-----BEGIN PRIVACY-ENHANCED MESSAGE-----Proc-Type: 2001,MIC-CLEAROriginator-Name: webmaster@www.sec.govOriginator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQABMIC-Info: RSA-MD5,RSA, DatJQtzYJFvCRIZFCtmwKhCVTDmDQObg0ZKZTj3i6w+KAP36qyt0h+dK9BSwOsWz Qv0yQYt5AD8+94vF4YVQJA==

0000898430-03-000028.txt : 200301060000898430-03-000028.hdr.sgml : 2003010620030106143307ACCESSION NUMBER:0000898430-03-000028CONFORMED SUBMISSION TYPE:N-30DPUBLIC DOCUMENT COUNT:1CONFORMED PERIOD OF REPORT:20021031FILED AS OF DATE:20030106EFFECTIVENESS DATE:20030106

FILER:

COMPANY DATA:COMPANY CONFORMED NAME:RUSSELL FRANK INVESTMENT COCENTRAL INDEX KEY:0000351601IRS NUMBER:911151059STATE OF INCORPORATION:WAFISCAL YEAR END:1231

FILING VALUES:FORM TYPE:N-30DSEC ACT:1940 ActSEC FILE NUMBER:811-03153FILM NUMBER:03504743

BUSINESS ADDRESS:STREET 1:909 A ST 6TH FLCITY:TACOMASTATE:WAZIP:98402BUSINESS PHONE:2066277001

MAIL ADDRESS:STREET 1:909 A STSTREET 2:11TH FLOORCITY:TACOMASTATE:WAZIP:98402

N-30D1dn30d.txtINSTITUTIONAL FUNDS 2002 ANNUAL REPORT

FRANK RUSSELL INVESTMENT COMPANY

INSTITUTIONAL FUNDS

2002 Annual Report

CLASS E, I, AND Y SHARES

EQUITY I FUNDEQUITY II FUNDEQUITY III FUNDEQUITY Q FUNDINTERNATIONAL FUNDFIXED INCOME I FUNDFIXED INCOME III FUND

CLASS C, E, AND S SHARES

EMERGING MARKETS FUNDREAL ESTATE SECURITIES FUNDSHORT TERM BOND FUND

CLASS C, E, I, AND S SHARES

SELECT GROWTH FUNDSELECT VALUE FUND

OCTOBER 31, 2002

[LOGO] Russell

Frank Russell Investment Company

Frank Russell Investment Company is a "series mutual fund" with 31 different investment portfolios. These financial statements report on twelve Funds, each of which has distinct investment objectives and strategies.

Frank Russell Investment Management Company

Responsible for overall management and administration of the Funds.

Frank Russell Company

Consultant to Frank Russell Investment Management Company.

Frank Russell Investment Company Institutional Funds

Annual Report October 31, 2002

Table of Contents Page

Letter to Our Clients ............................................. 3 Equity I Fund ..................................................... 4 Equity II Fund .................................................... 14 Equity III Fund ................................................... 26 Equity Q Fund ..................................................... 34 International Fund ................................................ 42 Fixed Income I Fund ............................................... 58 Fixed Income III Fund ............................................. 74 Emerging Markets Fund ............................................. 90 Real Estate Securities Fund ....................................... 100 Short Term Bond Fund .............................................. 104 Select Growth Fund ................................................ 114 Select Value Fund ................................................. 120 Statement of Assets and Liabilities ............................... 126 Statement of Operations ........................................... 130 Statement of Changes in Net Assets ................................ 132 Financial Highlights .............................................. 136 Notes to Statement of Net Assets .................................. 145 Notes to Financial Statements ..................................... 146 Report of Independent Accountants ................................. 163 Tax Information ................................................... 164 Disclosure of Information about Fund Directors .................... 165 Matter Submitted to a Vote of Shareholders ........................ 168 Manager, Money Managers and Service Providers ..................... 173

Frank Russell Investment Company - Institutional FundsCopyright (C) Frank Russell Company 2002. All rights reserved. This material isproprietary and may not be reproduced, transferred, or distributed in any formwithout prior written permission from Frank Russell Company. It is delivered onan "as is" basis without warranty. The Russell logo is a trademark and servicemark of Frank Russell Company. Frank Russell Company and Standard & Poor'sCorporation are the owners of the trademarks, service marks, and copyrightsrelated to their respective indexes. This material must be accompanied orpreceded by a current Frank Russell Investment Company Prospectus containingcomplete information concerning the investment objectives and operations of theCompany, charges, and expenses. The Prospectus should be read carefully beforean investment is made. The performance as of April 1, 1995 is reported gross ofinvestment advisory fees. For periods thereafter, performance and yields arereported net of investment advisory fees but gross of investment services fees,descriptions of which can be obtained from the investment advisor. Investmentservices fees and other account expenses will reduce performance (e.g., aninvestment services fee of 0.2% off average managed assets will reduce a 10.0%Semiannual return to 9.8%). The performance quoted represents past performanceand the investment return and principal value of an investment will fluctuate sothat shares, when redeemed, may be worth more or less than their original cost.Investments in securities of non- US issuers and foreign currencies involveinvestment risks different than those of US issuers; the Prospectus containsfurther information and details regarding these risks. Russell FundDistributors, Inc., is the distributor of Frank Russell Investment Company.

To Our Clients

As we present Frank Russell Investment Company's 2002 Annual Report, we wouldlike to thank you for choosing to put your confidence in Russell's MULTI ASSET,MULTI STYLE, MULTI MANAGER(TM) investment solution.

This annual report is being delivered against the backdrop of continued,uncertain markets. As the third year of a bear market passes we would like totake a moment to reflect on our investment process and how it has performed inthis volatile environment.

Overall, Russell's focus on diversity and risk management has been accomplishedthrough the use of multiple asset classes, where applicable, and multiple styledifferentiated money managers. This process ensures that investors areparticipating in a broad range of asset classes and investment styles. Forexample, certain segments of the equity market were strong performers, such asvalue relative to growth and international relative to domestic. As Russellinvestors, your broad asset allocation was supported by money managerdiversification.

As we move into 2003, we remain committed to our strategically diversifiedinvestment philosophy based on world class independent manager research. Asglobal leaders in multi-manager investing, we continue to have a worldwidenetwork of manager research analysts conducting ongoing reviews of the managersin your portfolios, ensuring the most appropriate managers and strategies areemployed.

You have put your financial security in our hands and we take thatresponsibility very seriously. Thank you for your continued confidence andinvestment with Frank Russell Investment Company. We look forward to 2003 andwill continue to earn your support.

Warm Regards,

[GRAPHIC]Len BrennanPresident and Chief Executive Officer

Equity I Fund

Portfolio Management Discussion--October 31, 2002 (Unaudited)

Objective: To provide income and capital growth by investing principally inequity securities.

