will generally result in higher transaction costs to a Portfolio.

INTEREST RATE RISK. The value of fixed income securities in the Portfolios can be expected to vary inversely with changes in prevailing interest rates. Fixed income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The Portfolios are not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securi- ties, and the average maturity of a Portfolio's assets will vary within the limits stated above under "What Are the Differences Among the Portfolios?" based upon its sub-adviser's assessment of economic and market conditions.

STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen- tration of investments by the State-Specific Tax-Free Portfolios in state-spe- cific Municipal Obligations raises special investment considerations. In par- ticular, changes in the economic condition and governmental policies of a state and its political subdivisions could adversely affect the value of a Portfo- lio's shares. Certain matters relating to the states in which the State-Spe- cific Tax-Free Portfolios invest are described below. For further information, see "Special Considerations Regarding State-Specific Municipal Obligations" in the Statement of Additional Information.

Pennsylvania. Although the General Fund of the Commonwealth (the principal op- erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases and spending decreases resulted in surpluses the following three years; as of June 30, 1994, the General Fund had a surplus of $892.9 million. The deficit in the Commonwealth's unreserved/ undesignated funds also have been eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris- ing unemployment, a relatively high proportion of persons 65 and older in the Commonwealth and court ordered increases in healthcare reimbursement rates place increased pressures on the tax resources of the Commonwealth and its mu- nicipalities. The Commonwealth has sold a substantial amount of bonds over the past several years, but the debt burden remains moderate. The recession has af- fected Pennsylvania's economic base, with income and job growth at levels below national averages. Employment growth has shifted to the trade and service sec- tors, with losses in more high-paid manufacturing positions. A new governor took office in January, 1995, but the Commonwealth is likely to continue to show fiscal restraint.

New Jersey. The State of New Jersey generally has a diversified economic base consisting of, among others, commerce and service industries, selective commer- cial agriculture, insurance, tourism, petroleum refining and manufacturing, al- though New Jersey's manufacturing industry has experienced a downward trend in the last few years. New Jersey is a major recipient of

Federal assistance and, of all the states, is among the highest in the amount of Federal aid received. Therefore, a decrease in Federal financial assistance may adversely affect the financial condition of New Jersey and its political subdivisions and instrumentalities. While New Jersey's economic base has become more diversified over time and thus its economy appears to be less vulnerable during recessionary periods, a recurrence of high levels of unemployment could adversely affect New Jersey's overall economy and the ability of New Jersey and its political subdivisions and instrumentalities to meet their financial obli- gations. In addition, New Jersey maintains a balanced budget which restricts total appropriation increases to only 5% annually with respect to any munici- pality or county, the balanced budget plan may actually adversely affect a par- ticular municipality's or county's ability to repay its obligations.

Ohio. While diversifying more into the service and other non-manufacturing areas, the economy of Ohio continues to rely in part on durable goods manufac- turing largely concentrated in motor vehicles and equipment, steel, rubber products and household appliances. As a result, general economic activity in Ohio, as in many other industrially developed states, tends to be more cyclical than in some other states and in the nation as a whole. Agriculture is an im- portant segment of the Ohio economy with over half the State's area devoted to farming and approximately 15% of total employment in agribusiness. In prior years, the State's overall unemployment rate was commonly somewhat higher than the national figure. For example, the reported 1990 average monthly State rate was 5.7%, compared to the 5.5% national figure. However, for the last four years the State rates were below the national rates (5.5% versus 6.1% in 1994). The unemployment rate and its effects vary among particular geographic areas of the State. There can be no assurance that future national, regional or state- wide economic difficulties and the resulting impact on State or local govern- ment finances generally will not adversely affect the market value of Ohio Mu- nicipal Obligations held in the Portfolio or the ability of particular obligors to make timely payments of debt service on (or lease payments relating to) those obligations.

TRUSTEES         The business and affairs of the Fund are managed under the
                 direction of its Board of Trustees. The following persons
                 currently serve on the Board:

                   William O. Albertini--Executive Vice President and Chief
                   Financial Officer of Bell Atlantic Corporation.

                   Raymond J. Clark--Treasurer of Princeton University.

                   Robert M. Hernandez--Vice Chairman and Chief Financial Of-
                   ficer of USX Corporation.

                   Anthony M. Santomero--Deputy Dean of The Wharton School,
                   University of Pennsylvania.

                   David R. Wilmerding, Jr.--President of Gates, Wilmerding,
                   Carper & Rawlings, Inc.

ADVISER AND      The Adviser to the Compass Capital Funds is PNC Asset Manage-
SUB-ADVISERS     ment Group ("PAMG"). Each of the Portfolios within the Com-
                 pass Capital Fund family, except the International Bond Port-
                 folio, is managed by a specialized portfolio manager who is a
                 member of PAMG's fixed income portfolio management subsidi-
                 ary, BlackRock Financial Management, Inc. ("BlackRock"). The
                 sub-adviser of the International Bond Portfolio is Morgan
                 Grenfell Investment Services Limited ("Morgan Grenfell").

                 The eleven portfolios and their investment sub-advisers and

portfolio managers are as follows:

                             INVESTMENT
COMPASS CAPITAL PORTFOLIO   SUB-ADVISER            PORTFOLIO MANAGER
- -------------------------  -------------- ------------------------------------
Low Duration Bond          BlackRock(/1/) Robert S. Kapito; Vice Chairman of
                                          BlackRock since 1988; Portfolio co-
                                          manager since its inception.
                                          Michael P. Lustig; Vice President of
                                          BlackRock since 1989; Portfolio co-
                                          manager since 1994.
                                          Scott Amero; Managing Director of
                                          BlackRock since 1990; Portfolio co-
                                          manager since its inception.

                                INVESTMENT
COMPASS CAPITAL PORTFOLIO      SUB-ADVISER               PORTFOLIO MANAGER
- -------------------------  -------------------- ------------------------------------
Intermediate Government          BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
 Bond                                           and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.
Intermediate Bond                BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
                                                and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.
Core Bond                        BlackRock(/1/) Scott Amero (see above); Mr. Amero
                                                has been Portfolio manager since its
                                                inception.
Government Income                BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
                                                and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.
Managed Income                   BlackRock(/1/) Robert S. Kapito, Michael P. Lustig
                                                and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.
International Bond         Morgan Grenfell(/2/) Martin A. Hall; Director of Morgan
                                                Grenfell since 1991; Portfolio
                                                manager since 1991.
Tax-Free Income                  BlackRock(/1/) Kevin Klingert; portfolio manager at
                                                BlackRock since 1991; prior to
                                                joining BlackRock, Assistant Vice
                                                President, Merrill, Lynch, Pierce,
                                                Fenner & Smith; Portfolio manager
                                                since 1995.
Pennsylvania Tax-Free            BlackRock(/1/) Kevin Klingert (see above);
 Income                                         Portfolio manager since 1995.
New Jersey Tax-Free In-          BlackRock(/1/) Kevin Klingert (see above);
 come                                           Portfolio manager since 1995.
Ohio Tax-Free Income             BlackRock(/1/) Kevin Klingert (see above);
                                                Portfolio manager since 1995.

(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York 10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM, 1NB England.

PAMG was organized in 1994 to perform advisory services for investment companies, and has its principal offices at 1835 Market Street, Philadelphia, Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi- bank holding company. Morgan Grenfell is an indirect wholly- owned subsidiary of Deutsche Bank, A.G., a German financial services conglomerate.

For their investment advisory and sub-advisory services, PAMG and the Portfolios' sub-advisers are entitled to fees, com- puted daily on a Portfolio-by-Portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are The Expenses Of The Portfolios?" PAMG and the sub-advisers intend to waive a portion of their fees during the current fiscal year. All sub-advisory fees are paid by PAMG, and do not represent an extra charge to the Portfolios.

                              EACH PORTFOLIO
                         EXCEPT THE INTERNATIONAL
                              BOND PORTFOLIO       INTERNATIONAL BOND PORTFOLIO
                         ------------------------- ----------------------------------
AVERAGE DAILY NET         INVESTMENT  SUB-ADVISORY   INVESTMENT         SUB-ADVISORY
 ASSETS                  ADVISORY FEE     FEE       ADVISORY FEE            FEE
- -----------------        ------------ ------------ --------------      --------------
first $1 billion             .500%        .350%                  .550%               .400%
$1 billion--$2 billion       .450         .300                   .500                .350
$2 billion--$3 billion       .425         .275                   .475                .325
greater than $3 billion      .400         .250                   .450                .300

For the twelve months ended September 30, 1996, the Portfo- lios (other than the Low Duration Bond, Core Bond, Interna- tional Bond and New Jersey Tax-Free Income Portfolios) paid investment advisory fees at the following annual rates (ex- pressed as a percentage of average daily net assets) after voluntary fee waivers: Intermediate Government Bond Portfo- lio, .30%; Intermediate Bond Portfolio, .30%; Government In- come Portfolio, .30%; Managed Income Portfolio, .35%; Tax- Free Income Portfolio, .30%; Pennsylvania Tax-Free Income Portfolio, .30%; and Ohio Tax-Free Income Portfolio, .30%. For the period from April 1, 1996 through September 30, 1996, the Low Duration Bond and Core Bond Portfolios paid invest- ment advisory fees, after voluntary fee waivers, at the an- nual rates of % and % of their respective average daily net assets. For the periods from February 1, 1996 and Febru- ary 13, 1996, respectively, through September 30, 1996, the New Jersey Tax-Free Income and International Bond Portfolios paid investment advisory fees, after voluntary fee waivers, at the annual rates of % and % of their respective aver- age daily net assets.

The sub-advisers to each Portfolio strive to achieve best execu- tion on all transactions. Infrequently, brokerage transactions for the Portfolios may be directed through registered broker/dealers who have entered into dealer agreements with Com- pass Capital's distributor, subject to the requirements of best execution.

ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com-

              pass Distributors, Inc. ("CDI") (the "Administrators") serve as
              the Fund's co-administrators. CCG and PFPC are indirect wholly-
              owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub-
              sidiary of Provident Distributors, Inc. ("PDI"). A majority of
              the outstanding stock of PDI is owned by its officers and the
              remaining outstanding stock is owned by Pennsylvania Merchant
              Group Ltd.

              The Administrators generally assist the Fund in all aspects of
              its administration and operation, including matters relating to
              the maintenance of financial records and fund accounting. As
              compensation for these services, CCG is entitled to receive a
              fee, computed daily and payable monthly, at an annual rate of
              .03% of each Portfolio's average daily net assets, and PFPC and
              CDI are entitled to receive a combined fee, computed daily and
              payable monthly, at an annual rate of .20% of the first $500
              million of each Portfolio's average daily net assets, .18% of
              the next $500 million of each Portfolio's average daily net as-
              sets, .16% of the next $1 billion of each Portfolio's average
              daily net assets and .15% of each Portfolio's average daily net
              assets in excess of $2 billion. From time to time the Adminis-
              trators may waive some or all of their administration fees from
              a Portfolio.

              For information about the operating expenses the Portfolios paid
              for the most recent fiscal year, see "What Are the Expenses of
              the Portfolios?"

TRANSFER      PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT,        their transfer agent and dividend disbursing agent.

AND SERVICE   Under the Fund's Distribution and Service Plan (the "Plan"), In-
PLAN          vestor Shares of the Portfolios bear the expense of payments
              ("distribution fees") made to CDI, as the Fund's distributor
              (the "Distributor"), or affiliates of PNC Bank, National Associ-
              ation ("PNC Bank") for distribution and sales support services.
              The distribution fees may be used to compensate the Distributor
              for distribution services and to compensate

the Distributor and PNC Bank affiliates for sales support services provided in connection with the offering and sale of Investor Shares. The distribution fees may also be used to reimburse the Distributor and PNC Bank affiliates for related expenses, including payments to brokers, dealers, financial institutions and industry professionals ("Service Organiza- tions") for sales support services and related expenses. Dis- tribution fees payable under the Plan will not exceed .10% (annualized) of the average daily net asset value of each Portfolio's outstanding Investor A Shares and .75% (annualized) of the average daily net asset value of each Portfolio's outstanding Investor B Shares. Payments under the Plan are not tied directly to out-of-pocket expenses and therefore may be used by the recipients as they choose (for example, to defray their overhead expenses). The Plan also permits the Distributor, PAMG, the Administrators and other companies that receive fees from the Fund to make payments relating to distribution and sales support activities out of their past profits or other sources available to them.

Under the Plan, the Fund intends to enter into service ar- rangements with Service Organizations (including PNC Bank and its affiliates) with respect to each class of Investor Shares pursuant to which Service Organizations will render certain support services to their customers who are the beneficial owners of Investor Shares. In consideration for a shareholder servicing fee of up to .25% (annualized) of the average daily net asset value of Investor Shares owned by their customers, Service Organizations may provide one or more of the follow- ing services: responding to customer inquiries relating to the services performed by the Service Organization and to customer inquiries concerning their investments in Investor Shares; assisting customers in designating and changing divi- dend options, account designations and addresses; and provid- ing other similar shareholder liaison services. In considera- tion for a separate shareholder processing fee of up to .15% (annualized) of the average daily net asset value of Investor Shares owned by their customers, Service Organizations may provide one or more of these additional services to such cus- tomers: processing purchase and redemption requests from customers and placing orders with the Fund's transfer agent or the Distributor; processing dividend payments from the Fund on behalf of customers; providing sub-accounting with respect to Investor Shares beneficially owned by customers or the information necessary for sub-accounting; and providing other similar services.

Service Organizations may charge their clients additional fees for account services. Customers who are beneficial own- ers of Investor Shares should read this Prospectus in light of the terms and fees governing their accounts with Service Organizations.

The Glass-Steagall Act and other applicable laws, among other things, prohibit banks from engaging in the business of under- writing securities. It is intended that the services provided by Service Organizations under their service agreements will not be prohibited under these laws. Under state securities laws, banks and financial institutions that receive payments from the Fund may be required to register as dealers.

INVESTMENT QUALITY. Securities acquired by the Low Duration Bond Portfolio, In- termediate Government Bond Portfolio and Government Income Portfolio will be rated in the highest rating category at the time of purchase or, if unrated, of comparable quality as determined by the Portfolios' sub-adviser. Securities ac- quired by the other Portfolios will be rated investment grade at the time of purchase (within the four highest voting categories by Standard & Poor's Rat- ings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services, Inc.) or, if unrated, of comparable quality as determined by a Portfolio's sub-adviser. Securities rated "Baa" on "BBB" are generally considered to be investment grade although they have specu- lative characteristics. If a security's rating is reduced below the minimum rating that is permitted for a Portfolio, the Portfolio's sub-adviser will con- sider whether the Portfolio should continue to hold the security.

INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Intermediate Government Bond Portfolio and Government Income Portfolio (the "Government Portfolios") will invest at least 65% of their total assets in obligations issued or guaran- teed by the U.S. Government, its agencies or instrumentalities and related re- purchase agreements during normal market conditions. Under normal market condi- tions, the International Bond Portfolio will invest at least 65% of its total assets in the debt obligations of foreign issuers located in at least three different foreign countries. The Pennsylvania Tax-Free Income Portfolio and New Jersey Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (together with the "State-Specific Tax-Free Port- folios," the "Tax-Free Portfolios") will invest, during normal market condi- tions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and possessions of the United States, the District of Columbia and their political sub-divisions, agencies, instrumentalities and au- thorities and related tax-exempt derivative securities the interest on which is exempt from regular Federal income tax and is not an item of tax preference for purposes of the Federal alternative minimum tax ("Municipal Obligations"). In addition, each State-Specific Tax-Free Portfolio intends to invest at least 65% of its net assets in Municipal Obligations of issuers located in the particular state indicated by its name. The Tax-Free Income Portfolio intends to invest no more than 25% of its net assets in Municipal Obligations of issuers located in the same state. During temporary defensive periods each Tax-Free Portfolio may invest without limitation in securities that are not Municipal Obligations and may hold without limitation uninvested cash reserves.

FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in foreign securities and currencies. Investing in securities of foreign issuers involves considerations not typically associated with investing in securities of companies organized and operated in the United States. Because foreign secu- rities generally are denominated and pay dividends or interest in foreign cur- rencies, the value of a Portfolio that invests in foreign securities will be affected favorably or unfavorably by changes in currency exchange rates.

A Portfolio's investments in foreign securities may also be adversely affected by changes in foreign political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitations on the removal of funds or assets, or imposition of (or change in) exchange control regulations. In addi- tion, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Portfolio's operations. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. While the volume of transactions effected on foreign stock exchanges has increased in recent years, it remains appreciably below that of the New York Stock Exchange. Accordingly, a Portfo- lio's foreign investments may be less liquid and their prices may be more vola- tile than comparable investments in securities in U.S. companies. In addition, there is generally less government supervision and regulation of securities ex- changes, brokers and issuers in foreign countries than in the United States.

Foreign investments may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities, instrumentalities or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank, Asian Development Bank, European Investment Bank, and European Economic Commu- nity; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of domestic banks and corporations issued in foreign curren- cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may include loan participations and assignments, convertible securities and zero- coupon securities.

Because the securities markets in these countries are highly developed, the In- ternational Bond Portfolio may invest more than 25% of its total assets in the securities of issuers located in Canada, France, Germany, Japan and the United Kingdom. Investments of 25% or more of the Portfolio's total assets in a par- ticular country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries.

To maintain greater flexibility, the International Bond Portfolio may invest in instruments which have the characteristics of futures contracts. These instru- ments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the value of a currency or com- modity at a future point in time. The risks of such investments could reflect the risks of investing in futures, currencies and securities, including vola- tility and illiquidity.

The expense ratio of the International Bond Portfolio can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as higher investment research costs, higher foreign custody costs, higher commission costs and additional costs arising from delays in settlements of transactions involving foreign securities.

MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga- tions are "general obligation" securities and "revenue" securities. General ob- ligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue se- curities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as the user of the facility being fi- nanced. Revenue securities include private activity bonds which are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved. Municipal Obligations may also in- clude "moral obligation" bonds, which are normally issued by special purpose public authorities. If the issuer of moral obligation bonds is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.

Also included within the general category of Municipal Obligations are partici- pation certificates in a lease, an installment purchase contract, or a condi- tional sales contract ("lease obligations") entered into by a state or politi- cal subdivision to finance the acquisition or construction of equipment, land, or facilities. Although lease obligations are not general obligations of the issuer for which the state or other governmental body's unlimited taxing power is pledged, certain lease obligations are backed by a covenant to appropriate money to make the lease obligation payments. However, under certain lease obli- gations, the state or governmental body has no obligation to make these pay- ments in future years unless money is appropriated on a yearly basis. Although "non-appropriation" lease obligations are secured by the leased property, dis- position of the property in the event of foreclosure might prove difficult. These securities represent a relatively new type of financing that is not yet as marketable as more conventional securities.

Each Tax-Free Portfolio may invest up to 20% of its total assets (when added together with any other taxable investments held by the Portfolio) in private activity bonds the interest on which is an item of tax preference for purposes of the Federal alternative minimum tax ("AMT Paper"). In addition, each Tax- Free Portfolio may invest 25% or more of its assets in Municipal Obligations the interest on which is paid solely from revenues of similar projects. To the extent a Portfolio's assets are invested in Municipal Obligations payable from the revenues of similar projects or are invested in private activity bonds, the Portfolio will be subject to the particular risks presented by the laws and economic conditions relating to such projects and bonds to a greater extent than it would be if its assets were not so invested.

The Tax-Free Income Portfolio is classified as a diversified portfolio, and the State-Specific Tax-Free Portfolios are classified as non-diversified portfo- lios, under the 1940 Act. Investment returns on a non-diversified portfolio typically are dependent upon the performance of a smaller number of securities relative to the number held in a diversified portfolio. Consequently, the change in value of any one security may affect the overall value of a non-di- versified portfolio more than it would a diversified portfolio.

Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu- nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to purchase, at the Portfo-

lio's option, specified Municipal Obligations at a specified price. The acqui- sition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligations to which the commitment relates.

The amount of information regarding the financial condition of issuers of Mu- nicipal Obligations may be less extensive than the information for public cor- porations, and the secondary market for Municipal Obligations may be less liq- uid than that for taxable obligations. In addition, Municipal Obligations pur- chased by the Portfolios included obligations backed by letters of credit and other forms of credit enhancement issued by domestic and foreign banks, as well as other financial institutions. Changes in the credit quality of these insti- tutions could cause loss to a Municipal Portfolio and affect its share price.

The Tax-Free Portfolios may invest in tax-exempt derivative securities relating to Municipal Obligations, including tender option bonds, participations, bene- ficial interests in trusts and partnership interests. The amount of information regarding the financial condition of issuers of Municipal Obligations may not be as extensive as that which is made available by public corporations and the secondary market for Municipal Obligations may be less liquid than that for taxable fixed-income securities. Accordingly, the ability of a Tax-Free Portfo- lio to buy and sell tax-exempt securities may, at any particular time and with respect to any particular securities, be limited.

Opinions relating to the validity of Municipal Obligations and to the exemption of interest thereon from Federal and state income tax are rendered by counsel to the respective issuers and sponsors of the obligations at the time of issu- ance. The Fund and its service providers will rely on such opinions and will not review independently the underlying proceedings relating to the issuance of Municipal Obligations, the creation of any tax-exempt derivative securities, or the bases for such opinions.

MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax- Free Portfolios) may make significant investments in mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, install- ment sale contracts, credit card receivables or other assets) issued by govern- mental entities and private issuers.

The Portfolios may acquire several types of mortgage-related securities, in- cluding guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage- related securities ("ARMs") and collateralized mortgage obligations ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as pass-through entities known as real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in a variety of ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no principal payments will be made on a CMO class until all other classes hav- ing an earlier stated maturity date are paid in full. The classes may include accrual certificates (also known

as "Z-Bonds"), which only accrue interest at a specified rate until other spec- ified classes have been retired and are converted thereafter to interest-paying securities. They may also include planned amortization classes ("PAC's") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and generally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws, which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may be prepaid at any time be- cause the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of a Portfolio, the maturity of mortgage-related and other asset-backed securities will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In gener- al, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substan- tial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment or prepayment proceeds by a Portfolio will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset backed security's total return and maturity may be difficult to predict precisely. To the extent that a Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Portfolio's principal investment to the extent of premium paid.

Prepayments on mortgage-related and asset-backed securities generally increase with falling interest rates and decrease with rising interest rates; further- more, prepayment rates are influenced by a variety of economic and social fac- tors. In general, the collateral supporting non-mortgage asset-backed securi- ties is of shorter maturity than mortgage loans and is less likely to

experience substantial prepayments. Like other fixed income securities, when interest rates rise the value of a mortgage-related or asset-backed security generally will decline; however, when interest rates decline, the value of these securities that have prepayment features may not increase as much as that of other fixed income securities.

The Portfolios may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-related securities contain- ing loans or mortgages originated by PNC Bank or its affiliates. It is possible that under some circumstances, PNC Mortgage Securities Corp. or its affiliates could have interests that are in conflict with the holders of these mortgage- backed securities, and such holders could have rights against PNC Mortgage Se- curities Corp. or its affiliates.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in- vestment objectives, the Portfolios may purchase Treasury receipts and other "stripped" securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obliga- tions. These participations, which may be issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions, are issued at a discount to their "face value," and may include stripped mortgage-backed securities ("SMBS"). Stripped securities, par- ticularly SMBS, may exhibit greater price volatility than ordinary debt securi- ties because of the manner in which their principal and interest are returned to investors. The International Bond Portfolio also may purchase "stripped" se- curities that evidence ownership in the future interest payments or principal payments on obligations of foreign governments.

SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mort- gage-backed obligations. A common type of SMBS will have one class receiving all of the interest, while the other class receives all of the principal. How- ever, in some cases, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment. The market value of SMBS can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that re- ceives all or most of the interest are generally higher than prevailing market yields on other mortgage-related obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

Each Portfolio may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest pay- ments.

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt obligations of domestic or

foreign corporations and banks, and may acquire commercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a for- eign issuer. Bank obligations may include certificates of deposit, notes, bank- ers' acceptances and fixed time deposits. These obligations may be general ob- ligations of the parent bank or may be limited to the issuing branch or subsid- iary by the terms of a specific obligation or by government regulation. The Portfolios may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest rates, maturities and times of issuance. Obligations of certain agencies and instrumentalities of the U.S. Government such as the GNMA are supported by the United States' full faith and credit; others such as those of the FNMA and the Student Loan Marketing Association are supported by the right of the issuer to borrow from the Treasury; others such as those of the Federal Farm Credit Banks or the FHLMC are supported only by the credit of the instrumentality. No assur- ance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law.

INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfo- lios expect to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration management technique or to protect against an increase in the price of securi- ties a Portfolio anticipates purchasing at a later date. The Portfolios intend to use these transactions as a hedge and not as a speculative investment.

Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of inter- est on a notional principal amount from the party selling such interest rate floor.

In addition, the International Bond Portfolio may engage in foreign currency exchange transactions to protect against uncertainty in the level of future ex- change rates. The Portfolio may engage in foreign currency exchange transac- tions in connection with the purchase and sale of portfolio securities (trans- action hedging) and to protect the value of specific portfolio positions (posi- tion hedging). The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency, and may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts (futures contracts). The Portfolio may also purchase ex- change-listed and over-the-counter call and put options on futures contracts and on foreign currencies, and may write covered call options on up to 100% of the currencies in its portfolio. In order to

protect against currency fluctuations, the International Bond Portfolio may en- ter into currency swaps. Currency swaps involve the exchange of the rights of the Portfolio and another party to make or receive payments in specified cur- rencies.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio may write covered call options, buy put options, buy call options and write secured put options for the purpose of hedging or earn- ing additional income, which may be deemed speculative or, with respect to the International Bond Portfolio, cross-hedging. These options may relate to par- ticular securities, securities indices or the yield differential between two securities or, in the case of the International Bond Portfolio, foreign curren- cies, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they de- fault.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts for hedging pur- poses or to maintain liquidity. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately afterwards the aggregate amount of margin deposits on its existing futures positions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of certain securities, the cash value of a securities index or a stated quan- tity of a foreign currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. A Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may utilize futures contracts in anticipation of changes in the composition of its holdings or in currency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru- ments held by a Portfolio and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the re- sulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; and (d) a sub-adviser's inability to predict correctly the direction of securities pric- es, interest rates, currency exchange rates and other economic factors. For further discussion of risks involved with domestic and foreign futures and op- tions, see Appendix B in the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance companies. Under these contracts, a Portfolio makes cash contributions to a de- posit fund of the insurance company's general account. The insurance company then credits to the Portfolio, on a monthly basis, interest which is based on an index (such as the Salomon Brothers CD Index), but is guaranteed not to be less than a certain minimum rate. Each Portfolio does not expect to invest more than 5% of its net assets in GICs at any time during the current fiscal year.

SECURITIES LENDING. A Portfolio may seek additional income by lending securi- ties on a short-term basis. The securities lending agreements will require that the loans be secured by collateral in cash, U.S. Government securities or ir- revocable bank letters of credit maintained on a current basis equal in value to at least the market value of the loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of the value of its total assets. Securities loans involve risks of delay in receiving additional collateral or in recover- ing the loaned securities, or possibly loss of rights in the collateral if the borrower of the securities becomes insolvent.

VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The Portfolios may invest up to 10% of their total assets in leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate of an inverse floater resets in the opposite direction from the market rate of inter- est to which it is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that ex- ceeds the magnitude of the change in the index rate of interest. The higher de- gree of leverage inherent in inverse floaters is associated with greater vola- tility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for a Portfolio. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for a Portfolio to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Portfolio is not entitled to exercise its demand rights.

REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made through reverse repurchase agreements under which a Portfolio sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. The Portfolios may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolios (except the Tax-Free Portfolios) may use reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the trans- action. This use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest expense, that the market value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obli- gated to repurchase and that the securities may not be returned to the Portfo- lio. During the time a reverse repurchase agreement is outstanding, a Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liquid debt securities having a value at least equal to the repurchase price. A Portfolio's reverse repurchase agree- ments, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an additional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act. As a share- holder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that each Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of the value of its net assets in securities that are illiquid. GICs, variable and floating rate instruments that cannot be disposed of within seven days, and re- purchase agreements and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to this 15% limit. Each Portfolio may purchase securities which are not registered un- der the Securities Act of 1933 (the "1933 Act") but which can be sold to "qual- ified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by a Portfolio's sub-adviser that an adequate trading market exists

for that security. This investment practice could have the effect of increasing the level of illiquidity in a Portfolio during any period that qualified insti- tutional buyers become uninterested in purchasing these restricted securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se- curities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These transactions involve a commitment by a Port- folio to purchase or sell particular securities with payment and delivery tak- ing place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a security that it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and forward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield available in the market when the securities delivery takes place. Each Portfolio's when-issued purchases and forward commitments are not expected to exceed 25% of the value of its total assets absent unusual market conditions.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, each Portfolio (except the Tax- Free Portfolios) may enter into dollar roll transactions. A dollar roll trans- action involves a sale by the Portfolio of a mortgage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar secu- rity at a later date at an agreed-upon price. The securities that are repur- chased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepay- ment histories than those sold. During the period between the sale and repur- chase, a Portfolio will not be entitled to receive interest and principal pay- ments on the securities sold. Proceeds of the sale will be invested in addi- tional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the in- come, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of a Portfolio compared with what the per- formance would have been without the use of dollar rolls. At the time a Portfo- lio enters into a dollar roll transaction, it will place in a segregated ac- count maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including ac- crued interest) and will subsequently monitor the account to ensure that its value is maintained. A Portfolio's dollar rolls, together with its reverse re- purchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties a Portfolio is required to purchase may decline below the agreed upon re- purchase price of those securities. If the broker/dealer to whom a Portfolio sells securities becomes insolvent, the Portfolio's right to purchase or repur- chase securities may be restricted. Successful use of mortgage dollar rolls may depend upon a sub-adviser's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully em- ployed.

SHORT SALES. The Portfolios may only make short sales of securities "against- the-box." A short sale is a transaction in which a Portfolio sells a security it does not own in anticipation that the market price of that security will de- cline. The Portfolios may make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain portfolio flexibility. In a short sale "against-the-box," at the time of sale, the Portfolio owns or has the immediate and unconditional right to ac- quire the identical security at no additional cost. When selling short "against-the-box," a Portfolio forgoes an opportunity for capital appreciation in the security.

PORTFOLIO TURNOVER RATES. Under normal market conditions it is expected that the annual portfolio turnover rates for the Tax-Free Portfolios will not exceed 100%. The annual portfolio turnover rates for the other Portfolios may be high, and may exceed 500%. A Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the sub-adviser believes investment considerations warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates will generally result in higher transaction costs to a Portfolio and greater realized capital gains which are taxable as ordinary income to shareholders.

INTEREST RATE RISK. The value of fixed income securities in the Portfolios can be expected to vary inversely with changes in prevailing interest rates. Fixed income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The Portfolios are not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securi- ties, and the average maturity of a Portfolio's assets will vary within the limits stated above under "What Are the Differences Among the Portfolios?" based upon its sub-adviser's assessment of economic and market conditions.

STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen- tration of investments by the State-Specific Tax-Free Portfolios in state-spe- cific Municipal Obligations raises special investment considerations. In par- ticular, changes in the economic condition and governmental policies of a state and its political subdivisions could adversely affect the value of a Portfo- lio's shares. Certain matters relating to the states in which the State-Spe- cific Tax-Free Portfolios invest are described below. For further information, see "Special Considerations Regarding State-Specific Municipal Obligations" in the Statement of Additional Information.

Pennsylvania. Although the General Fund of the Commonwealth (the principal op- erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases and spending decreases resulted in surpluses the following three years; as of June 30, 1994, the General Fund had a surplus of $892.9 million. The deficit in the Commonwealth's unreserved/ undesignated funds also have been eliminated, and there was a surplus of $79.2 million as of June 30, 1994. Ris- ing unemployment, a relatively high proportion of persons 65 and older in the Commonwealth and court ordered increases in healthcare reimbursement rates place increased pressures on the tax resources of the Commonwealth and its mu- nicipalities. The Commonwealth has sold a substantial amount of bonds over the past several years, but the debt burden remains moderate. The recession has af- fected Pennsylvania's economic base, with in-

come and job growth at levels below national averages. Employment growth has shifted to the trade and service sectors, with losses in more high-paid manu- facturing positions. A new governor took office in January, 1995, but the Com- monwealth is likely to continue to show fiscal restraint.

New Jersey. The State of New Jersey generally has a diversified economic base consisting of, among others, commerce and service industries, selective commer- cial agriculture, insurance, tourism, petroleum refining and manufacturing, al- though New Jersey's manufacturing industry has experienced a downward trend in the last few years. New Jersey is a major recipient of Federal assistance and, of all the states, is among the highest in the amount of Federal aid received. Therefore, a decrease in Federal financial assistance may adversely affect the financial condition of New Jersey and its political subdivisions and instrumen- talities. While New Jersey's economic base has become more diversified over time and thus its economy appears to be less vulnerable during recessionary pe- riods, a recurrence of high levels of unemployment could adversely affect New Jersey's overall economy and the ability of New Jersey and its political subdi- visions and instrumentalities to meet their financial obligations. In addition, New Jersey maintains a balanced budget which restricts total appropriation in- creases to only 5% annually with respect to any municipality or county, and the balanced budget plan may actually adversely affect a particular municipality's or county's ability to repay its obligations.

               The business and affairs of the Fund are managed under the di-
               rection of its Board of Trustees. The following persons cur-
               rently serve on the Board:

                 William O. Albertini--Executive Vice President and Chief Fi-
                 nancial Officer of Bell Atlantic Corporation.

                 Raymond J. Clark--Treasurer of Princeton University.

                 Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
                 cer of USX Corporation.

                 Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
                 versity of Pennsylvania.

                 David R. Wilmerding, Jr.--President of Gates, Wilmerding,
                 Carper & Rawlings, Inc.

ADVISER AND    The Adviser to the COMPASS CAPITAL FUNDS is PNC Asset Manage-
SUB-ADVISERS   ment Group ("PAMG"). Each of the Portfolios within the Compass
               Capital Fund family, except the International Bond Portfolio,
               is managed by a specialized portfolio manager who is a member
               of PAMG's fixed income portfolio management subsidiary, Black-
               Rock Financial Management, Inc. ("BlackRock"). The sub-adviser
               of the International Bond Portfolio is Morgan Grenfell Invest-
               ment Services Limited ("Morgan Grenfell").

               The eight portfolios and their investment sub-advisers and

portfolio managers are as follows:

                             INVESTMENT
COMPASS CAPITAL PORTFOLIO   SUB-ADVISER            PORTFOLIO MANAGER
- -------------------------  -------------- ------------------------------------
Low Duration Bond          BlackRock/(1)/ Robert S. Kapito; Vice Chairman of
                                          BlackRock since 1988; Portfolio co-
                                          manager since its inception.

                                          Michael P. Lustig; Vice President of
                                          BlackRock since 1989; Portfolio co-
                                          manager since 1994.

                                          Scott Amero; Managing Director of
                                          BlackRock since 1990; Portfolio co-
                                          manager since its inception.

                                INVESTMENT
COMPASS CAPITAL PORTFOLIO      SUB-ADVISER               PORTFOLIO MANAGER
- -------------------------  -------------------- ------------------------------------
Intermediate Government          BlackRock/(1)/ Robert S. Kapito, Michael P. Lustig
 Bond                                           and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.

Core Bond                        BlackRock/(1)/ Scott Amero (see above); Mr. Amero
                                                has been Portfolio manager since its
                                                inception.

Government Income                BlackRock/(1)/ Robert S. Kapito, Michael P. Lustig
                                                and Scott Amero (see above); Messrs.
                                                Kapito, Lustig and Amero have been
                                                Portfolio co-managers since 1995.

International Bond         Morgan Grenfell/(2)/ Martin A. Hall; Director of Morgan
                                                Grenfell since 1991; Portfolio
                                                manager since 1991.

Tax-Free Income                  BlackRock/(1)/ Kevin Klingert; portfolio manager at
                                                BlackRock since 1991; prior to
                                                joining BlackRock, Assistant Vice
                                                President, Merrill, Lynch, Pierce,
                                                Fenner & Smith; Portfolio manager
                                                since 1995.

Pennsylvania Tax-Free            BlackRock/(1)/ Kevin Klingert (see above);
 Income                                         Portfolio manager since 1995.

New Jersey Tax-Free              BlackRock/(1)/ Kevin Klingert (see above);
 Income                                         Portfolio manager since 1995.

(1) BlackRock has its primary offices at 345 Park Avenue, New York, New York 10154.
(2) Morgan Grenfell has its primary offices at 20 Finsbury Circus, London ECZM, 1NB England.

PAMG was organized in 1994 to perform advisory services for in- vestment companies, and has its principal offices at 1835 Market Street, Philadelphia, Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company. Morgan
Grenfell is an indirect wholly-owned subsidiary of Deutsche Bank, A.G., a German financial services conglomerate.

For their investment advisory and sub-advisory services, PAMG and the Portfolios' sub-advisers are entitled to fees, computed daily on a Portfolio-by-Portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are The Expenses Of The Portfolios?" PAMG and the sub-advisers intend to waive a portion of their fees during the current fis- cal year. All sub-advisory fees are paid by PAMG, and do not represent an extra charge to the Portfolios.

                              EACH PORTFOLIO
                         EXCEPT THE INTERNATIONAL
                              BOND PORTFOLIO       INTERNATIONAL BOND PORTFOLIO
                         ------------------------- -----------------------------
AVERAGE DAILY NET         INVESTMENT  SUB-ADVISORY   INVESTMENT    SUB-ADVISORY
ASSETS                   ADVISORY FEE     FEE       ADVISORY FEE       FEE
- -----------------        ------------ ------------ -------------- --------------
first $1 billion             .500%        .350%         .550%          .400%
$1 billion--$2 billion       .450         .300          .500           .350
$2 billion--$3 billion       .425         .275          .475           .325
greater than $3 billion      .400         .250          .450           .300

For the twelve months ended September 30, 1996, the Portfolios paid investment advisory fees at the following annual rates (expressed as a percentage of average daily net assets) after voluntary fee waivers: Intermediate Government Bond Portfolio, .30%; Government Income Portfolio, .30%; Tax-Free Income Port- folio, 0%; and Pennsylvania Tax-Free Income Portfolio, .30%. For the period from April 1, 1996 through September 30, 1996, the Low Duration Bond and Core Bond Portfolios paid investment advisory fees, after voluntary fee waivers, at the annual rates of % and % of their respective average daily net as- sets. For the period from February 1, 1996 and February 13, 1996, respectively, through September 30, 1996, the New Jersey Tax-Free Income and International Bond Portfolios paid invest- ment advisory fees, after voluntary fee waivers, at the annual rates of % and % of their respective average daily net as- sets.

                The sub-advisers to each Portfolio strive to achieve best exe-
                cution on all transactions. Infrequently, brokerage transac-
                tions for the Portfolios may be directed through registered
                broker/dealers who have entered into dealer agreements with
                Compass Capital's distributor, subject to the requirements of
                best execution.

ADMINISTRATORS  Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
                Compass Distributors, Inc. ("CDI") (the "Administrators")
                serve as the Fund's co-administrators. CCG and PFPC are indi-
                rect wholly-owned subsidiaries of PNC Bank Corp. CDI is a
                wholly-owned subsidiary of Provident Distributors, Inc.
                ("PDI"). A majority of the outstanding stock of PDI is owned
                by its officers and the remaining outstanding stock is owned
                by Pennsylvania Merchant Group Ltd.

                The Administrators generally assist the Fund in all aspects of
                its administration and operation, including matters relating
                to the maintenance of financial records and fund accounting.
                As compensation for these services, CCG is entitled to receive
                a fee, computed daily and payable

30

              monthly, at an annual rate of .03% of each Portfolio's average
              daily net assets, and PFPC and CDI are entitled to receive a
              combined fee, computed daily and payable monthly, at an annual
              rate of .20% of the first $500 million of each Portfolio's aver-
              age daily net assets, .18% of the next $500 million of each
              Portfolio's average daily net assets, .16% of the next $1 bil-
              lion of each Portfolio's average daily net assets and .15% of
              each Portfolio's average daily net assets in excess of $2 bil-
              lion. From time to time the Administrators may waive some or all
              of their administration fees from a Portfolio.

              For information about the operating expenses the Portfolios paid
              for the most recent fiscal year, see "What Are the Expenses of
              the Portfolios?"

TRANSFER      PNC Bank, National Association ("PNC Bank") serves as the Port-
AGENT,        folios' custodian and PFPC serves as their transfer agent and
DIVIDEND      dividend disbursing agent.

DISTRIBUTION  Under the Fund's Distribution and Service Plan (the "Plan"), In-
AND SERVICE   vestor C Shares of the Portfolios bear the expense of payments
PLAN          ("distribution fees") made to CDI, as the Fund's distributor
              (the "Distributor"), or affiliates of PNC Bank for distribution
              and sales support services. The distribution fees may be used to
              compensate the Distributor for distribution services and to com-
              pensate the Distributor and PNC Bank affiliates for sales sup-
              port services provided in connection with the offering and sale
              of Investor C Shares. The distribution fees may also be used to
              reimburse the Distributor and PNC Bank affiliates for related
              expenses, including payments to brokers, dealers, financial in-
              stitutions and industry professionals ("Service Organizations")
              for sales support services and related expenses. Distribution
              fees payable under the Plan will not exceed .75% (annualized) of
              the average daily net asset value of each Portfolio's outstand-
              ing Investor C Shares. Payments under the Plan are not tied di-
              rectly to out-of-pocket expenses and therefore may be used by
              the recipients as they choose (for example, to defray their
              overhead expenses). The Plan also permits the Distributor, PAMG,
              the Administrators and other companies that receive fees from
              the Fund to make payments relating to distribution and sales
              support activities out of their past profits or other sources
              available to them.

              Under the Plan, the Fund intends to enter into service arrange-
              ments with Service Organizations (including PNC Bank and its af-
              filiates) with respect to Investor C Shares pursuant to which
              Service Organizations

                will render certain support services to their customers who
                are the beneficial owners of Investor C Shares. In considera-
                tion for a shareholder servicing fee of up to .25%
                (annualized) of the average daily net asset value of Investor
                C Shares owned by their customers, Service Organizations may
                provide one or more of the following services: responding to
                customer inquiries relating to the services performed by the
                Service Organization and to customer inquiries concerning
                their investments in Investor C Shares; assisting customers in
                designating and changing dividend options, account designa-
                tions and addresses; and providing other similar shareholder
                liaison services. In consideration for a separate shareholder
                processing fee of up to .15% (annualized) of the average daily
                net asset value of Investor C Shares owned by their customers,
                Service Organizations may provide one or more of these addi-
                tional services to such customers: processing purchase and re-
                demption requests from customers and placing orders with the
                Fund's transfer agent or the Distributor; processing dividend
                payments from the Fund on behalf of customers; providing sub-
                accounting with respect to Investor C Shares beneficially
                owned by customers or the information necessary for
                sub-accounting; and providing other similar services.

                Service Organizations may charge their clients additional fees
                for account services. Customers who are beneficial owners of
                Investor C Shares should read this Prospectus in light of the
                terms and fees governing their accounts with Service Organiza-
                tions.

                The Glass-Steagall Act and other applicable laws, among other
                things, prohibit banks from engaging in the business of under-
                writing securities. It is intended that the services provided
                by Service Organizations under their service agreements will
                not be prohibited under these laws. Under state securities,
                banks and financial institutions that receive payments from
                the Fund may be required to register as dealers.

EXPENSES        Expenses are deducted from the total income of each Portfolio
                before dividends and distributions are paid. Expenses include,
                but are not limited to, fees paid to PAMG and the Administra-
                tors, transfer agency and custodian fees, trustee fees, taxes,
                interest, professional fees, shareholder servicing and
                processing fees, distribution fees, fees and expenses in reg-
                istering and qualifying the Portfolios and their shares for
                distribution under Federal and state securities laws, expenses
                of preparing prospectuses and statements of additional infor-
                mation and of printing and distributing prospectuses and
                statements of additional information to existing shareholders,
                expenses relating to shareholder reports, shareholder meetings
                and proxy solicitations, insurance premiums, the expense of
                independent pricing services, and other expenses which are

32

not expressly assumed by PAMG or the Fund's service providers under their agreements with the Fund. Any general expenses of the Fund that do not belong to a particular investment portfolio will be allocated among all investment portfolios by or under the direction of the Board of Trustees in a manner the Board de- termines to be fair and equitable.

What Pricing Options Are Available To Investors?

The Bond Portfolios of Compass Capital Funds offer different pricing options to investors in the form of different share classes. The Investor C Share pricing option is described be- low:

Investor C Shares of all Portfolios:
 Maximum Front-End Sales Charge                0.00%
 12b-1 Fee                                     0.75%
 CDSC (Redemption Charge)                      1.00%
                                      (If redeemed within 12
                                        months of purchase)

The Fund also offers two additional pricing options for shares of the Portfolios--Investor A Shares (which are sold with a front-end load) and Investor B Shares (which are subject to a back-end load if redeemed within six years of purchase). C Shares may make sense for shorter term (relative to both B Shares and A Shares) investors who prefer to pay for profes- sional investment advice on an ongoing basis (asset-based sales charge) rather than with a traditional, one-time front- end sales charge. Such investors may plan to make substantial redemptions within 6 years of purchase. Brokers will receive commissions equal to 1% of Investor C Shares sold by them plus ongoing fees under the Fund's Distribution and Service Plan as described above under "Who Manages the Fund?" These commis- sions and payments may be different than the reallowances or placement fees paid to dealers in connection with sales of In- vestor A Shares and Investor B Shares. For more information on A Shares and B Shares of the Portfolios, call (800) 441-7762.

Investors wishing to purchase shares of the Portfolios may do so either by mailing the investment application attached to this Prospectus along with a check or by wiring money as spec- ified below under "How Are Shares Purchased?"

How Are Shares Purchased?

GENERAL. Initial and subsequent purchase orders may be placed through securi- ties brokers, dealers or financial institutions ("brokers"), or the transfer agent. Generally, individual investors will purchase Investor C Shares through a broker who will then transmit the purchase order directly to the transfer agent.