Invests in: Primarily US equity securities.

Strategy: The Fund uses a multi-style, multi-manager strategy intended toachieve higher returns with moderate risk. The Fund employed the investmentmanagement services of eleven managers with three separate and distinctinvestment styles.

[GRAPHIC]

Equity I Fund - Class I Equity I Fund - Class Y ++++++

Periods Ended Growth of Total Periods Ended Growth of Total 10/31/02 $10,000 Return 10/31/02 $10,000 Return 1 Year $ 8,596 (14.04)% 1 Year $ 8,604 (13.96)% 5 Years $ 9,389 (1.25)%ss. 5 Years $ 9,410 (1.21)%ss. 10 Years $ 23,757 9.03%ss. 10 Years $ 23,808 9.06%ss.

Equity I Fund - Class E++++ Russell 1000(R) Index

Periods Ended Growth of Total Periods Ended Growth of Total 10/31/02 $10,000 Return 10/31/02 $ 10,000 Return

1 Year $ 8,574 (14.26)% 1 Year $ 8,540 (14.60)% 5 Years $ 9,312 (1.41)%ss. 5 Years $ 10,356 0.70%ss. 10 Years $ 23,562 8.94%ss. 10 Years $ 25,445 9.79%ss.

Performance Review

For the year ended October 31, 2002, the Equity I Fund Class I, Class E andClass Y shares lost 14.04%, 14.26% and 13.96%, respectively. This compared to aloss of 14.60% for the Fund's benchmark, the Russell 1000(R) Index.

Market and Portfolio Highlights

Broad US equity markets experienced a short rally in November and December of2001; however, by the end of the first calendar quarter of 2002 and throughoutmost of the remaining fiscal year, a trend of market losses had returned.Corporate accounting and earnings remained under scrutiny as the economy gavemixed signals, such as healthy consumer spending and low interest rates, whichcontrasted with negative factors such as rising unemployment and a depressedmanufacturing sector.

During the past twelve months, the market environment was difficult for activemanagers. However, managers who were defensively positioned through exposure tostocks of undervalued, anti-cyclical companies with histories of predictableearnings and low debt levels generally outperformed those managers favoringcompanies with positive forward-looking earnings growth. The Fund's investmentapproach was not fully rewarded since it tended to favor companies with strongearnings growth potential.

Fund performance was negatively impacted by its exposure to companies whosemanagement and accounting practices were questioned. Tyco International Ltd. andWorldCom, both troubled companies, detracted from the Fund's results. During theperiod the Fund's managers avoided, or had only minimal exposure to, most of theother ailing companies such as SBC Communications

4 Equity I Fund

Equity I Fund

Portfolio Management Discussion--October 31, 2002 (Unaudited)

Inc., McDonald's Corp., and Verizon Communications Inc. While the pharmaceuticalsector as a whole had negative returns, the Fund's overweight was a positivecontributor due to stock selection. The Fund also benefited from its managers'overweight holdings in companies that the market favored in the latter half of2002 such as Procter & Gamble, which rose in July on news of an acceleratedcorporate buy-back program, and Bank of America, which announced efficiencystreamlining measures.

Value stocks held firmer than growth issues for most of the fiscal period, butin the last four months growth stocks staged a return. The preference for valuecreated a difficult environment for the Fund's growth managers, especiallyTurner Investment Partners, which favors accelerating earnings growth companies.However, Turner's lower benchmark-relative returns were in line withexpectations as it was positioned for a more rapid market recovery, consistentwith its investment approach. Marsico, a growth manager, overcame theunfavorable growth environment and performed well by underweighting the laggingtechnology sector in favor of consumer discretionary and defense holdings.

The Fund's value managers all had respectable market-relative returns, with MFSleading, followed by Barclays and Alliance/ Bernstein. These managers benefitedby not investing in growth stocks that had fallen into the value category and bygenerally avoiding companies that sustained large losses during the period.

The custom-designed defensive investment strategy used by Westpeak lived up toexpectations by outperforming both the benchmark and the Fund's other managersduring the fiscal year. Jacobs Levy steadied returns with rewarded stockselection, while Suffolk and Peachtree lagged since they were positioned for aspeedier recovery.

During most of the fiscal year, the portfolio maintained an approximate 2%underweight to the declining technology sector, boosting Fund returns during theperiod. Most managers found this sector unappealing because of its highvaluations relative to future growth prospects. Yet, by October 2002, some ofthe Fund's more aggressive managers, such as Suffolk and Peachtree, began tooverweight the sector in anticipation of a recovery. The Fund's aggregateholdings tended to favor the consumer discretionary, materials & processing, andproducer durables sectors, while avoiding integrated oils and utilities. Theseover- and underweight positions contributed to performance during the period.

One change was made to the manager line-up during the fiscal period. AllianceCapital was replaced with Montag & Caldwell in October 2002. This change morefully diversifies the growth allocation of the Fund.

Top Ten Equity Holdings (as a percent of Total October 31, 2002 Investments)

Citigroup, Inc. 2.7% Pfizer, Inc. 2.7 Microsoft Corp. 2.5 Exxon Mobil Corp. 1.9 Procter & Gamble Co. 1.8 Wal-Mart Stores, Inc. 1.8 Viacom, Inc. Class B 1.5 Johnson & Johnson 1.4 American International Group 1.4 General Electric Co. 1.3

Portfolio Characteristics October 31, 2002

Current P/E Ratio 20.0x Portfolio Price/Book Ratio 2.67x Market Capitalization-$-Weighted Average 65.81 Bil Number of Holdings 631

Money Managers Styles

Alliance Capital Management, LP-Bernstein Investment Research & Management Unit Value Barclays Global Fund Advisors Value Jacobs Levy Equity Management, Inc. Market-Oriented MFS Institutional Advisors, Inc. Value Marsico Capital Management, LLC Growth Montag & Caldwell, Inc. Growth Peachtree Asset Management Market-Oriented Strong Capital Management, Inc. Growth Suffolk Capital Management, Inc. Market-Oriented Turner Investment Partners, Inc. Growth Westpeak Global Advisors, LP Market-Oriented

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

* Equity I Fund Class I assumes initial investment on November 1, 1992.

** Russell 1000(R) Index includes the 1,000 largest companies in the Russell 3000(R) Index. The Russell 1000(R) Index represents the universe of stocks from which most active money managers typically select. The Russell 1000(R) Index return reflects adjustments for income dividends and capital gains distributions reinvested as of the ex-dividend dates.

+ Prior to April 1, 1995, Fund performance results are reported gross of investment management fees. For the period following April 1, 1995, Fund performance results are reported net of investment management fees but gross of any investment services fees. Information concerning these fees can be obtained from the Fund's Advisor upon request.

++ Equity I Fund Class I performance has been linked with Class E to provide historical perspective. From May 14, 1999 (commencement of sale) through the current period, Class E paid shareholder service fees. Total return would have been lower had these fees been in effect during prior reporting periods.

+++ Equity I Fund Class I performance has been linked with Class Y to provide historical perspective.

ss. Annualized.

Performance is historical and assumes reinvestment of all dividends and capitalgains. Investment return and principal value will fluctuate so that aninvestor's shares, when redeemed, may be worth more or less than when purchased.Past performance is not indicative of future results.

Equity I Fund 5

Equity I Fund

Statement of Net Assets--October 31, 2002

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------Common Stocks - 95.5%Auto and Transportation - 2.0%American Axle & Manufacturing Holdings, Inc. (AE) 3,740 89AMR Corp. (AE) 660 3ArvinMeritor, Inc. 4,533 69Autoliv, Inc. 17,600 341Burlington Northern Santa Fe Corp. 27,320 703Canadian National Railway Co. 12,996 555Cooper Tire & Rubber Co. 13,380 174CSX Corp. 490 14Dana Corp. 79,400 794Delphi Corp. 56,740 395FedEx Corp. 48,029 2,555Ford Motor Co. 47,249 400General Motors Corp. 24,260 807Genuine Parts Co. 11,610 343Goodyear Tire & Rubber Co. (The) 19,600 139Harley-Davidson, Inc. 53,771 2,812JB Hunt Transport Services, Inc. (AE) 2,400 66JetBlue Airways Corp. (AE) 2,380 96Lear Corp. (AE) 6,330 231Norfolk Southern Corp. 29,300 592Paccar, Inc. 5,590 247Skywest, Inc. 2,230 34Southwest Airlines Co. 31,405 459TRW, Inc. 1,760 94Union Pacific Corp. 11,730 693United Parcel Service, Inc. Class B 14,500 870Visteon Corp. 10,700 71 ---------- 13,646 ----------Consumer Discretionary - 18.6%Abercrombie & Fitch Co. Class A (AE) 72,000 1,283Advance Auto Parts (AE) 8,000 428Amazon.com, Inc. (AE) 15,000 290AOL Time Warner, Inc. (AE) 235,290 3,471Apollo Group, Inc. Class A (AE) 30,800 1,278Autozone, Inc. (AE) 10,000 858Avon Products, Inc. 15,000 727Banta Corp. 1,520 47Bed Bath & Beyond, Inc. (AE) 50,558 1,793Belo Corp. Class A 33,100 765Black & Decker Corp. 30,250 1,414Blyth, Inc. 3,930 111Bob Evans Farms 900 22Brinker International, Inc. (AE) 53,800 1,527Callaway Golf Co. 5,800 71Career Education Corp. (AE) 8,090 324Carnival Corp. 87,500 2,286CEC Entertainment, Inc. (AE) 580 16Cendant Corp. (AE) 6,300 72Cheesecake Factory (The) (AE) 8,000 271Chico's FAS, Inc. (AE) 35,500 685

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------Claire's Stores, Inc. 2,700 70Clear Channel Communications, Inc. (AE) 95,981 3,556Clorox Co. 14,260 641Coach, Inc. (AE) 8,200 244Colgate-Palmolive Co. 73,915 4,064Corinthian Colleges, Inc. (AE) 7,000 266Costco Wholesale Corp. (AE) 31,000 1,052Darden Restaurants, Inc. 8,150 155Dillard's, Inc. Class A 7,500 124DoubleClick, Inc. (AE) 3,760 26Eastman Kodak Co. 22,260 733eBay, Inc. (AE) 35,048 2,217EchoStar Communications Corp. Class A (AE) 1,470 30Electronic Arts, Inc. (AE) 54,686 3,561Estee Lauder Cos., Inc. (The) Class A 11,700 341Expedia, Inc. Class A (AE) 210 14Family Dollar Stores 1,100 34Fastenal Co. 9,000 306Federated Department Stores (AE) 54,621 1,677Fortune Brands, Inc. 16,700 836Four Seasons Hotels, Inc. 51,150 1,680Gannett Co., Inc. 40,749 3,094Gemstar-TV Guide International, Inc. (AE) 2,010 7Gillette Co. (The) 75,550 2,257GTECH Holdings Corp. (AE) 2,740 71Harrah's Entertainment, Inc. (AE) 4,030 169Hearst-Argyle Television, Inc. (AE) 610 15Hilton Hotels Corp. 6,200 76Hollywood Entertainment Corp. (AE) 1,600 31Home Depot, Inc. 58,580 1,692International Game Technology (AE) 15,000 1,128ITT Educational Services, Inc. (AE) 2,500 55Jones Apparel Group, Inc. (AE) 6,250 217Kimberly-Clark Corp. 31,840 1,640Knight-Ridder, Inc. 7,330 441Kohl's Corp. (AE) 72,308 4,226Landry's Restaurants, Inc. 2,500 57Leggett & Platt, Inc. 4,300 90Lowe's Cos., Inc. 114,306 4,770Ltd Brands 21,220 333Mandalay Resort Group (AE) 47,700 1,349Manpower, Inc. 5,800 198Marriott International, Inc. Class A 32,400 1,002Mattel, Inc. 9,100 167May Department Stores Co. (The) 24,720 577Maytag Corp. 1,900 49McDonald's Corp. 30,430 551Media General, Inc. Class A 430 24Meredith Corp. 2,400 109MGM Mirage (AE) 56,581 1,760Michaels Stores, Inc. (AE) 13,700 616Newell Rubbermaid, Inc. 39,900 1,294Nike, Inc. Class B 41,340 1,951