The minimum investment for the initial purchase of shares is $500; there is a $100 minimum for subsequent investments. Purchases through the Automatic In- vestment Plan described below are subject to a lower initial purchase minimum. In addition, the minimum initial investment for employees of the Fund, the Fund's investment adviser, sub-advisers, Distributor or transfer agent or em- ployees of their affiliates is $100, unless payment is made through a payroll deduction program in which case the minimum investment is $25.

PURCHASES THROUGH BROKERS. Shares of the Portfolios may be purchased through brokers which have entered into dealer agreements with the Distributor. Pur- chase orders received by a broker and transmitted to the transfer agent before the close of regular trading on the New York Stock Exchange (currently 4:00
p.m. Eastern time) on a Business Day will be effected at the net asset value determined that day. Payment for an order may be made by the broker in Federal funds or other funds immediately available to the Portfolios' custodian no later than 4:00 p.m. (Eastern time) on the third Business Day following receipt of the purchase order.

It is the responsibility of brokers to transmit purchase orders and payment on a timely basis. If payment is not received within the period described above, the order will be canceled, notice thereof will be given, and the broker and its customers will be responsible for any loss to the Fund or its shareholders. Orders of less than $500 may be mailed by a broker to the transfer agent.

PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor C Shares by completing and signing the Account Application Form and mailing it to the transfer agent, together with a check in at least the minimum initial pur- chase amount payable to Compass Capital Funds. An Account Application Form may be obtained by calling (800) 441-7762. The name of the Portfolio with respect to which shares are purchased must also appear on the check or Federal Reserve Draft. Investors may also wire Federal funds in connection with the purchase of shares. The wire instructions must include the name of the Portfolio, specify the class of Investor Shares, and include the name of the account registration and the shareholder account number. Before wiring any funds, an investor must call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase orders which are received by PFPC, together with payment, before the close of regular trading hours on the New York Stock Exchange (currently 4:00 p.m. East- ern time) on any Business Day (as defined below) are priced at the applicable net asset value next determined on that day.

OTHER PURCHASE INFORMATION. Shares of each Portfolio are sold on a continuous basis by CDI as the Distributor. CDI maintains its principal offices at 259 Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087. Purchases may be effected on weekdays on which both the New York Stock Exchange and the Federal Reserve Bank of Philadelphia are open for business (a "Business Day"). Payment for orders which are not received or accepted will be returned after prompt in- quiry. The issuance of shares is recorded on the books of the Fund. No certifi- cates will be issued for shares. Payments for shares of a Portfolio may, in the discretion of the Fund's investment adviser, be made in the form of securities that are permissible investments for that Portfolio. Compass Capital reserves the right to reject any purchase order or to waive the minimum initial invest- ment requirement.

REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ- ten redemption request in proper form must be sent directly to Compass Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the contingent deferred sales charge, if applicable, there is no charge for a re- demption. Shareholders may also place redemption requests through a broker or other institution, which may charge a fee for this service.

WHEN REDEEMING SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE THAT THEY ARE REDEEMING INVESTOR C SHARES. If a redeeming shareholder owns both Investor A Shares and Investor B or Investor C Shares in the same Portfolio, the Investor A Shares will be redeemed first unless the shareholder indicates otherwise.

Except as noted below, a request for redemption must be signed by all persons in whose names the shares are registered. Signatures must conform exactly to the account registration. If the proceeds of the redemption would exceed $25,000, or if the proceeds are not to be paid to the record owner at the rec- ord address, or if the shareholder is a corporation, partnership, trust or fi- duciary, signature(s) must be guaranteed by any eligible guarantor institution. Eligible guarantor institutions generally include banks, broker/dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations.

Generally, a properly signed written request with any required signature guar- antee is all that is required for a redemption. In some cases, however, other documents may be necessary. Additional documentary evidence of authority is re- quired by PFPC in the event redemption is requested by a corporation, partner- ship, trust, fiduciary, executor or administrator.

EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited redemption, shares can be redeemed by telephone and the proceeds sent by check to the shareholder or by Federal wire transfer to a single previously desig- nated bank account. Once authorization is on file, PFPC will honor requests by any person by telephone at (800) 441-7762 (in Delaware call collect (302) 791- 1194) or other means. The minimum amount that may be sent by check is $500, while the minimum amount that may be wired is $10,000. The Fund reserves the right to change these minimums or to terminate these redemption privileges. If the proceeds of a redemption would exceed $25,000, the redemption request must be in writing and will be subject to the signature guarantee requirement de- scribed above. During periods of substantial economic or market change, tele- phone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.

The Fund is not responsible for the efficiency of the Federal wire system or the shareholder's firm or bank. The Fund does not currently charge for wire transfers. The shareholder is responsible for any charges imposed by the share- holder's bank. To change the name of the single designated bank account to re- ceive wire redemption proceeds, it is necessary to send a written re-

quest (with a guaranteed signature as described above) to Compass Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.

The Fund reserves the right to refuse a telephone redemption if it believes it advisable to do so. The Fund, the Administrators and the Distributor will em- ploy reasonable procedures to confirm that instructions communicated by tele- phone are genuine. The Fund, the Administrators and the Distributor will not be liable for any loss, liability, cost or expense for acting upon telephone in- structions reasonably believed to be genuine in accordance with such proce- dures.

ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold- er's account in any Portfolio at any time the net asset value of the account in such Portfolio falls below the required minimum initial investment as the re- sult of a redemption or an exchange request. A shareholder will be notified in writing that the value of the shareholder's account in a Portfolio is less than the required amount and will be allowed 30 days to make additional investments before the redemption is processed.

PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net asset value per share next determined after the request for redemption is re- ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil- mington, Delaware 19899-8907. Proceeds from the redemption of Investor C Shares will be reduced by the amount of any applicable contingent deferred sales charge. Unless another payment option is used as described above, payment for redeemed shares is normally made by check mailed within seven days after ac- ceptance by PFPC of the request and any other necessary documents in proper or- der. Payment may, however, be postponed or the right of redemption suspended as provided by the rules of the SEC. If the shares to be redeemed have been re- cently purchased by check, the Fund's transfer agent may delay the payment of redemption proceeds, which may be a period of up to 15 days after the purchase date, pending a determination that the check has cleared.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsibili- ties under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

COMPASS CAPITAL FUNDS offers shareholders many special features which enable an investor to have greater investment flexibility as well as greater access to information about the Fund throughout the investment period.

Additional information on each of these features is available from PFPC by calling (800) 441-7762 (in Delaware call collect (302) 791-1194).

EXCHANGE PRIVILEGE. Investor C Shares of each Portfolio may be exchanged for Investor C Shares of other portfolios of the Fund which offer that class of shares, based on their respective net asset values.

The exchange of Investor C Shares will not be subject to a CDSC, which will continue to be measured from the date of the original purchase and will not be affected by exchanges.

A shareholder wishing to make an exchange may do so by sending a written re- quest to PFPC at the address given above. Shareholders are automatically pro- vided with telephone exchange privileges when opening an account, unless they indicate on the Application that they do not wish to use this privilege. To add this feature to an existing account that previously did not provide for this option, a Telephone Exchange Authorization Form must be filed with PFPC. This form is available from PFPC. Once this election has been made, the shareholder may simply contact PFPC by telephone at (800) 441-7762 (in Delaware call col- lect (302) 791-1194) to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to PFPC in writing.

If the exchanging shareholder does not currently own shares of the investment portfolio whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and broker of record as the account from which shares are exchanged, unless otherwise speci- fied in writing by the shareholder with all signatures guaranteed by an eligi- ble guarantor institution as defined above. In order to participate in the Au- tomatic Investment Program or establish a Systematic Withdrawal Plan for the new account, however, an exchanging shareholder must file a specific written request.

Any share exchange must satisfy the requirements relating to the minimum ini- tial investment requirement, and must be legally available for sale in the state of the investor's residence. For Federal income tax purposes, a share ex- change is a taxable event and, accordingly, a capital gain or loss may be real- ized. Before making an exchange request, shareholders should consult a tax or other financial adviser and should consider the investment objective, policies and restrictions of the investment portfolio into which the shareholder is mak- ing an exchange, as set forth in the applicable Prospectus. Brokers may charge a fee for handling exchanges.

The Fund reserves the right to modify or terminate the exchange privilege at any time. Notice will be given to shareholders of any material modification or termination except where notice is not required.

The Fund reserves the right to reject any telephone exchange request. Telephone exchanges may be subject to limitations as to amount or frequency, and to other restrictions that may be established from time to time to ensure that exchanges do not operate to the disadvantage of any portfolio or its shareholders. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Fund, the Administrators and the Distributor will not be liable for any loss, liabil- ity, cost or expense for acting upon telephone instructions reasonably believed to be genuine in accordance with such procedures. Exchange orders may also be sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming- ton, Delaware 19899-8907.

AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of any Portfolio may arrange for periodic investments in that Portfolio through automatic deductions from a checking or savings account by completing the AIP Application Form which may be obtained from PFPC. The minimum pre-authorized investment amount is $50.

RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi- vidual retirement accounts ("IRAs") and rollover IRAs. For further information as to applications and annual fees, contact the Distributor. To determine whether the benefits of an IRA are available and/or appropriate, a shareholder should consult with a tax adviser.

SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal Plan which may be used by investors who wish to receive regular distributions from their accounts. Upon commencement of the SWP, the account must have a cur- rent value of $10,000 or more in a Portfolio. Shareholders may elect to receive automatic cash payments of $100 or more either monthly, every other month, quarterly, three times a year, semi-annually, or annually. Automatic withdraw- als are normally processed on the 25th day of the applicable month or, if such day is not a Business Day, on the next Business Day and are paid promptly thereafter. An investor may utilize the SWP by completing the SWP Application Form which may be obtained from PFPC.

Shareholders should realize that if withdrawals exceed income dividends their invested principal in the account will be depleted. To participate in the SWP, shareholders must have their dividends automatically reinvested. Shareholders may change or cancel the SWP at any time, upon written notice to PFPC. No con- tingent deferred sales charge will be assessed on redemptions of Investor C Shares made through the SWP that do not exceed 12% of an account's net asset value on an annualized basis. For example, monthly, quarterly and semi-annual SWP redemptions of Investor C Shares will not be subject to the CDSC if they do not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the redemption date. SWP redemptions of Investor C Shares in excess of this limit are still subject to the applicable CDSC.

PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred sales charge of 1.00% based on the lesser of the offering price or the net as- set value of the Investor C Shares on the redemption date if redeemed within twelve months after purchase.

EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge on Investor C Shares is not charged in connection with: (1) ex- changes described in "What Are The Shareholder Features Of The Fund?--Exchange Privilege"; (2) redemptions made in connection with minimum required distribu- tions from IRA, 403(b)(7) and qualified employee benefit plan accounts due to the shareholder reaching age 70 1/2; (3) redemptions in connection with a shareholder's death or disability (as defined in the Internal Revenue Code) subsequent to the purchase of Investor C Shares; (4) involuntary redemptions of Investor C Shares in accounts with low balances as described in "How Are Shares Redeemed?"; and (5) redemptions made pursuant to the Systematic Withdrawal Plan, subject to the limitations set forth above under "What Are The Share- holder Features Of The Fund?--Systematic Withdrawal Plan." In addition, no con- tingent deferred sales charge is charged on Investor C Shares acquired through the reinvestment of dividends or distributions.

When an investor redeems Investor C Shares, the redemption order is processed to minimize the amount of the contingent deferred sales charge that will be charged. Investor C Shares are redeemed first from those shares that are not subject to the deferred sales load (i.e., shares that were acquired through re- investment of dividends or distributions) and after that from the shares that have been held the longest.

EQUITY SECURITIES. During normal market conditions each Portfolio, except the Balanced Portfolio, will normally invest at least 80% of the value of its total assets in equity securities. The Portfolios will invest primarily in equity se- curities of U.S. issuers, except the International Equity and International Emerging Markets Portfolios, which will invest primarily in foreign issuers. Equity securities include common stock and preferred stock (including convert- ible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts and partnerships; and depositary receipts.

ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may invest in both sponsored and unsponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental De- pository Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence ownership of either foreign or domestic un- derlying securities. GDRs are depository receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs are organized independently and without the cooperation of the issuer of the underlying securities. As a result, available information con- cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present additional investment considerations as described below under "In- ternational Portfolios."

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio (other than the Index Master Portfolio) may write cov- ered call options, buy put options, buy call options and write secured put op- tions for the purpose of hedging or earning additional income, which may be deemed speculative or, with respect to the International Equity and Interna- tional Emerging Markets Portfolios, cross-hedging. These options may relate to particular securities, stock or bond indices or the yield differential between two securities, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding op- tions exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its mem- bers if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts to commit funds awaiting investment in stocks or maintain cash liquidity or, except with re- spect to the Index Master Portfolio, for other hedging purposes. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately af- terwards the aggregate amount of margin deposits on its existing futures posi- tions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. A Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may utilize futures con- tracts in anticipation of changes in the composition of its holdings or in cur- rency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru- ments held by a Portfolio and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the re- sulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; and (d) a sub-adviser's inability to predict correctly the direction of securities pric- es, interest rates, currency exchange rates and other economic factors. For further discussion of risks involved with domestic and foreign futures and op- tions, see Appendix B in the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re- quests, or as a temporary defensive measure if its sub-adviser determines that market conditions warrant, each Portfolio other than the Index Master Portfolio may also invest without limitation in high quality money market instruments. The Balanced Portfolio may also invest in these securities in furtherance of its investment objective. The Index Master Portfolio may invest up to 5% of

its net assets in certain short-term fixed income obligations in order to main- tain liquidity or as invest temporarily uncommitted cash balances.

High quality money market instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign is- suers, bank obligations, including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial paper, repurchase agreements and obli- gations of supranational organizations. Generally, such obligations will mature within one year from the date of settlement, but may mature within two years from the date of settlement. Under a repurchase agreement, a Portfolio agrees to purchase securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price. Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the Index Master Portfolio) may purchase securities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These transac- tions involve a commitment by a Portfolio to purchase or sell particular secu- rities with payment and delivery taking place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a se- curity it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and forward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield available in the market when the securi- ties delivery takes place. Each Portfolio's when-issued purchases and forward commitments are not expected to exceed 25% of the value of its total assets ab- sent unusual market conditions.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made by each Portfolio (except the Index Master Portfolio) through reverse repur- chase agreements under which the Portfolio sells portfolio securities to finan- cial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. A Portfolio may use the proceeds of re- verse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expi- ration of the reverse repurchase agreement. The Balanced Portfolio may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. This use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest expense, that the market value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obligated to repurchase and that the securi- ties may not be returned to the Portfolio. During the time a reverse repurchase agreement is outstanding, a Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropri

ate liquid securities having a value at least equal to the repurchase price. A Portfolio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets (33% in the case of the Index Master Portfolio). In addition, the Balanced Portfolio may borrow up to an additional 5% of its total assets for temporary purposes. Whenever borrowings exceed 5% of a Portfolio's total assets, the Portfolios (other than the Index Master Portfolio and the Balanced Portfolio) will not make any investments.

INVESTMENT COMPANIES. In connection with the management of their daily cash po- sitions, the Portfolios (other than the Index Master Portfolio) may invest in securities issued by other investment companies which invest in short-term debt securities and which seek to maintain a $1.00 net asset value per share. Such Portfolios may also invest in securities issued by other investment companies with similar investment objectives. The International Equity and International Emerging Markets Portfolios may purchase shares of investment companies invest- ing primarily in foreign securities, including so-called "country funds." Coun- try funds have portfolios consisting exclusively of securities of issuers lo- cated in one foreign country. The Index Equity Portfolio may also invest in Standard & Poor's Depository Receipts (SPDRs) and shares of other investment companies that are structured to seek a similar correlation to the performance of the S&P 500 Index. Securities of other investment companies will be acquired within limits prescribed by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addi- tion to the expenses each bears directly in connection with its own operations.

SECURITIES LENDING. A Portfolio may seek additional income by lending securi- ties on a short-term basis. The securities lending agreements will require that the loans be secured by collateral in cash, U.S. Government securities or (ex- cept for the Index Master Portfolio) irrevocable bank letters of credit main- tained on a current basis equal in value to at least the market value of the loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of the value of its total assets. Securities loans involve risks of delay in re- ceiving additional collateral or in recovering the loaned securities, or possi- bly loss of rights in the collateral if the borrower of the securities becomes insolvent.

ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% (10% with respect to the Index Master Portfolio) of the value of its net assets in secu- rities that are illiquid. Variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agreements and time deposits that do not provide for payment within seven days after notice, without taking a re- duced price, are subject to these limits. Each Portfolio may purchase securi- ties which are not registered under the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by the adviser or sub-adviser that an adequate trading market exists for that security. This investment practice could have the effect of increasing the level of illiquidity in a Portfolio during any pe- riod that qualified institutional buyers become uninterested in purchasing these restricted securities.

SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at least 90% (and in any event at least 65%) of their respective total assets in equity securities of smaller-capitalized organizations (less than $1 billion at the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio and Mid- Cap Growth Equity Portfolio will invest, under normal market conditions, at least 90% (and in any event at least 65%) of their respective total assets in equity securities of medium-capitalized organizations (between $1 billion and $5 billion at the time of purchase). These organizations will normally have more limited product lines, markets and financial resources and will be depen- dent upon a more limited management group than larger capitalized companies.

INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the Index Master Portfolio (in which all of the assets of the Index Equity Portfo- lio are invested) invests at least 95% of the value of its total assets in se- curities included in the Standard & Poor's 500(R) Composite Stock Price Index (the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of the stocks that comprise the S&P 500 Index in approximately the same propor- tions as they are represented in the Index. The Portfolio operates as an index portfolio and, therefore, is not actively managed (through the use of economic, financial or market analysis), and adverse performance will ordinarily not re- sult in the elimination of a stock from the Portfolio. The Portfolio will re- main fully invested in common stocks even when stock prices are generally fall- ing. Ordinarily, portfolio securities will not be sold except to reflect addi- tions or deletions of the stocks that comprise the S&P 500 Index, including mergers, reorganizations and similar transactions and, to the extent necessary, to provide cash to pay redemptions of the Portfolio's shares. The investment performance of the Index Master Portfolio and the Index Equity Portfolio is ex- pected to approximate the investment performance of the S&P 500 Index, which tends to be cyclical in nature, reflecting periods when stock prices generally rise or fall.

* "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Fund and The DFA Investment Trust Company.

S&P has no obligation or liability in connection with the administration, mar- keting or trading of the Index Equity Portfolio or Index Master Portfolio.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN- DEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ER- RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM- PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT- ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE- CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

INTERNATIONAL PORTFOLIOS. During normal market conditions, the International Equity Portfolio and International Emerging Markets Portfolio (the "Interna- tional Portfolios") will invest at least 90% (and in any event at least 65%) of their total assets in equity securities of foreign issuers. Investing in for- eign securities involves considerations not typically associated with investing in securities of companies organized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Portfolio that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates.

A Portfolio's investments in foreign securities may also be adversely affected by changes in foreign political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitation on the removal of funds or as- sets, or imposition of (or change in) exchange control regulations. In addi- tion, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Portfolio's operations.

In general, less information is publicly available with respect to foreign is- suers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting require- ments applicable to issuers in the United States. While the volume of transac- tions effected on foreign stock exchanges has increased in recent years, it re- mains appreciably below that of the New York Stock Exchange. Accordingly, a Portfolio's foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities in U.S. companies. In addi- tion, there is generally less government supervision and regulation of securi- ties exchanges, brokers and issuers in foreign countries than in the United States.

The expense ratios of the International Equity and International Emerging Mar- kets Portfolios can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as the

higher cost of investment research, higher cost of custody of foreign securi- ties, higher commissions paid on comparable transactions on foreign markets and additional costs arising from delays in settlements of transactions involving foreign securities.

As stated, the International Emerging Markets Portfolio will invest its assets in countries with emerging economies or securities markets. These countries may include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub- lic, Ecuador, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam. Politi- cal and economic structures in many of these countries may be undergoing sig- nificant evolution and rapid development, and these countries may lack the so- cial, political and economic stability characteristic of more developed coun- tries. Some of these countries may have in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. As a result, the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the value of invest- ments in these countries and the availability to a Portfolio of additional in- vestments in emerging market countries. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in these countries may make investments in the countries illiquid and more volatile than investments in Japan or most Western European countries. There may be little financial or accounting information available with respect to issuers located in certain emerging market countries, and it may be difficult to assess the value or prospects of an investment in such is- suers.

The International Equity Portfolio invests primarily in equity securities of issuers located in countries included in EAFE. Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United Kingdom are currently included in EAFE. From time to time the International Eq- uity Portfolio may invest more than 25% of its total assets in the securities of issuers located in Japan. Investments of 25% or more of the Portfolio's to- tal assets in this or any other country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries. For example, in the past events in the Japanese economy as well as social developments and natural disasters have affected Japanese secu- rities and currency markets, and have periodically disrupted the relationship of the Japanese yen with other currencies and with the U.S. dollar.

The International Equity and International Emerging Markets Portfolios may (but are not required to) use forward foreign currency exchange contracts to hedge against movements in the value of foreign currencies (including the European Currency Unit (ECU)) relative to the U.S. dollar in connection with specific portfolio transactions or with respect to portfolio positions. A forward for- eign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts do not eliminate fluctuations in the values of portfolio securities but rather allow a Portfolio to establish a rate of ex- change for a future point in time.

BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio may include domestic and dollar-denominated foreign debt securities, including bonds, debentures, notes, equipment lease and trust certificates, mortgage-re- lated and asset-backed securities, guaranteed investment contracts (GICs), ob- ligations issued or guaranteed by the U.S. Government or its agencies or in- strumentalities and state and local Municipal obligations. These securities will be rated at the time of purchase within the four highest rating groups as- signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat- ings Group ("S&P") or another nationally recognized statistical rating organi- zation. If unrated, the securities will be determined at the time of purchase to be of comparable quality by the sub-adviser. Securities rated "Baa" by Moody's or "BBB" by S&P, respectively, are generally considered to be invest- ment grade although they have speculative characteristics. If a fixed income security is reduced below Baa by Moody's or BBB by S&P, the Portfolio's sub- adviser will dispose of the security in an orderly fashion as soon as practica- ble. Investments in securities of foreign issuers, which present additional in- vestment considerations as described above under "International Portfolios," will be limited to 5% of the Portfolio's total assets.

The market value of the Balanced Portfolio's investments in fixed income corpo- rate and other securities will change in response to changes in interest rates and the relative financial strength of each issuer. During periods of falling interest rates, the values of long-term fixed income securities generally rise. Conversely, during periods of rising interest rates the values of such securi- ties generally decline. Changes in the financial strength of an issuer or changes in the ratings of any particular security may also affect the value of these investments.

The Balanced Portfolio may make significant investments in mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, installment sale contracts, credit card receivables or other assets) issued by governmental entities and private issues.

The Balanced Portfolio may acquire several types of mortgage-related securi- ties, including guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage-related securities ("ARMs") and collateralized mortgage obliga- tions ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Is- suers of CMOs frequently elect to be taxed as a pass-through entity known as real estate mortgage investment conduits, or REMICs. CMOs are issued in multi- ple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in many ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no principal payments will be made on a CMO class until all other clas- ses having an earlier stated maturity date are paid in full. The classes may include accrual certificates (also known as "Z-Bonds"), which only accrue in- terest at a specified rate until other specified classes have been retired and are converted thereafter to interest-paying securities. They may also include planned amortization classes ("PACs") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and generally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured, and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchase would ac- quire an interest superior to that of the holders of the related automobile re- ceivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustees for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivable. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may be prepaid at any time be- cause the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of a Portfolio, the maturity of other asset-backed securities will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instru- ment, in particular, is likely to be substantially less than the original matu- rity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In general, the collateral sup- porting non-mortgage asset-backed securities is of shorter maturity than mort- gage loans and is less likely to experience substantial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Balanced Portfolio will gener- ally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that the Balanced Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Balanced Portfolio's principal investment to the extent of premium paid.

The Balanced Portfolio may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-related securi- ties containing loans or mortgages originated by PNC Bank or its affiliates. It is possible that, under some circumstances, PNC Mortgage Securities Corp. or its affiliates could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage Securities Corp. or its affiliates.

The Balanced Fund may also purchase obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and instrumentalities. Obligations of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury. Others are supported by the right of the issuer to borrow from the U.S. Treasury; and still others are sup- ported only by the credit of the agency or instrumentality issuing the obliga- tion. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Certain U.S. Treasury and agency securities may be held by trusts that issue participation certificates (such as Treasury income growth receipts ("TIGRs") and certificates of accrual on Treasury certificates ("CATs")). The Balanced Portfolio may purchase these certificates, as well as Treasury receipts and other stripped securities, which represent beneficial ownership interests in either future interest payments or the future principal payments on U.S. Government obligations. These instruments are issued at a dis- count to their "face value" and may (particularly in the case of stripped mort- gage-backed securities) exhibit greater price volatility than ordinary debt se- curities because of the manner in which their principal and interest are re- turned to investors.

The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt obligations that do not make periodic interest payments) and state and local government obligations. Zero-coupon bonds are subject to greater market fluctu- ations from changing interest rates than debt obligations of comparable maturi- ties which make current distributions of interest. Municipal obligations may be purchased when the Portfolio's subadviser believes that their return, on a pre- tax basis, will be comparable to the returns of other permitted investments. Dividends paid by the Portfolio that are derived from interest on municipal ob- ligations will be taxable to shareholders.

To take advantage of attractive opportunities in the mortgage market and to en- hance current income, the Balanced Portfolio may enter into dollar roll trans- actions. A dollar roll transaction involves a sale by the Portfolio of a mort- gage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and stated ma- turity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold. During the period be- tween 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 additional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Portfolio compared with what the performance would have been without the use of dollar rolls. At the time that the Portfolio enters into a dollar roll transaction, it will place in a segregated account maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that its value is maintained. The Portfolio's dollar rolls, together with its reverse repurchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties the Portfolio is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom the Portfo- lio sells securities becomes insolvent, the Portfolio's right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the sub-adviser's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be success- fully employed.

PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that the annual portfolio turnover rate for each Portfolio (including both the eq- uity and fixed income portions of the Balanced Portfolio in the aggregate) and for the Index Master Portfolio will not exceed 150%. A Portfolio's annual port- folio turnover rate will not, however, be a factor preventing a sale or pur- chase when the adviser or sub-adviser believes investment considerations war- rant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e., over 100%) will generally result in higher transaction costs to a Portfolio.

Each Portfolio has also adopted certain fundamental investment limitations that may be changed only with the approval of a "majority of the outstanding shares of a Portfolio" (as defined in the Statement of Additional Information). Sev- eral of the Portfolios' fundamental investment policies, which are set forth in full in the Statement of Additional Information, are summarized below.

No Portfolio may:

(1) purchase securities (except U.S. Government securities (and, in the case of the Index Master Portfolio, obligations of instrumentalities of the U.S. Government) and related repurchase agreements) if more than 5% of its total assets will be invested in the securities of any one issuer, except that up to 25% of a Portfolio's total assets may be invested without regard to this 5% limitation;

(2) subject to the foregoing 25% exception (other than with respect to the In- dex Master Portfolio), purchase more than 10% of the outstanding voting se- curities of any issuer;

(3) invest 25% or more of its total assets in one or more issuers conducting their principal business activities in the same industry; and

(4) borrow money in amounts over one-third of the value of its total assets (33% of net assets in the case of the Index Master Portfolio) at the time of such borrowing.

These investment limitations are applied at the time investment securities are purchased. Notwithstanding the investment limitations, the Index Equity Portfo- lio may invest all of its assets in shares of an open-end management investment company with substantially the same investment objective, policies and limita- tions of that Portfolio.

In order to permit the sale of its shares in certain states, the Fund may make commitments more restrictive than the investment policies and limitations de- scribed in this Prospectus. If the Fund determines that any commitment is no longer in the best interests of a Portfolio, it will revoke the commitment by terminating sales of shares of the Portfolio in the state involved.

The business and affairs of the Fund and of The DFA Investment Trust Company (in which the assets of the Fund's Index Equity Portfolio are invested) are managed under the direction of their separate Boards of Trustees. The following persons currently serve as trustees of Compass Capital Funds:

William O. Albertini--Executive Vice President and Chief Finan- cial Officer of Bell Atlantic Corporation.

Raymond J. Clark--Treasurer of Princeton University.

Robert M. Hernandez--Vice Chairman and Chief Financial Officer of USX Corporation.

Anthony M. Santomero--Deputy Dean of The Wharton School, Uni- versity of Pennsylvania.

David R. Wilmerding, Jr.--President of Gates, Wilmerding, Carper & Rawlings, Inc.

The Statement of Additional Information furnishes additional in- formation about the trustees and officers of both the Fund and The DFA Investment Trust Company.

ADVISER AND   The Adviser to Compass Capital Funds is PNC Asset Management
SUB-ADVISERS  Group, Inc. ("PAMG"), except with respect to the Index Equity
              Portfolio. Each of the Portfolios within the Compass Capital
              Fund family is managed by a specialized portfolio manager who is
              a member of one of PAMG's portfolio management subsidiaries.

              The Portfolios (other than the Index Equity Portfolio) and their

investment sub-advisers and portfolio managers are as follows:

                           INVESTMENT
COMPASS CAPITAL PORTFOLIO  SUB-ADVISER          PORTFOLIO MANAGER
- -------------------------  ----------- ------------------------------------
Value Equity                PCM/(1)/   Benedict E. Capaldi; Vice President
                                       of PCM since 1995; prior to joining
                                       PCM, Senior Vice President and
                                       portfolio manager with Radnor
                                       Capital Management, President of
                                       Chestnut Hill Advisors, Inc. and
                                       Managing Director of Brandywine
                                       Asset Management, Inc.; Portfolio
                                       manager since 1995.

                                  INVESTMENT
COMPASS CAPITAL PORTFOLIO         SUB-ADVISER                 PORTFOLIO MANAGER
- -------------------------  ------------------------- ------------------------------------
Growth Equity                              PEAC(/2/) Robert K. Urquhart; Managing
                                                     Director of PEAC's Large Cap Growth
                                                     Equity Investments area since 1995;
                                                     prior to joining PEAC, Chief
                                                     Investment Officer and partner of
                                                     Cole Financial Group, Inc., a
                                                     partner of Seacliff Holdings, Inc.
                                                     and of RCM Capital Management;
                                                     Portfolio manager since 1995.
Small Cap Value Equity                      PCM(/1/) Christian K. Stadlinger; Vice
                                                     President of PCM since July 1996;
                                                     prior to joining PCM, Portfolio
                                                     Manager and Research Analyst with
                                                     Morgan Stanley Asset Management;
                                                     Portfolio manager since July 1996.
Small Cap Growth Equity                    PEAC(/2/) William J. Wykle; investment manager
                                                     with PEAC since 1995; investment
                                                     manager with PNC Bank, National
                                                     Association from 1986 to 1995;
                                                     Portfolio manager since its
                                                     inception.
Mid-Cap Value Equity                        PCM(/1/) Benedict E. Capaldi (see above);
                                                     Portfolio co-manager since its
                                                     inception.
                                                     Daniel B. Eagan; portfolio manager
                                                     with PCM since 1995; director of
                                                     investment strategy at PAMG during
                                                     1995; portfolio manager with PEAC
                                                     during 1995; Portfolio co-manager
                                                     since its inception.
Mid-Cap Growth Equity                      PEAC(/2/) William J. Wykle (see above);
                                                     Portfolio co-manager since its
                                                     inception.
                                                     [insert McVail Bio]
International Equity       Castle International(/4/) Gordon Anderson; Managing Director
                                                     and Chief Investment Officer since
                                                     1996; prior to joining
                                                     CastleInternational, Investment
                                                     Director of Dunedin Fund Managers
                                                     Ltd.; Portfolio manager since 1996.