6 Equity I Fund

Equity I Fund

Statement of Net Assets, continued--October 31, 2002

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------Nordstrom, Inc. 10,000 199Office Depot, Inc. (AE) 13,900 200Omnicom Group 1,135 65Pacific Sunwear Of California (AE) 4,400 103Park Place Entertainment Corp. (AE) 2,710 20PEP Boys-Manny Moe & Jack 4,200 49Petsmart, Inc. (AE) 27,580 527PF Chang's China Bistro, Inc. (AE) 3,200 110Pittston Brink's Group 1,130 24Procter & Gamble Co. 138,743 12,272RadioShack Corp. (AE) 7,330 153Reed Elsevier PLC - ADR 27,470 997Republic Services, Inc. (AE) 39,200 807RR Donnelley & Sons Co. 12,500 251Ryanair Holdings PLC - ADR (AE) 9,807 365Saks, Inc. (AE) 1,370 15Sears Roebuck and Co. 39,750 1,044ServiceMaster Co. (The) 21,230 218Stanley Works (The) 4,200 136Staples, Inc. (AE) 2,650 41Starbucks Corp. (AE) 7,000 167Starwood Hotels & Resorts Worldwide, Inc. 13,790 321Take-Two Interactive Software (AE) 5,100 131Talbots, Inc. 1,810 50Target Corp. 13,300 401Tech Data Corp. (AE) 3,930 126Ticketmaster Class B (AE) 830 20Tiffany & Co. 101,631 2,661TJX Cos., Inc. 14,600 300Toys R US, Inc. (AE) 8,600 86Tribune Co. 58,260 2,799Univision Communications, Inc. Class A (AE) 9,000 233USA Interactive (AE) 31,500 797VF Corp. 21,130 778Viacom, Inc. Class A (AE) 1,200 54Viacom, Inc. Class B (AE) 228,439 10,191Wal-Mart Stores, Inc. 227,122 12,162Wallace Computer Services, Inc. 2,380 44Walt Disney Co. 167,287 2,794Washington Post Class B 160 116Waste Management, Inc. 20,660 476Weight Watchers International, Inc. (AE) 11,000 521Wendy's International, Inc. 4,365 138Westwood One, Inc. (AE) 17,630 640Whirlpool Corp. 6,900 322Williams-Sonoma, Inc. (AE) 280 7Wynn Resorts, Ltd. (AE) 100 1Yahoo, Inc. (AE) 23,100 345Yum! Brands, Inc. (AE) 4,390 99 --------- 123,758 ---------

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------Consumer Staples - 5.9%Albertson's, Inc. 16,480 368Anheuser-Busch Cos., Inc. 71,666 3,781Campbell Soup Co. 36,900 778Coca-Cola Co. (The) 143,187 6,655Coca-Cola Enterprises, Inc. 4,600 110Conagra Foods, Inc. 74,850 1,815Coors (Adolph) Class B 1,500 103Diageo PLC - ADR 8,350 372Dial Corp. (The) 4,060 86Dole Food Co. 790 23Hershey Foods Corp. 2,960 193HJ Heinz Co. 31,000 997Hormel Foods Corp. 6,390 155JM Smucker Co. (The) 13,275 486Kellogg Co. 60,470 1,927Kroger Co. (AE) 16,080 239Monsanto Co. 22,176 367Pepsi Bottling Group, Inc. 9,710 262PepsiAmericas, Inc. 8,360 128PepsiCo, Inc. 193,973 8,554Philip Morris Cos., Inc. 119,061 4,852RJ Reynolds Tobacco Holdings, Inc. 15,950 647Ruddick Corp. 510 8Safeway, Inc. (AE) 1,170 27Sara Lee Corp. 88,303 2,016Sensient Technologies Corp. 1,800 44Smithfield Foods, Inc. (AE) 900 14Supervalu, Inc. 39,940 671Systemco Corp. 32,989 1,045Tyson Foods, Inc. Class A 15,820 175Unilever NV 2,400 154UST, Inc. 3,600 110Walgreen Co. 49,831 1,682Whole Foods Market, Inc. (AE) 5,000 233WM Wrigley Jr. Co. 4,600 243 --------- 39,320 ---------Financial Services - 20.2%ACE, Ltd. 980 30Aetna, Inc. 11,000 443Aflac, Inc. 17,650 537AG Edwards, Inc. 2,580 85Allmerica Financial Corp. 3,780 32Allstate Corp. (The) 64,500 2,566AMBAC Financial Group, Inc. 140 9American Express Co. 76,796 2,793American Financial Group, Inc. 1,700 39American International Group 144,782 9,056AmSouth Bancorp 32,300 633Annaly Mortgage Management, Inc. 8,140 143AON Corp. 22,340 409Apartment Investment & Management Co. Class A (o) 4,100 144

Equity I Fund 7

Equity I Fund

Statement of Net Assets, continued--October 31, 2002

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------

Arden Realty, Inc. (o) 280 6Associated Banc-Corp 773 26Astoria Financial Corp. 540 14Bank of America Corp. 109,462 7,640Bank of New York Co., Inc. (The) 21,280 553Bank One Corp. 60,570 2,336BB&T Corp. 15,530 563Bear Stearns Cos., Inc. (The) 4,200 256CarrAmerica Realty Corp. (o) 7,091 168Charles Schwab Corp. (The) 139,082 1,277Charter One Financial, Inc. 9,581 290Chelsea Property Group, Inc. (o) 1,700 55Chubb Corp. 20,400 1,151Cigna Corp. 7,710 279Cincinnati Financial Corp. 2,400 91Citigroup, Inc. 492,389 18,195CNA Financial Corp. (AE) 1,720 45Colonial BancGroup, Inc. (The) 460 6Comerica, Inc. 7,240 316Commerce Bancorp, Inc. 3,800 174Commerce Bancshares, Inc. 59 2Compass Bancshares, Inc. 1,610 52Countrywide Credit Industries, Inc. 5,300 267Crescent Real Estate Equities Co. (o) 1,920 28Deluxe Corp. 13,670 632Doral Financial Corp. 9,000 236Duke Realty Corp. (o) 10,770 262E*TRADE Group, Inc. (AE) 4,900 22Equifax, Inc. 3,600 85Equity Office Properties Trust (o) 49,780 1,199Equity Residential (o) 19,610 465Fannie Mae 50,610 3,384Federated Investors, Inc. Class B 11,320 303Fidelity National Financial, Inc. 3,000 91Fifth Third Bancorp 21,310 1,353First American Corp. 3,300 67First Data Corp. 19,100 667FirstMerit Corp. 300 7FleetBoston Financial Corp. 187,324 4,382Freddie Mac 59,640 3,673Fulton Financial Corp. 1,818 33Golden State Bancorp, Inc. 2,100 77Golden West Financial Corp. 8,640 597Goldman Sachs Group, Inc. 55,275 3,958Greenpoint Financial Corp. 2,950 129H&R Block, Inc. 12,580 558Hartford Financial Services Group, Inc. 26,550 1,049Hibernia Corp. Class A 3,790 75Highwoods Properties, Inc. (o) 1,980 40Hilb Rogal & Hamilton Co. 2,400 98Household International, Inc. 11,320 269HRPT Properties Trust (o) 2,300 18Huntington Bancshares, Inc. 31,500 596iStar Financial, Inc. (o) 2,330 66

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------Jefferson-Pilot Corp. 6,500 261John Hancock Financial Services, Inc. 38,520 1,129JP Morgan Chase & Co. 180,370 3,743Keycorp 37,783 923Landamerica Financial Group, Inc. 900 32Lehman Brothers Holdings, Inc. 98,206 5,231Lincoln National Corp. 9,320 284Loews Corp. 6,000 259Marsh & McLennan Cos., Inc. 27,300 1,275MBIA, Inc. 11,500 502MBNA Corp. 149,236 3,031Mellon Financial Corp. 85,840 2,428Merrill Lynch & Co., Inc. 82,980 3,149Metlife, Inc. 50,830 1,214Moody's Corp. 8,681 409Morgan Stanley 78,480 3,054National City Corp. 56,170 1,524National Commerce Financial Corp. 1,520 37Nationwide Financial Services 420 12New Century Financial Corp. 1,400 30New York Community Bancorp, Inc. 6,900 200Old National Bancorp 332 8Old Republic International Corp. 6,130 183PMI Group, Inc. (The) 940 28PNC Financial Services Group, Inc. 17,670 718Popular, Inc. 770 25Principal Financial Group 20,070 563Protective Life Corp. 1,030 29Providian Financial Corp. 2,040 9Prudential Financial, Inc. (AE) 5,280 154Regions Financial Corp. 15,340 520RenaissanceRe Holdings, Ltd. 9,000 369Ryder System, Inc. 270 6Safeco Corp. 27,940 994Simon Property Group, Inc. (o) 20,630 705SLM Corp. 46,627 4,790SouthTrust Corp. 60,788 1,557Sovereign Bancorp, Inc. 13,500 190St Paul Cos. 27,640 907State Street Corp. 410 17Sungard Data Systems, Inc. (AE) 3,720 82SunTrust Banks, Inc. 21,940 1,335TCF Financial Corp. 600 25Torchmark Corp. 9,430 338Travelers Property Casualty Corp. 11,600 247Travelers Property Casualty Corp. Class A (AE) 8,699 115Travelers Property Casualty Corp Class B (AE) 25,778 349Trizec Properties, Inc. (o) 1,630 17Union Planters Corp. 9,545 270UnionBanCal Corp. 6,200 265UnumProvident Corp. 13,360 274US Bancorp 103,368 2,180

8 Equity I Fund

Equity I Fund

Statement of Net Assets, continued--October 31, 2002 Market Number Value of (000) Shares $ ------- -------

Wachovia Corp. 109,830 3,821Washington Federal, Inc. 250 6Washington Mutual, Inc. 69,817 2,497Wells Fargo & Co. 116,373 5,873Willis Group Holdings, Ltd. (AE) 22,000 673WR Berkley Corp. 4,570 170XL Capital, Ltd. Class A 2,640 201Zions Bancorp 180 7 ------- 134,344 -------

Health Care - 14.7%Abbott Laboratories 144,499 6,050Alcon, Inc. (AE) 11,000 451Allergan, Inc. 12,000 653AmerisourceBergen Corp. 25,217 1,794Amgen, Inc. (AE) 153,006 7,124Amylin Pharmaceuticals, Inc. (AE) 7,000 122Anthem, Inc. (AE) 13,000 819Baxter International, Inc. 70,800 1,771Becton Dickinson & Co. 10,710 316Biomet, Inc. 15,000 442Boston Scientific Corp. (AE) 62,251 2,343Bristol-Myers Squibb Co. 34,470 848Cardinal Health, Inc. 6,000 415Charles River Laboratories International, Inc. (AE) 9,000 331Chiron Corp. (AE) 960 38Coventry Health Care, Inc. (AE) 7,000 234CR Bard, Inc. 1,490 83CuraGen Corp. (AE) 1,460 6DaVita, Inc. (AE) 957 23Eli Lilly & Co. 41,170 2,285First Health Group Corp. (AE) 11,000 286Forest Laboratories, Inc. (AE) 43,029 4,216Genentech, Inc. (AE) 750 26Gilead Sciences, Inc. (AE) 15,500 538Guidant Corp. (AE) 52,850 1,563HCA, Inc. 33,232 1,445Health Management Associates, Inc. Class A 10,300 197Henry Schein, Inc. (AE) 6,000 301Humana, Inc. (AE) 16,100 196ICOS Corp. (AE) 1,030 25Idec Pharmaceuticals Corp. (AE) 48,120 2,214Johnson & Johnson 157,863 9,274Laboratory Corp. of America Holdings (AE) 66,450 1,601McKesson Corp. 13,000 388Medimmune, Inc. (AE) 11,444 292Medtronic, Inc. 116,698 5,228Merck & Co., Inc. 66,813 3,624Mid Atlantic Medical Services (AE) 430 16Mylan Laboratories 1,851 58Oxford Health Plans (AE) 8,500 302Pfizer, Inc. 570,233 18,116

Market Number Value of (000) Shares $ ------- -------

Pharmacia Corp. 77,251 3,322Quest Diagnostics (AE) 32,860 2,097Renal Care Group, Inc. (AE) 190 6Schering-Plough Corp. 69,610 1,486Sepracor, Inc. (AE) 4,500 39St. Jude Medical, Inc. (AE) 8,400 299Steris Corp. (AE) 27,100 719Stryker Corp. 29,500 1,861Tenet Healthcare Corp. (AE) 28,050 806Teva Pharmaceutical Industries - ADR 17,360 1,344Triad Hospitals, Inc. (AE) 4,200 153UnitedHealth Group, Inc. 57,256 5,207Universal Health Services, Inc. Class B (AE) 4,000 194Varian Medical Systems, Inc. (AE) 150 7Watson Pharmaceuticals, Inc. (AE) 5,590 154WellPoint Health Networks (AE) 14,000 1,053Wyeth 54,510 1,826Zimmer Holdings, Inc. (AE) 27,802 1,146 ------- 97,773 -------Integrated Oils - 3.2%Amerada Hess Corp. 4,590 235BP PLC - ADR 26,360 1,014ChevronTexaco Corp. 40,598 2,746ConocoPhillips 54,622 2,649Exxon Mobil Corp. 379,656 12,779Marathon Oil Corp. 20,270 424Occidental Petroleum Corp. 35,230 1,005Unocal Corp. 27,020 747 ------- 21,599 -------Materials and Processing - 3.8%Air Products & Chemicals, Inc. 65,950 2,915Akzo Nobel NV - ADR 12,500 373Alcoa, Inc. 71,312 1,573Allegheny Technologies, Inc. 910 6Archer-Daniels-Midland Co. 138,023 1,880Ashland, Inc. 11,220 295Ball Corp. 3,770 183Bemis Co. 2,900 151Carpenter Technology 630 7Catellus Development Corp. (AE) 7,130 127Dow Chemical Co. (The) 38,660 1,005Du Pont EI de Nemours & Co. 47,650 1,966Eastman Chemical Co. 3,830 139Ecolab, Inc. 8,800 425Engelhard Corp. 18,605 412Georgia-Pacific Corp. 15,860 193Harsco Corp. 80 2International Paper Co. 43,910 1,534Jacobs Engineering Group, Inc. (AE) 2,944 89Kaydon Corp. 2,100 42Lafarge North America, Inc. 4,150 123Lubrizol Corp. 2,720 79