                                  INVESTMENT
COMPASS CAPITAL PORTFOLIO         SUB-ADVISER                 PORTFOLIO MANAGER
- -------------------------  ------------------------- ------------------------------------
International Emerging     Castle International/(4)/ Euan Rae; Senior Investment Manager
 Markets                                             since 1996; prior to joining
                                                     CastleInternational, Head of
                                                     Emerging Markets at Dunedin Fund
                                                     Managers Ltd. and investment manager
                                                     with Edinburgh Fund Managers;
                                                     Portfolio manager since 1996.
Select Equity                               PCM/(1)/ Daniel B. Eagan (see above);
                                                     Portfolio manager since 1995.
Balanced                                     PCM and Daniel B. Eagan (see above);
                                 BlackRock/(1)//(3)/ Portfolio co-manager since 1994.
                                                     Robert S. Kapito; Vice Chairman of
                                                     BlackRock since 1988; Portfolio co-
                                                     manager since 1995.
                                                     Keith T. Anderson; Managing Director
                                                     and co-chair of Portfolio Management
                                                     Group and Investment Strategy
                                                     Committee of BlackRock since 1988;
                                                     Portfolio co-manager since 1995.

(1) Provident Capital Management, Inc. ("PCM") has its primary offices at 1700 Market Street, 27th Floor, Philadelphia, PA 19103.
(2) PNC Equity Advisors Company ("PEAC") has its primary offices at 1835 Market Street, 15th Floor, Philadelphia, PA 19103.
(3) BlackRock Financial Management, Inc. ("BlackRock") has its primary offices at 345 Park Avenue, New York, New York 10154.

(4) CastleInternational Asset Management Limited ("CastleInternational") has its primary office at 7 Castle Street, Edinburgh, Scotland, EH3 3AM.

PAMG was organized in 1994 to perform advisory services for in- vestment companies, and has its principal offices at 1835 Market Street, Philadelphia, Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.

For their investment advisory and sub-advisory services, PAMG and the Portfolios' sub-advisers are entitled to fees, computed daily on a portfolio-by-portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are the Expenses of the Portfolios?" PAMG and the sub-advisers intend to waive a portion of their fees during the current fis- cal year. All sub-advisory fees are paid by PAMG and do not rep- resent an extra charge to the Portfolios.

                            Investment  Sub-Advisory
Average Daily Net Assets   Advisory Fee     Fee
------------------------   ------------ ------------
first $1 billion               .550%        .400%
$1 billion -- $2 billion       .500         .350
$2 billion -- $3 billion       .475         .325
greater than $3 billion        .450         .300

                            Investment  Sub-Advisory
Average Daily Net Assets   Advisory Fee     Fee
------------------------   ------------ ------------
first $1 billion               .750%        .600%
$1 billion -- $2 billion       .700         .550
$2 billion -- $3 billion       .675         .525
greater than $3 billion        .650         .500

                            Investment  Sub-Advisory
Average Daily Net Assets   Advisory Fee     Fee
------------------------   ------------ ------------
first $1 billion              1.250%       1.100%
$1 billion -- $2 billion      1.200        1.050
$2 billion -- $3 billion      1.155        1.005
greater than $3 billion       1.100         .950

Although the advisory fee rate payable by the International Emerging Markets Portfolio is higher than the rate payable by mutual funds investing in domestic securities, the Fund be- lieves it is comparable to the rates paid by many other funds with similar investment objectives and policies and is appro- priate for the Portfolio in light of its investment objective and policies.

For their last fiscal year the Portfolios paid investment ad- visory fees at the following annual rates (expressed as a per- centage of average daily net assets) after voluntary fee waiv- ers: Value Equity Portfolio, .50%; Growth Equity Portfolio, .50%; Small Cap Value Equity Portfolio, .53%; Small Cap Growth Equity Portfolio, .53%; International Equity Portfolio, .70%; International Emerging Markets Portfolio, 1.15%; Select Equity Portfolio, .50%; and Balanced Portfolio, .50%. For the period

from October 1, 1995 through June 1, 1996, the Index Equity Portfolio paid investment advisory fees to its former investment adviser at the annual rate of % of its average daily net as- sets.

               The sub-advisers to each Portfolio strive to achieve best execu-
               tion on all transactions. Infrequently, brokerage transactions
               for the Portfolios may be directed through registered
               broker/dealers who have entered into dealer agreements with Com-
               pass Capital's distributor.

ADVISER TO     Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX MASTER   Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment
PORTFOLIO      adviser to the Index Master Portfolio.

               DFA was organized in May 1981 and is engaged in the business of
               providing investment management services to institutional in-
               vestors. DFA's assets under management totalled approximately
               $   billion at October 31, 1996. David G. Booth and Rex A.
               Sinquefield, both of whom are trustees and officers of The DFA
               Investment Trust Company and directors,officers and shareholders
               of DFA, may be deemed controlling persons of DFA.

               Investment decisions for the Index Master Portfolio are made by
               the Investment Committee of DFA, which meets on a regular basis
               and also as needed to consider investment issues. The Investment
               Committee is composed of certain officers and directors of DFA
               who are elected annually. DFA provides the Index Master Portfo-
               lio with a trading department and selects brokers and dealers to
               effect securities transactions.

               For the investment advisory services provided to the Index Mas-
               ter Portfolio under the advisory agreement, DFA is entitled to
               receive a fee at the annual rate of .025% of the Index Master
               Portfolio's average daily net assets. For the Index Master Port-
               folio's fiscal year ended November 30, 1996, DFA received a
               monthly fee for its investment advisory services which, on an
               annual basis, equaled .025% of the Index Master Portfolio's net
               assets.

ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com- pass Distributors, Inc. ("CDI") (the "Administrators") serve as the Fund's co-administrators. CCG and PFPC are indirect wholly- owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub- sidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its officers and the remaining outstanding stock is owned by Pennsylvania Merchant Group Ltd.

                The Administrators generally assist the Fund in all aspects of
                its administration and operation, including matters relating
                to the maintenance of financial records and fund accounting.
                As compensation for these services, CCG is entitled to receive
                a fee, computed daily and payable monthly, at an annual rate
                of .03% of each Portfolio's average daily net assets, and PFPC
                and CDI are entitled to receive a combined fee, computed daily
                and payable monthly, at an annual rate of .20% of the first
                $500 million of each Portfolio's average daily net assets,
                .18% of the next $500 million of each Portfolio's average
                daily net assets, .16% of the next $1 billion of each Portfo-
                lio's average daily net assets and .15% of each Portfolio's
                average daily net assets in excess of $2 billion. From time to
                time the Administrators may waive some or all of their admin-
                istration fees from a Portfolio. PFPC serves as the adminis-
                trative services, dividend disbursing and transfer agent to
                the Index Master Portfolio, for which PFPC is entitled to com-
                pensation at the annual rate of .015% of the Index Master
                Portfolio's net assets.

                For information about the operating expenses the Portfolios
                paid for the most recent fiscal year, see "What Are The Ex-
                penses Of The Portfolios?"

TRANSFER        PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT,          as their transfer agent and dividend disbursing agent.

EXPENSES        Expenses are deducted from the total income of each Portfolio
                before dividends and distributions are paid. Expenses include,
                but are not limited to, fees paid to the investment adviser
                and the Administrators, transfer agency and custodian fees,
                trustee fees, taxes, interest, professional fees, shareholder
                servicing and processing fees, fees and expenses in register-
                ing and qualifying the Portfolios and their shares for distri-
                bution under Federal and state securities laws, expenses of
                preparing prospectuses and statements of additional informa-
                tion and of printing and distributing prospectuses and state-
                ments of additional information to existing shareholders, ex-
                penses relating to shareholder reports, shareholder meetings
                and proxy solicitations, insurance premiums, the expense of
                independent pricing services, and other expenses which are not
                expressly assumed by PAMG or the Fund's service providers un-
                der their agreements with the Fund. Any general expenses of
                the Fund that do not belong to a particular investment portfo-
                lio will be allocated among all investment portfolios by or
                under the direction of the Board of Trustees in a manner the
                Board determines to be fair and equitable.

38

DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous basis by CDI as distributor. CDI maintains its principal offices at 259 Radnor- Chester Road, Suite 120, Radnor, Pennsylvania 19087.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other companies that receive fees from the Fund to make payments relating to distri- bution and sales support activities out of their past profits or other sources available to them. The Fund is not required or permitted under the Plan to make distribution payments with respect to Institutional Shares.

PURCHASE OF SHARES. Institutional Shares are offered to institutional invest- ors, including registered investment advisers with a minimum investment of $500,000 and individuals with a minimum investment of $2,000,000.

Institutional Shares are sold at their net asset value per Share next computed after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (East- ern Time) on a Business Day are priced the same day. A "Business Day" is any weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open for business.

Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders re- ceived by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Busi- ness Day.

Payment for Institutional Shares must normally be made in Federal funds or other funds immediately available to the Fund's custodian. Payment may also, in the discretion of the Fund, be made in the form of securities that are permis- sible investments for the respective Portfolios. For further information, see the Statement of Additional Information. The minimum initial investment for in- stitutions is $5,000. There is no minimum subsequent investment requirement.

Compass Capital may in its discretion waive the minimum investment amount and may reject any order for Institutional Shares.

REDEMPTION OF SHARES. Redemption orders for Institutional Shares may be placed by telephoning PFPC at (800) 441-7450. Institutional Shares are redeemed at their net asset value per share next determined after PFPC's receipt of the re- demption order. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures.

Payment for redeemed shares for which a redemption order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal funds wired to the redeeming Institution on the next Business Day, provided that the Fund's custodian is also open for business. Payment for redemption or- ders received after 4:00 p.m. (Eastern Time) or on a day

when the Fund's custodian is closed is normally wired in Federal funds on the next Business Day following redemption on which the Fund's custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven days after receiving a redemption order if, in the judgment of PAMG, an earlier payment could adversely affect a Portfolio. No charge for wiring re- demption payments is imposed by the Fund.

During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.

The Fund may redeem Institutional Shares in any Portfolio account if the ac- count balance drops below $5,000 as the result of redemption requests and the shareholder does not increase the balance to at least $5,000 on thirty days' written notice.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsibili- ties under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

EQUITY SECURITIES. During normal market conditions each Portfolio, except the Balanced Portfolio, will normally invest at least 80% of the value of its total assets in equity securities. The Portfolios will invest primarily in equity se- curities of U.S. issuers, except the International Equity and International Emerging Markets Portfolios, which will invest primarily in foreign issuers. Equity securities include common stock and preferred stock (including convert- ible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts and partnerships; and depositary receipts.

ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may invest in both sponsored and unsponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental De- pository Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence ownership of either foreign or domestic un- derlying securities. GDRs are depository receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs are organized independently and without the cooperation of the issuer of the underlying securities. As a result, available information con- cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present additional investment considerations as described below under "In- ternational Portfolios."

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio (other than the Index Master Portfolio) may write cov- ered call options, buy put options, buy call options and write secured put op- tions for the purpose of hedging or earning additional income, which may be deemed speculative or, with respect to the International Equity and Interna- tional Emerging Markets Portfolios, cross-hedging. These options may relate to particular securities, stock or bond indices or the yield differential between two securities, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding op- tions exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its mem- bers if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts to commit funds awaiting investment in stocks or maintain cash liquidity or, except with re- spect to the Index Master Portfolio, for other hedging purposes. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately af- terwards the aggregate amount of margin deposits on its existing futures posi- tions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. A Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may utilize futures con- tracts in anticipation of changes in the composition of its holdings or in cur- rency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru- ments held by a Portfolio and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the re- sulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; and (d) a sub-adviser's inability to predict correctly the direction of securities pric- es, interest rates, currency exchange rates and other economic factors. For further discussion of risks involved with domestic and foreign futures and op- tions, see Appendix B in the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption re- quests, or as a temporary defensive measure if its sub-adviser determines that market conditions warrant, each Portfolio other than the Index Master Portfolio may also invest without limitation in high quality money market instruments. The Balanced Portfolio may also invest in these securities in furtherance of its investment objective. The Index Master Portfolio may invest up to 5% of

its net assets in certain short-term fixed income obligations in order to main- tain liquidity or to invest temporarily recommitted cash balances.

High quality money market instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign is- suers, bank obligations, including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial paper, repurchase agreements and obli- gations of supranational organizations. Generally, such obligations will mature within one year from the date of settlement, but may mature within two years from the date of settlement. Under a repurchase agreement, a Portfolio agrees to purchase securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price. Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the Index Master Portfolio) may purchase securities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These transac- tions involve a commitment by a Portfolio to purchase or sell particular secu- rities with payment and delivery taking place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a se- curity it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and forward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield available in the market when the securi- ties delivery takes place. Each Portfolio's when-issued purchases and forward commitments are not expected to exceed 25% of the value of its total assets ab- sent unusual market conditions.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made by each Portfolio (except the Index Master Portfolio) through reverse repur- chase agreements under which the Portfolio sells portfolio securities to finan- cial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. A Portfolio may use the proceeds of re- verse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expi- ration of the reverse repurchase agreement. The Balanced Portfolio may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. This use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest expense, that the market value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obligated to repurchase and that the securi- ties may not be returned to the Portfolio. During the time a reverse repurchase agreement is outstanding, a Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropri

ate liquid securities having a value at least equal to the repurchase price. A Portfolio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets (33% in the case of the Index Master Portfolio). In addition, the Balanced Portfolio may borrow up to an additional 5% of its total assets for temporary purposes. Whenever borrowings exceed 5% of a Portfolio's total assets, the Portfolios (other than the Index Master Portfolio and the Balanced Portfolio) will not make any investments.

INVESTMENT COMPANIES. In connection with the management of their daily cash po- sitions, the Portfolios (other than the Index Master Portfolio) may invest in securities issued by other investment companies which invest in short-term debt securities and which seek to maintain a $1.00 net asset value per share. Such Portfolios may also invest in securities issued by other investment companies with similar investment objectives. The International Equity and International Emerging Markets Portfolios may purchase shares of investment companies invest- ing primarily in foreign securities, including so-called "country funds." Coun- try funds have portfolios consisting exclusively of securities of issuers lo- cated in one foreign country. The Index Equity Portfolio may also invest in Standard & Poor's Depository Receipts (SPDRs) and shares of other investment companies that are structured to seek a similar correlation to the performance of the S&P 500 Index. Securities of other investment companies will be acquired within limits prescribed by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addi- tion to the expenses each bears directly in connection with its own operations.

SECURITIES LENDING. A Portfolio may seek additional income by lending securi- ties on a short-term basis. The securities lending agreements will require that the loans be secured by collateral in cash, U.S. Government securities or (ex- cept for the Index Master Portfolio) irrevocable bank letters of credit main- tained on a current basis equal in value to at least the market value of the loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of the value of its total assets. Securities loans involve risks of delay in re- ceiving additional collateral or in recovering the loaned securities, or possi- bly loss of rights in the collateral if the borrower of the securities becomes insolvent.

ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% (10% with respect to the Index Master Portfolio) of the value of its net assets in secu- rities that are illiquid. Variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agreements and time deposits that do not provide for payment within seven days after notice, without taking a re- duced price, are subject to these limits. Each Portfolio may purchase securi- ties which are not registered under the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by the adviser or sub-adviser that an adequate trading market exists for that security. This investment practice could have the effect of increasing the level of illiquidity in a Portfolio during any pe- riod that qualified institutional buyers become uninterested in purchasing these restricted securities.

SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap Growth Equity Portfolio and Small Cap Value Equity Portfolio will invest at least 90% (and in any event at least 65%) of their respective total assets in equity securities of smaller-capitalized organizations (less than $1 billion at the time of purchase). Similarly, the Mid-Cap Value Equity Portfolio and Mid- Cap Growth Equity Portfolio will invest, under normal market conditions, at least 90% (and in any event at least 65%) or their respective total assets in equity securities of medium-capitalized organizations (between $1 billion and $5 billion at the time of purchase). These organizations will normally have more limited product lines, markets and financial resources and will be more dependent upon a limited management group than larger capitalized companies.

INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the Index Master Portfolio (in which all of the assets of the Index Equity Portfo- lio are invested) invests at least 95% of the value of its total assets in se- curities included in the Standard & Poor's 500 (R) Composite Stock Price Index (the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of the stocks that comprise the S&P 500 Index in approximately the same propor- tions as they are represented in the Index. The Portfolio operates as an index portfolio and, therefore, is not actively managed (through the use of economic, financial or market analysis), and adverse performance will ordinarily not re- sult in the elimination of a stock from the Portfolio. The Portfolio will re- main fully invested in common stocks even when stock prices are generally fall- ing. Ordinarily, portfolio securities will not be sold except to reflect addi- tions or deletions of the stocks that comprise the S&P 500 Index, including mergers, reorganizations and similar transactions and, to the extent necessary, to provide cash to pay redemptions of the Portfolio's shares. The investment performance of the Index Master Portfolio and the Index Equity Portfolio is ex- pected to approximate the investment performance of the S&P 500 Index, which tends to be cyclical in nature, reflecting periods when stock prices generally rise or fall.

* "Standard & Poor's(R)," "S&P," "S&P 500(R)," "Standard & Poor's 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Fund and The DFA Investment Trust Company.

S&P has no obligation or liability in connection with the administration, mar- keting or trading of the Index Equity Portfolio or Index Master Portfolio.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN- DEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ER- RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM- PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT- ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE- CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

INTERNATIONAL PORTFOLIOS. During normal market conditions, the International Equity Portfolio and International Emerging Markets Portfolio (the "Interna- tional Portfolios") will invest at least 90% (and in any event at least 65%) of their total assets in equity securities of foreign issuers. Investing in for- eign securities involves considerations not typically associated with investing in securities of companies organized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Portfolio that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates.

A Portfolio's investments in foreign securities may also be adversely affected by changes in foreign political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitation on the removal of funds or as- sets, or imposition of (or change in) exchange control regulations. In addi- tion, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Portfolio's operations.

In general, less information is publicly available with respect to foreign is- suers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting require- ments applicable to issuers in the United States. While the volume of transac- tions effected on foreign stock exchanges has increased in recent years, it re- mains appreciably below that of the New York Stock Exchange. Accordingly, a Portfolio's foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities in U.S. companies. In addi- tion, there is generally less government supervision and regulation of securi- ties exchanges, brokers and issuers in foreign countries than in the United States.

The expense ratios of the International Equity and International Emerging Mar- kets Portfolios can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as the

higher cost of investment research, higher cost of custody of foreign securi- ties, higher commissions paid on comparable transactions on foreign markets and additional costs arising from delays in settlements of transactions involving foreign securities.

As stated, the International Emerging Markets Portfolio will invest its assets in countries with emerging economies or securities markets. These countries may include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub- lic, Ecuador, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela and Vietnam. Politi- cal and economic structures in many of these countries may be undergoing sig- nificant evolution and rapid development, and these countries may lack the so- cial, political and economic stability characteristic of more developed coun- tries. Some of these countries may have in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. As a result, the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the value of invest- ments in these countries and the availability to a Portfolio of additional in- vestments in emerging market countries. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in these countries may make investments in the countries illiquid and more volatile than investments in Japan or most Western European countries. There may be little financial or accounting information available with respect to issuers located in certain emerging market countries, and it may be difficult to assess the value or prospects of an investment in such is- suers.

The International Equity Portfolio invests primarily in equity securities of issuers located in countries included in EAFE. Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United Kingdom are currently included in EAFE. From time to time the International Eq- uity Portfolio may invest more than 25% of its total assets in the securities of issuers located in Japan. Investments of 25% or more of the Portfolio's to- tal assets in this or any other country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries. For example, in the past events in the Japanese economy as well as social developments and natural disasters have affected Japanese secu- rities and currency markets, and have periodically disrupted the relationship of the Japanese yen with other currencies and with the U.S. dollar.

The International Equity and International Emerging Markets Portfolios may (but are not required to) use forward foreign currency exchange contracts to hedge against movements in the value of foreign currencies (including the European Currency Unit (ECU)) relative to the U.S. dollar in connection with specific portfolio transactions or with respect to portfolio positions. A forward for- eign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts do not eliminate fluctuations in the values of portfolio securities but rather allow a Portfolio to establish a rate of ex- change for a future point in time.

BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio may include domestic and dollar-denominated foreign debt securities, including bonds, debentures, notes, equipment lease and trust certificates, mortgage-re- lated and asset-backed securities, guaranteed investment contracts (GICs), ob- ligations issued or guaranteed by the U.S. Government or its agencies or in- strumentalities and state and local municipal obligations. These securities will be rated at the time of purchase within the four highest rating groups as- signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat- ings Group ("S&P") or another nationally recognized statistical rating agency. If unrated, the securities will be determined at the time of purchase to be of comparable quality by the sub-adviser. Securities rated "Baa" by Moody's or "BBB" by S&P, respectively, are generally considered to be investment grade al- though they have speculative characteristics. If a fixed income security is re- duced below Baa by Moody's or BBB by S&P, the Portfolio's sub-adviser will dis- pose of the security in an orderly fashion as soon as practicable. Investments in securities of foreign issuers, which present additional investment consider- ations as described above under "International Portfolios," will be limited to 5% of the Portfolio's total assets.

The market value of the Balanced Portfolio's investments in fixed income corpo- rate and other securities will change in response to changes in interest rates and the relative financial strength of each issuer. During periods of falling interest rates, the values of long-term fixed income securities generally rise. Conversely, during periods of rising interest rates the values of such securi- ties generally decline. Changes in the financial strength of an issuer or changes in the ratings of any particular security may also affect the value of these investments.

The Balanced Portfolio may make significant investments in mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, installment sale contracts, credit card receivables or other assets) issued by governmental entities and private issuers.

The Balanced Portfolio may acquire several types of mortgage-related securi- ties, including guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage-related securities ("ARMs") and collateralized mortgage obliga- tions ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Is- suers of CMOs frequently elect to be taxed as a pass-through entity known as real estate mortgage investment conduits, or REMICs. CMOs are issued in multi- ple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in many ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no principal payments will be made on a CMO class until all other clas- ses having an earlier stated maturity date are paid in full. The classes may include accrual certificates (also known as "Z-Bonds"), which only accrue in- terest at a specified rate until other specified classes have been retired and are converted thereafter to interest-paying securities. They may also include planned amortization classes ("PACs") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and generally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured, and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustees for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may be prepaid at any time be- cause the underlying assets (i.e. loans) generally may be prepaid at any time. In calculating the average weighted maturity of a Portfolio, the maturity of other asset-backed securities will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instru- ment, in particular, is likely to be substantially less than the original matu- rity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In general, the collateral sup- porting non-mortgage asset-backed securities is of shorter maturity than mort- gage loans and is less likely to experience substantial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Balanced Portfolio will gener- ally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that the Balanced Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Balanced Portfolio's principal investment to the extent of premium paid.

The Balanced Portfolio may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-related securi- ties containing loans or mortgages originated by PNC Bank or its affiliates. It is possible that, under some circumstances, PNC Mortgage Securities Corp. or its affiliates could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage Securities Corp. or its affiliates.

The Balanced Fund may also purchase obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and instrumentalities. Obligations of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury. Others are supported by the right of the issuer to borrow from the U.S. Treasury; and still others are sup- ported only by the credit of the agency or instrumentality issuing the obliga- tion. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Certain U.S. Treasury and agency securities may be held by trusts that issue participation certificates (such as Treasury income growth receipts ("TIGRs") and certificates of accrual on Treasury certificates ("CATs")). The Balanced Portfolio may purchase these certificates, as well as Treasury receipts and other stripped securities, which represent beneficial ownership interests in either future interest payments or the future principal payments on U.S. Government obligations. These instruments are issued at a dis- count to their "face value" and may (particularly in the case of stripped mort- gage-backed securities) exhibit greater price volatility than ordinary debt se- curities because of the manner in which their principal and interest are re- turned to investors.

The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt obligations that do not make periodic interest payments) and state and local government obligations. Zero-coupon bonds are subject to greater market fluctu- ations from changing interest rates than debt obligations of comparable maturi- ties which make current distributions of interest. Municipal obligations may be purchased when the Portfolio's sub-adviser believes that their return, on a pre-tax basis, will be comparable to the returns of other permitted invest- ments. Dividends paid by the Portfolio that are derived from interest on munic- ipal obligations will be taxable to shareholders.

To take advantage of attractive opportunities in the mortgage market and to en- hance current income, the Balanced Portfolio may enter into dollar roll trans- actions. A dollar roll transaction involves a sale by the Portfolio of a mort- gage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and stated ma- turity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold. During the period be- tween 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 additional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Portfolio compared with what the performance would have been without the use of dollar rolls. At the time that the Portfolio enters into a dollar roll transaction, it will place in a segregated account maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that its value is maintained. The Portfolio's dollar rolls, together with its reverse repurchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties the Portfolio is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom the Portfo- lio sells securities becomes insolvent, the Portfolio's right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the sub-adviser's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be success- fully employed.

PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that the annual portfolio turnover rate for each Portfolio (including both the eq- uity and fixed income portions of the Balanced Portfolio in the aggregate) and for the Index Master Portfolio will not exceed 150%. A Portfolio's annual port- folio turnover rate will not, however, be a factor preventing a sale or pur- chase when the adviser or sub-adviser believes investment considerations war- rant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e., over 100%) will generally result in higher transaction costs to a Portfolio.

Each Portfolio has also adopted certain fundamental investment limitations that may be changed only with the approval of a "majority of the outstanding shares of a Portfolio" (as defined in the Statement of Additional Information). Sev- eral of the Portfolios' fundamental investment policies, which are set forth in full in the Statement of Additional Information, are summarized below.

No Portfolio may:

(1) purchase securities (except U.S. Government securities (and, in the case of the Index Master Portfolio, obligations of instrumentalities of the U.S. Government) and related repurchase agreements) if more than 5% of its total assets will be invested in the securities of any one issuer, except that up to 25% of a Portfolio's total assets may be invested without regard to this 5% limitation;

(2) subject to the foregoing 25% exception (other than with respect to the In- dex Master Portfolio), purchase more than 10% of the outstanding voting se- curities of any issuer;

(3) invest 25% or more of its total assets in one or more issuers conducting their principal business activities in the same industry; and

(4) borrow money in amounts over one-third of the value of its total assets (33% of net assets in the case of the Index Master Portfolio) at the time of such borrowing.

These investment limitations are applied at the time investment securities are purchased. Notwithstanding the investment limitations, the Index Equity Portfo- lio may invest all of its assets in shares of an open-end management investment company with substantially the same investment objective, policies and limita- tions of that Portfolio.

In order to permit the sale of its shares in certain states, the Fund may make commitments more restrictive than the investment policies and limitations de- scribed in this Prospectus. If the Fund determines that any commitment is no longer in the best interests of a Portfolio, it will revoke the commitment by terminating sales of shares of the Portfolio in the state involved.

TRUSTEES      The business and affairs of the Fund and of The DFA Investment
              Trust Company (in which the assets of the Fund's Index Equity
              Portfolio are invested) are managed under the direction of their
              separate Boards of Trustees. The following persons currently
              serve as trustees of Compass Capital Funds:

                William O. Albertini--Executive Vice President and Chief Fi-
                nancial Officer of Bell Atlantic Corporation.

                Raymond J. Clark--Treasurer of Princeton University.

                Robert M. Hernandez--Vice Chairman and Chief Financial Officer
                of USX Corporation.

                Anthony M. Santomero--Deputy Dean of The Wharton School, Uni-
                versity of Pennsylvania.

                David R. Wilmerding, Jr.--President of Gates, Wilmerding,
                Carper & Rawlings, Inc.

              The Statement of Additional Information furnishes additional in-
              formation about the trustees and officers of both the Fund and
              The DFA Investment Trust Company.

ADVISER AND
SUB-          The Adviser to Compass Capital Funds is PNC Asset Management
ADVISERS      Group, Inc. ("PAMG"), except with respect to the Index Equity
              Portfolio. Each of the Portfolios within the Compass Capital
              Fund family is managed by a specialized portfolio manager who is
              a member of one of PAMG's portfolio management subsidiaries.

              The Portfolios (other than the Index Equity Portfolio) and their

investment sub-advisers and portfolio managers are as follows:

                             INVESTMENT
COMPASS CAPITAL PORTFOLIO    SUB-ADVISER            PORTFOLIO MANAGER
- -------------------------  ---------------          -----------------
Value Equity               PCM/(1)/        Benedict E. Capaldi; Vice President
                                           of PCM since 1995; prior to joining
                                           PCM, Senior Vice President and
                                           portfolio manager with Radnor
                                           Capital Management, President of
                                           Chestnut Hill Advisors, Inc. and
                                           Managing Director of Brandywine
                                           Asset Management, Inc.; Portfolio
                                           manager since 1995.

                                  INVESTMENT
COMPASS CAPITAL PORTFOLIO        SUB-ADVISER                 PORTFOLIO MANAGER
- -------------------------  ------------------------          -----------------
Growth Equity              PEAC(/2/)                Robert K. Urquhart; Managing
                                                    Director of PEAC's Large Cap Growth
                                                    Equity Investments area since 1995;
                                                    prior to joining PEAC, Chief
                                                    Investment Officer and partner of
                                                    Cole Financial Group, Inc., a
                                                    partner of Seacliff Holdings, Inc.
                                                    and of RCM Capital Management;
                                                    Portfolio manager since 1995.
Small Cap Value Equity     PCM(/1/)                 Christian K. Stadlinger; Vice
                                                    President of PCM since July 1996;
                                                    prior to joining PCM, Portfolio
                                                    Manager and Research Analyst with
                                                    Morgan Stanley Asset Management;
                                                    Portfolio manager since July 1996.
Small Cap Growth Equity    PEAC(/2/)                William J. Wykle; investment manager
                                                    with PEAC since 1995; investment
                                                    manager with PNC Bank, National
                                                    Association from 1986 to 1995;
                                                    Portfolio manager since its
                                                    inception.
Mid-Cap Value Equity       PCM(/1/)                 Benedic E. Capaldi (see above);
                                                    Portfolio co-manager since its
                                                    inception.
Mid-Cap Growth Equity      PEAC(/2/)                Daniel B. Egan; portfolio manager
                                                    with PCM since 1995; director of
                                                    investment strategy at PAMG during
                                                    1995; portfolio manager with PEAC
                                                    during 1995; Portfolio co-manager
                                                    prior to inception. William J. Wykle
                                                    (see above); Portfolio co-manager
                                                    since its inception.
                                                    [McVail Bio]
International Equity       CastleInternational(/4/) Gordon Anderson; Managing Director
                                                    and Chief Investment Officer since
                                                    1996; prior to joining
                                                    CastleInternational, Investment
                                                    Director of Dunedin Fund Managers
                                                    Ltd.; Portfolio manager since 1996.
International Emerging     CastleInternational(/4/) Euan Rae; Senior Investment Manager
 Markets                                            since 1996; prior to joining
                                                    CastleInternational, Head of
                                                    Emerging Markets at Dunedin Fund
                                                    Managers Ltd. and investment manager
                                                    with Edinburgh Fund Managers;
                                                    Portfolio manager since 1996.