Equity I Fund 9

Equity I Fund

Statement of Net Assets, continued--October 31, 2002

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------Masco Corp. 75,700 1,556MeadWestvaco Corp. 20,411 428Newmont Mining Corp. 330 8Nucor Corp. 15,000 632Pactiv Corp. (AE) 18,460 366Phelps Dodge Corp. (AE) 5,870 182PPG Industries, Inc. 23,570 1,108Praxair, Inc. 52,920 2,884Precision Castparts Corp. 7,650 148Rayonier, Inc. 360 15Rohm & Haas Co. 27,180 904Schulman (A.), Inc. 4,805 84Sealed Air Corp. (AE) 3,200 49Sherwin-Williams Co. (The) 25,450 696Sigma-Aldrich Corp. 570 26Smurfit-Stone Container Corp. (AE) 58,350 759Sonoco Products Co. 4,220 99Syngenta AG - ADR 99,570 1,176Temple-Inland, Inc. 3,700 152United States Steel Corp. 7,180 92Vulcan Materials Co. 2,340 79Weyerhaeuser Co. 3,000 136York International Corp. 5,001 118 -------- 25,216 --------Miscellaneous - 1.9%Carlisle Cos., Inc. 2,600 97Crane Co. 1,550 28Eaton Corp. 10,230 700FMC Corp. (AE) 6,600 202General Electric Co. 355,897 8,986Illinois Tool Works, Inc. 3,200 196ITT Industries, Inc. 9,330 606Johnson Controls, Inc. 2,600 203Lancaster Colony Corp. 260 12SPX Corp. (AE) 31,100 1,307St. Joe Co. (The) 7,143 208Textron, Inc. 8,310 341 -------- 12,886 --------Other Energy - 2.7%Anadarko Petroleum Corp. 17,610 784Apache Corp. 70,379 3,805Aquila, Inc. 9,810 36Baker Hughes, Inc. 50,460 1,466BJ Services Co. (AE) 42,900 1,301Burlington Resources, Inc. 3,900 161Devon Energy Corp. 30,410 1,536Dynegy, Inc. Class A 45,700 31EL Paso Corp. 8,881 69ENSCO International, Inc. 8,000 216GlobalSantaFe Corp. 15,200 363Halliburton Co. 3,630 59Kerr-McGee Corp. 5,781 251

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------McDermott International, Inc. (AE) 1,390 5Noble Corp. (AE) 41,880 1,354Ocean Energy, Inc. 44,700 833Pioneer Natural Resources Co. (AE) 1,420 35PNM Resources, Inc. 2,840 63Schlumberger, Ltd. 49,410 1,982Smith International, Inc. (AE) 18,000 563Sunoco, Inc. 1,430 43Tidewater, Inc. 1,390 39Transocean, Inc. 50,240 1,104Weatherford International, Ltd. (AE) 25,700 1,029Williams Cos., Inc. 12,210 23XTO Energy, Inc. 24,580 591 -------- 17,742 --------Producer Durables - 5.5%3M Co. 38,940 4,943Allied Waste Industries, Inc. (AE) 6,220 51American Power Conversion (AE) 4,109 53Ametek, Inc. 220 8Andrew Corp. (AE) 8,189 70Applied Materials, Inc. (AE) 121,608 1,828Boeing Co. (The) 11,980 356Caterpillar, Inc. 37,390 1,527Centex Corp. 8,900 405Cooper Industries, Ltd. Class A 5,270 166Cummins, Inc. 17,000 407Deere & Co. 58,266 2,703DR Horton, Inc. 28,341 546Emerson Electric Co. 10,660 514General Dynamics Corp. 14,879 1,177Goodrich Corp. 13,690 207Honeywell International, Inc. 103,983 2,489Hovnanian Enterprises, Inc. Class A (AE) 4,000 151Hubbell, Inc. Class B 10,360 352Ingersoll-Rand Co. Class A 4,500 176Lennar Corp. 20,849 1,150Lockheed Martin Corp. 69,503 4,024MDC Holdings, Inc. 18,911 710Molex, Inc. Class A 990 23Motorola, Inc. 56,700 520Northrop Grumman Corp. 2,690 277Novellus Systems, Inc. (AE) 17,300 547Pall Corp. 120,240 2,089Pentair, Inc. 160 5Pitney Bowes, Inc. 1,940 65Pulte Homes, Inc. 2,400 110Raytheon Co. 47,580 1,404RF Micro Devices, Inc. (AE) 81,200 689Rockwell Collins, Inc. 6,760 152Steelcase, Inc. Class A 1,700 15Stewart & Stevenson Services 300 3Tektronix, Inc. (AE) 400 7Tyco International, Ltd. 219,237 3,170United Technologies Corp. 44,350 2,735

10 Equity I Fund

Equity I Fund

Statement of Net Assets, continued--October 31, 2002

Market Number Value of (000) Shares $ ------ ------

WW Grainger, Inc. 10,910 529Xerox Corp. (AE) 43,100 286 ------ 36,639 ------Technology - 11.2%Accenture, Ltd. Class A (AE) 19,200 324Activision, Inc. (AE) 4,350 89Acxiom Corp. (AE) 1,930 24Adobe Systems, Inc. 23,000 544Adtran, Inc. (AE) 4,740 120Advanced Micro Devices, Inc. (AE) 28,900 177Affiliated Computer Services, Inc. Class A (AE) 6,600 304Agere Systems, Inc. Class A (AE) 43,523 38Altera Corp. (AE) 1,460 17Analog Devices, Inc. (AE) 83,546 2,239Ariba, Inc. (AE) 98,204 232Automatic Data Processing 1,600 68Avaya, Inc. (AE) 44,000 88Avnet, Inc. 18,520 172Avocent Corp. (AE) 1,480 30BMC Software, Inc. (AE) 4,200 67Cisco Systems, Inc. (AE) 549,833 6,147Cognizant Technology Solutions Corp. (AE) 4,000 265CommScope, Inc. (AE) 3,520 28Computer Associates International, Inc. 13,660 203Computer Sciences Corp. (AE) 9,620 311Compuware Corp. (AE) 9,270 45Corning, Inc. (AE) 89,500 167Dell Computer Corp. (AE) 172,408 4,933Electronic Data Systems Corp. 87,400 1,316EMC Corp. (AE) 30,620 156Harris Corp. 12,120 320Hewlett-Packard Co. 282,079 4,457Hughes Electronics Corp. Class H (AE) 5,781 57Ingram Micro, Inc. Class A (AE) 20,170 289Intel Corp. 345,737 5,981International Business Machines Corp. 73,942 5,837International Rectifier Corp. (AE) 76,700 1,325Intersil Corp. Class A (AE) 3,200 54Intuit, Inc. (AE) 26,820 1,392Jabil Circuit, Inc. (AE) 8,220 127JD Edwards & Co. (AE) 1,240 15Koninklijke Philips Electronics NV 92,500 1,637L-3 Communications Holdings, Inc. (AE) 6,818 320Linear Technology Corp. 32,700 904Lucent Technologies, Inc. (AE) 57,800 71Maxim Integrated Products 4,650 148Microchip Technology, Inc. 49,100 1,198Micron Technology, Inc. (AE) 94,502 1,512Microsoft Corp. (AE) 313,480 16,762MicroStrategy, Inc. Class A (AE) 104 1Motorola, Inc. 23,030 772National Semiconductor Corp. (AE) 27,700 368

Market Number Value of (000) Shares $ ------ ------

Network Associates, Inc. (AE) 51,000 810Oracle Corp. (AE) 178,040 1,814PanAmSat Corp. (AE) 2,620 51Peoplesoft, Inc. (AE) 1,770 32Plexus Corp. (AE) 1,120 12QLogic Corp. (AE) 16,600 577Qualcomm, Inc. (AE) 143,894 4,967Quantum Corp. (AE) 34,100 101Rockwell Automation, Inc. 11,500 190Sandisk Corp. (AE) 3,500 69SAP AG - ADR 45,710 875Scientific-Atlanta, Inc. 5,980 73Solectron Corp. (AE) 22,510 51Storage Technology Corp. (AE) 6,740 119Sun MicroSystems, Inc. (AE) 4,580 14Symantec Corp. (AE) 40,900 1,636Symbol Technologies, Inc. 1,140 10Texas Instruments, Inc. 81,800 1,297UniSystem Corp. (AE) 15,900 139Veritas Software Corp. (AE) 6,000 92Vishay Intertechnology, Inc. (AE) 990 10Xilinx, Inc. (AE) 820 16 ------ 74,606 ------Utilities - 5.8%Allegheny Energy, Inc. 1,460 8Alliant Energy Corp. 12,140 194Alltel Corp. 10,310 513Ameren Corp. 17,150 693American Electric Power Co., Inc. 30,960 794AT&T Corp. 222,212 2,898AT&T Wireless Services, Inc. (AE) 14,376 99Avista Corp. 2,000 21BellSouth Corp. 152,320 3,983BT Group PLC - ADR 6,220 178Centerpoint Energy, Inc. 23,410 166CenturyTel, Inc. 2,100 59Cinergy Corp. 4,400 137CMS Energy Corp. 30,700 240Comcast Corp. Class A (AE) 44,850 1,032Consolidated Edison, Inc. 11,230 478Constellation Energy Group, Inc. 7,100 182COX Communications, Inc. Class A (AE) 45,330 1,242Dominion Resources, Inc. 3,297 158DTE Energy Co. 2,383 107Duke Energy Corp. 16,030 328Edison International (AE) 50,180 504Energy East Corp. 23,120 492Entergy Corp. 11,960 527Exelon Corp. 6,692 337FirstEnergy Corp. 10,970 356FPL Group, Inc. 15,440 911KeySpan Corp. 17,660 645Liberty Media Corp. Class A (AE) 65,530 542

Equity I Fund 11

Equity I Fund

Statement of Net Assets, continued--October 31, 2002

Number Market of Value Shares (000) $- --------------------------------------------------------------------------------Mirant Corp. (AE) 9,941 21National Fuel Gas Co. 39,740 802Nextel Communications, Inc. Class A (AE) 59,296 669Nicor, Inc. 510 16NiSource, Inc. 24,300 401Nokia OYJ - ADR 118,771 1,974Northeast Utilities 7,800 117NSTAR 22,560 946Pepco Holdings, Inc. 3,760 78PG&E Corp. (AE) 20,490 222Pinnacle West Capital Corp. 18,760 535PPL Corp. 19,080 660Progress Energy, Inc. 940 39Public Service Enterprise Group, Inc. 22,440 643Puget Energy, Inc. 17,400 370Quintiles Transnational Corp. (AE) 820 9Qwest Communications International 133,242 452Reliant Resources, Inc. (AE) 4,676 9SBC Communications, Inc. 212,104 5,443Sempra Energy 9,900 219Southern Co. (The) 5,550 165Sprint Corp.-FON Group 45,580 566TXU Corp. 7,220 104US Cellular Corp. (AE) 200 6Verizon Communications, Inc. 128,539 4,854Westar Energy, Inc. 17,100 186WGL Holdings, Inc. 9,420 218Wisconsin Energy Corp. 21,100 485Xcel Energy, Inc. 12,565 131 --------- 38,164 ---------Total Common Stocks

(cost $ 644,429) 635,693 ---------

Preferred Stocks - 0.1%Auto and Transportation - 0.1%General Motors Corp. 15,290 319

Technology - 0.0%Northrop Grumman Corp. 1,930 215

Utilities - 0.0%TXU Corp. 9,340 231 ---------Total Preferred Stocks

(cost $ 1,087) 765 ---------

Principal Market Amount Value (000) (000) $ $- --------------------------------------------------------------------------------Short-Term Investments - 4.6%

Frank Russell Investment Company

Money Market Fund (C) 25,819 25,819Software HOLDRs Trust 484 515United States Treasury Bill (c)(y)(s) 1.640% due 12/19/02 4,000 3,991 ---------Total Short-Term Investments

(cost $ 30,294) 30,325 ---------Total Investments - 100.2%

(identified cost $ 675,810) 666,783

Other Assets and Liabilities,

Net - (0.2%) (1,259) ---------Net Assets - 100.0% 665,524 =========

Unrealized Notional Appreciation Amount (Depreciation)Futures Contracts (000) (000) $ $

(Number of Contracts)Long PositionsRussell 1000 Index

expiration date 12/02 (18) 4,215 --

S&P 500 Index

expiration date 12/02 (137) 30,325 (206) ---------Total Unrealized Appreciation (Depreciation) on Open Futures

Contracts Purchased (206) =========

See accompanying notes which are an integral part of the financial statements.

12 Equity I Fund

Equity II Fund

Portfolio Management Discussion--October 31, 2002 (Unaudited)

Objective: To maximize total return primarily through capital appreciation andby assuming a higher level of volatility than the Equity I Fund.

Invests in: Primarily small capitalization and "emerging growth-type" US equitysecurities.

Strategy: The Fund uses a multi-style, multi-manager strategy intended toachieve higher returns with moderate risk. The Fund employed the investmentmanagement services of eight small capitalization stock fund managers with threeseparate and distinct investment styles.