                                INVESTMENT
COMPASS CAPITAL PORTFOLIO      SUB-ADVISER               PORTFOLIO MANAGER
- -------------------------  --------------------          -----------------
Select Equity              PCM(/1/)             Daniel B. Eagan (see above);
                                                Portfolio manager since 1995.
Balanced                   PCM and              Daniel B. Eagan (see above);
                           BlackRock(/1/) (/3/) Portfolio co-manager since 1994.
                                                Robert S. Kapito; Vice Chairman of
                                                BlackRock since 1988; Portfolio co-
                                                manager since 1995.
                                                Keith T. Anderson; Managing Director
                                                and co-chair of Portfolio Management
                                                Group and Investment Strategy
                                                Committee of BlackRock since 1988;
                                                Portfolio co-manager since 1995.

(1) Provident Capital Management, Inc. ("PCM") has its primary offices at 1700 Market Street, 27th Floor, Philadelphia, PA 19103.
(2) PNC Equity Advisors Company ("PEAC") has its primary offices at 1835 Market Street, 15th Floor, Philadelphia, PA 19103.
(3) BlackRock Financial Management, Inc. ("BlackRock") has its primary offices at 345 Park Avenue, New York, New York 10154.

(4) CastleInternational Asset Management Limited ("CastleInternational") has its primary offices at 7 Castle Street, Edinburgh, Scotland, EH3 3AM.

PAMG was organized in 1994 to perform advisory services for investment companies, and has its principal offices at 1835 Market Street, Philadelphia, Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi- bank holding company.

For their investment advisory and sub-advisory services, PAMG and the Portfolios' sub-advisers are entitled to fees, com- puted daily on a portfolio-by-portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are the Expenses of the Portfolios?" PAMG and the sub-advisers intend to waive a portion of their fees during the current fiscal year. All sub-advisory fees are paid by PAMG and do not represent an extra charge to the Portfolios.

                           Investment  Sub-Advisory
                          Advisory Fee     Fee
                          ------------ ------------
Average Daily Net Assets
first $1 billion              .550%        .400%
$1 billion--$2 billion        .500         .350
$2 billion--$3 billion        .475         .325
greater than $3 billion       .450         .300

                           Investment  Sub-Advisory
                          Advisory Fee     Fee
                          ------------ ------------
Average Daily Net Assets
first $1 billion              .750%        .600%
$1 billion--$2 billion        .700         .550
$2 billion--$3 billion        .675         .525
greater than $3 billion       .650         .500

          MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
            INTERNATIONAL EMERGING MARKETS PORTFOLIO
                        (BEFORE WAIVERS)

                           Investment  Sub-Advisory
Average Daily Net Assets  Advisory Fee     Fee
------------------------  ------------ ------------
first $1 billion             1.250%       1.100%
$1 billion -- $2 billion     1.200        1.050
$2 billion -- $3 billion     1.155        1.005
greater than $3 billion      1.100        0.950

Although the advisory fee rate payable by the International Emerging Markets Portfolio is higher than the rate payable by mutual funds investing in domestic securities, the Fund be- lieves it is comparable to the rates paid by many other funds with similar investment objectives and policies and is appro- priate for the Portfolio in light of its investment objective and policies.

For their last fiscal year the Portfolios paid investment ad- visory fees at the following annual rates (expressed as a per- centage of average daily net assets) after voluntary fee waiv- ers: Value Equity Portfolio, .50%; Growth Equity Portfolio, .50%; Small Cap Value Equity Portfolio, .53%; Small Cap Growth Equity Portfolio, .53%; International Equity Portfolio, .70%; International Emerging Markets Portfolio, 1.15%; Select Equity Portfolio, .50%; and Balanced Portfolio, .50%. For the period from October 1, 1995 through June 1, 1996, the Index Equity Portfolio paid investment advisory fees to its former invest- ment adviser at the annual rate of % of its average daily net assets.

The sub-advisers to each Portfolio strive to achieve best exe- cution on all transactions. Infrequently, brokerage transac- tions for the Portfolios may be directed through registered broker/dealers who have entered into dealer agreements with Compass Capital's distributor.

INDEX         Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
MASTER        Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment
PORTFOLIO     adviser to the Index Master Portfolio.

              DFA was organized in May 1981 and is engaged in the business of
              providing investment management services to institutional in-
              vestors. DFA's assets under management totalled approximately
              $   billion at October 31, 1996. David G. Booth and Rex A.
              Sinquefield, both of whom are trustees and officers of The DFA
              Investment Trust Company and directors, officers and sharehold-
              ers of DFA, may be deemed controlling persons of DFA.

              Investment decisions for the Index Master Portfolio are made by
              the Investment Committee of DFA, which meets on a regular basis
              and also as needed to consider investment issues. The Investment
              Committee is composed of certain officers and directors of DFA
              who are elected annually. DFA provides the Index Master Portfo-
              lio with a trading department and selects brokers and dealers to
              effect securities transactions.

              For the investment advisory services provided to the Index Mas-
              ter Portfolio under the advisory agreement, DFA is entitled to
              receive a fee at the annual rate of .025% of the Index Master
              Portfolio's average daily net assets. For the Index Master Port-
              folio's fiscal year ended November 30, 1996, DFA received a
              monthly fee for its investment advisory services which, on an
              annual basis, equaled .025% of the Index Master Portfolio's net
              assets.

ADMINISTRATORSCompass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and Com- pass Distributors, Inc. ("CDI") (the "Administrators") serve as the Fund's co-administrators. CCG and PFPC are indirect wholly- owned subsidiaries of PNC Bank Corp. CDI is a wholly-owned sub- sidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its officers and the remaining outstanding stock is owned by Pennsylvania Merchant Group Ltd.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters relating to the maintenance of financial records and fund accounting. As compensation for these services, CCG is entitled to receive a fee, computed daily and payable monthly, at an annual rate of .03% of each Portfolio's average daily net assets, and PFPC and CDI are entitled to receive a combined fee, computed daily and payable monthly, at an annual rate of .20% of the first $500 million of each Portfolio's average daily net assets, .18% of the next $500 million of each Portfolio's average daily net as- sets, .16% of the next $1 billion of each Portfolio's average daily net assets and .15% of each Portfolio's average daily net assets in excess of $2 billion. From

                time to time the Administrators may waive some or all of their
                administration fees from a Portfolio. PFPC serves as the ad-
                ministrative services, dividend disbursing and transfer agent
                to the Index Master Portfolio, for which PFPC is entitled to
                compensation at the annual rate of .015% of the Index Master
                Portfolio's net assets.

                For information about the operating expenses the Portfolios
                paid for the most recent fiscal year, see "What Are The
                Expenses Of The Portfolios?"

TRANSFER        PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT,          as their transfer agent and dividend disbursing agent.

SERVICING       The Fund intends to enter into service arrangements with in-
                stitutional investors ("Institutions") (including PNC Bank,
                National Association and its affiliates) which provide that
                the Institutions will render support services to their custom-
                ers who are the beneficial owners of Service Shares. These
                services are intended to supplement the services provided by
                the Fund's Administrators and transfer agent to the Fund's
                shareholders of record. In consideration for payment of a
                shareholder processing fee of up to .15% (on an annualized ba-
                sis) of the average daily net asset value of Service Shares
                owned beneficially by their customers, Institutions may pro-
                vide one or more of the following services: processing pur-
                chase and redemption requests from customers and placing or-
                ders with the Fund's transfer agent or the distributor;
                processing dividend payments from the Fund on behalf of cus-
                tomers; providing sub-accounting with respect to Service
                Shares beneficially owned by customers or the information nec-
                essary for sub-accounting; and providing other similar servic-
                es. In consideration for payment of a separate shareholder
                servicing fee of up to .15% (on an annualized basis) of the
                average daily net asset value of Service Shares owned benefi-
                cially by their customers, Institutions may provide one or
                more of these additional services to such customers: respond-
                ing to customer inquiries relating to the services performed
                by the Institution and to customer inquiries concerning their
                investments in Service Shares; assisting customers in desig-
                nating and changing dividend options, account designations and
                addresses; and providing other similar shareholder liaison
                services. Customers who are beneficial owners of Service
                Shares should read this Prospectus in light of the terms and
                fees governing their accounts with Institutions.

38

              Conflict-of-interest restrictions may apply to the receipt of
              compensation paid by the Fund in connection with the investment
              of fiduciary funds in Portfolio shares. Institutions, including
              banks regulated by the Comptroller of the Currency, Federal Re-
              serve Board and state banking commissions, and investment advis-
              ers and other money managers subject to the jurisdiction of the
              SEC, the Department of Labor or state securities commissions,
              are urged to consult their legal counsel before entering into
              agreements with the Fund.

              The Glass-Steagall Act and other applicable laws, among other
              things, prohibit banks from engaging in the business of under-
              writing securities. It is intended that the services provided by
              Institutions under their service agreements will not be prohib-
              ited under these laws. Under state securities laws, banks and
              financial institutions that receive payments from the Fund may
              be required to register as dealers.

EXPENSES      Expenses are deducted from the total income of each Portfolio
              before dividends and distributions are paid. Expenses include,
              but are not limited to, fees paid to the investment adviser and
              the Administrators, transfer agency and custodian fees, trustee
              fees, taxes, interest, professional fees, shareholder servicing
              and processing fees, fees and expenses in registering and quali-
              fying the Portfolios and their shares for distribution under
              Federal and state securities laws, expenses of preparing pro-
              spectuses and statements of additional information and of print-
              ing and distributing prospectuses and statements of additional
              information to existing shareholders, expenses relating to
              shareholder reports, shareholder meetings and proxy solicita-
              tions, insurance premiums, the expense of independent pricing
              services, and other expenses which are not expressly assumed by
              PAMG or the Fund's service providers under their agreements with
              the Fund. Any general expenses of the Fund that do not belong to
              a particular investment portfolio will be allocated among all
              investment portfolios by or under the direction of the Board of
              Trustees in a manner the Board determines to be fair and equita-
              ble.

DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous basis by CDI as distributor (the "Distributor"). CDI maintains its principal offices at 259 Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. The Plan permits CDI, PAMG, the Administrators and other companies that receive fees from the Fund to make payments relating to distri- bution and sales support activities out of their past profits or other sources available to them. The Fund is not required or permitted under the Plan to make distribution payments with respect to Service Shares.

PURCHASE OF SHARES. Service Shares are offered without a sales load to Institutions acting on behalf of their customers, as well as to certain persons who were shareholders of Compass Capital Group of Funds at the time of its combination with The PNC(R) Fund during the first quarter of 1996. Service Shares will normally be held of record by Institutions or in the names of nominees of Institutions. Share purchases are normally effected through a customer's account at an Institution through procedures established in connection with the requirements of the account. In these cases, confirmations of share purchases and redemptions will be sent to the Institutions. Beneficial ownership of shares will be recorded by the Institutions and reflected in the account statements provided by such Institutions to their customers. Investors wishing to purchase shares should contact their Institutions.

Service Shares are sold at their net asset value per share next computed after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern Time) on a Business Day are priced the same day. A "Business Day" is any week- day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open for business. Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Business Day.

Payment for Service Shares must normally be made in Federal funds or other funds immediately available to the Fund's custodian. Payment may also, in the discretion of the Fund, be made in the form of securities that are permissible investments for the respective Portfolios. For further information, see the Statement of Additional Information. The minimum initial investment is $5,000; however, Institutions may set a higher minimum for their customers. There is no minimum subsequent investment requirement.

Compass Capital may in its discretion waive the minimum investment amount and may reject any order for Service Shares.

REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in accordance with the procedures applicable to their accounts with the Institutions. These procedures will vary according to the type of account and the Institution involved, and customers should consult their account managers in this regard. It is the responsibility of Institutions to transmit

redemption orders to PFPC and credit their customers' accounts with redemption proceeds on a timely basis. In the case of shareholders holding share certificates, the certificates must accompany the redemption request.

Institutions may place redemption orders by telephoning PFPC at (800) 441-7450. Shares are redeemed at their net asset value per share next determined after PFPC's receipt of the redemption order. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions com- municated by telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures.

Payment for redeemed shares for which a redemption order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal funds wired to the redeeming Institution on the next Business Day, provided that the Fund's custodian is also open for business. Payment for redemption or- ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo- dian is closed is normally wired in Federal funds on the next Business Day fol- lowing redemption on which the Fund's custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven days after receiv- ing a redemption order if, in the judgment of PAMG, an earlier payment could adversely affect a Portfolio. No charge for wiring redemption payments is im- posed by the Fund, although Institutions may charge their customer accounts for redemption services. Information relating to such redemption services and charges, if any, should be obtained by customers from their Institutions.

During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at 400 Bellevue Parkway, Wilmington, DE 19809.

The Fund may redeem Service Shares in any Portfolio account if the account bal- ance drops below $5,000 as the result of redemption requests and the share- holder does not increase the balance to at least $5,000 upon thirty days' writ- ten notice. If a customer has agreed with an Institution to maintain a minimum balance in his or her account with the Institution, and the balance in the ac- count falls below that minimum, the customer may be obligated to redeem all or part of his or her shares in the Portfolios to the extent necessary to maintain the minimum balance required.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsibili- ties under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

EQUITY SECURITIES. During normal market conditions each Portfolio, except the Balanced Portfolio, will normally invest at least 80% of the value of its total assets in equity securities. The Portfolios will invest primarily in equity se- curities of U.S. issuers, except the International Equity and International Emerging Markets Portfolios, which will invest primarily in foreign issuers. Equity securities include common stock and preferred stock (including convert- ible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts and partnerships; and depositary receipts.

ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may invest in both sponsored and unsponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental De- pository Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence ownership of either foreign or domestic un- derlying securities. GDRs are depository receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs are organized independently and without the cooperation of the issuer of the underlying securities. As a result, available information con- cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present additional investment considerations as described below under "In- ternational Portfolios."

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio (other than the Index Master Portfolio) may write cov- ered call options, buy put options, buy call options and write secured put op- tions for the purpose of hedging or earning additional income, which may be deemed speculative or, with respect to the International Equity and Interna- tional Emerging Markets Portfolios, cross-hedging. These options may relate to particular securities, stock or bond indices or the yield differential between two securities, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding op- tions exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its mem- bers if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts to commit funds awaiting investment in stocks or maintain cash liquidity or, except with re- spect to the Index Master Portfolio, for other hedging purposes. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately af- terwards the aggregate amount of margin deposits on its existing futures posi- tions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. A Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may utilize futures con- tracts in anticipation of changes in the composition of its holdings or in cur- rency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru- ments held by a Portfolio and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the re- sulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; and (d) a sub-adviser's inability to predict correctly the direction of securities pric- es, interest rates, currency exchange rates and other economic factors. For further discussion of risks involved with domestic and foreign futures and op- tions, see Appendix B in the Statement of Additional Information.