[GRAPHIC]

Equity II Fund - Class 1- -------------------------------------------------- Periods Ended Growth of Total 10/31/02 $10,000 Return- --------------- ------------ ----------------1 Year $ 9,083 (9.17)%5 Years $ 10,659 1.28%(S)10 Years $ 26,200 10.11%(S)

Equity II Fund - Class E ++++- -------------------------------------------------- Periods Ended Growth of Total 10/31/02 $10,000 Return- --------------- ------------ ----------------1 Year $ 9,063 (9.37)%5 Years $ 10,575 1.12%(S)10 Years $ 25,992 10.02%(S)

Equity II Fund - Class Y ++++++- -------------------------------------------------- Periods Ended Growth of Total 10/31/02 $10,000 Return- --------------- -------------- ----------------1 Year $ 9,093 (9.07)%5 Years $ 10,688 1.34%(S)10 Years $ 26,270 10.13%(S)

Russell 2500(TM)Index- -------------------------------------------------- Periods Ended Growth of Total 10/31/02 $10,000 Return- --------------- ------------ ----------------1 Year $ 9,086 (9.14)%5 Years $ 10,716 1.39%(S)10 Years $ 25,962 10.01%(S)

Performance Review

For the year ended October 31, 2002, the Equity II Fund Class I, Class E andClass Y shares lost 9.17%, 9.37%, and 9.07%, respectively, compared to theFund's benchmark, the Russell 2500(TM) Index, which dropped 9.14%.

Market and Portfolio Highlights

This period was characterized by tentative economic hopes early in the perioddashed by recurring fears about weak operating profits, the continued threat ofterrorism, and fraudulent accounting practices at several major US firms.Corporate accounting and earnings remained under scrutiny throughout the period,though most of the negative impact was felt in the large cap sector. While smallcap companies are required to generate the same quantitative financialinformation as large cap companies, they often do not complement this with thequalitative attributes that help facilitate an understanding of theirbusinesses. As a result, small cap managers are accustomed to delving deeperinto small cap company accounts in order to gain confidence in theseinvestments. This increased scrutiny and analysis benefited small cap managers'results. Where large cap sell-offs rippled into smaller stocks, some managersperceived this as a buying

14 Equity II Fund

Equity II Fund

Portfolio Management Discussion--October 31, 2002 (Unaudited)

opportunity. The economy gave mixed signals, such as strong consumer spendingand low interest rates, which contrasted with negative factors such as risingunemployment and a depressed manufacturing sector.

The market environment for active small cap management was moderately favorableduring the period due to several factors. Small cap active managers' collectivetendency to have a larger cap profile than the benchmark helped returns duringthe fiscal year, as larger stocks outperformed smaller issues. Active small capvalue and small cap core managers tend to tilt toward lower valuation stocksversus their benchmarks, which helped as value stocks outperformed growth stocksby almost 20 percentage points. Lastly, active managers generally retain anallocation to cash, which has clearly aided in a depressed equity market.

The Fund's managers had a mix of results within each of the styles, with nomeaningful success or failure in the growth, value, or core styles. The twoworst performing managers, David J. Green and Suffolk, belong to the value andgrowth styles, respectively. Most of the Fund's managers emphasized stocks thatthey expected to benefit from an improving US economy as a result of the FederalReserve's (the Fed) extensive fiscal stimulus. The Fed's actions did nottranslate into across-the-board economic recovery, nor did it change the tide ofstrong negative market sentiment. Winning managers in all styles tended tounderweight technology-related stocks, overweight consumer-related stocks, andavoided stocks with no earnings or higher PE's.

The Fund gained positive results from overweights in the home building, retail,and publishing industries, which all benefited from healthy consumer spending.Overweights in the poor-performing electronics, computer services, andtelecommunication industry stocks were a drag on performance. Stocks with highlevels of both volatility and expected outperformance combined with a lack ofearnings tended to lead other issues in the early part of the year, but the Fundremained consistently underweight in these issues. The Fund's managers favoredcompanies with strong fundamentals (healthy balance sheets and earnings growth),a strategy which was not rewarded until third quarter. However, the late-periodbenefits derived from this strategy were not sufficient enough to overcome theFund's emphasis on high volatility stocks, which fared poorly in the latter partof the period.

In May 2002, Goldman Sachs Asset Management was retained by the Fund, replacingWestpeak and Globeflex. Goldman is rated very highly by the Fund's managementresearch team and will provide small cap core exposure to the Fund's strategy.Globeflex and Westpeak's investment processes and staffing experienced changesduring the period which made both firms unattractive to the Fund.

Top Ten Equity Holdings(as a percent of Total Investments) October 31, 2002

First American Corp. 0.6%Getty Images, Inc. 0.5Claire's Stores, Inc. 0.5Quiksilver, Inc. 0.5Arrow Electronics, Inc. 0.5Charles River Laboratories International, Inc. 0.5Imation Corp. 0.4Rent-A-Center, Inc. 0.4Annaly Mortgage Management, Inc. 0.4Ryder System, Inc. 0.4

Portfolio Characteristics October 31, 2002

Current P/E Ratio 16.1xPortfolio Price/Book Ratio 1.74xMarket Capitalization - $-Weighted Average 1.72 BilNumber of Holdings 867

Money Managers Styles

CapitalWorks Investment Partners, LLC GrowthDavid J. Greene & Company, LLC ValueDelphi Management, Inc. ValueGoldman Sachs Asset Management Market-OrientedJacobs Levy Equity Management, Inc. ValueSirach Capital Management, Inc. ValueSuffolk Capital Management, Inc. GrowthTimesSquare Capital Management, Inc. Growth

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

* Equity II Fund Class I assumes initial investment on November 1, 1992.

** Russell 2500(TM) Index is composed of the bottom 500 stocks the Russell 1000(R) Index and all the stocks in the Russell 2000(R) Index. The Russell 2500(TM) Index return reflects adjustments for income dividends and capital gains distributions reinvested as of the ex-dividend dates.

# Prior to April 1, 1995, Fund performance results are reported gross of investment management fees. For the period following April 1, 1995, Fund performance results are reported net of investment management fees but gross of any investment services fees. Information concerning these fees can be obtained from the Fund's Advisor upon request.

## Equity II Fund Class I performance has been linked with Class E to provide historical perspective. From May 14, 1999 (commencement of sale) through the current period, Class E paid shareholder service fees. Total return would have been lower had these fees been in effect during prior reporting periods.

### Equity II Fund Class I performance has been linked with Class Y to provide historical perspective.

(S) Annualized.

Performance is historical and assumes reinvestment of all dividends and capitalgains. Investment return and principal value will fluctuate so that aninvestor's shares, when redeemed, may be worth more or less than when purchased.Past performance is not indicative of future results.

E