PACIFIC HORIZON FUNDS INC, N-30D, 1997-05-08

PACIFIC HORIZON FUNDS INC
N-30D, 1997-05-08

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<PAGE> 1

PACIFIC HORIZON TAX-EXEMPT INCOME FUNDS

PACIFIC HORIZON TAX-EXEMPT INCOME FUNDS
ANNUAL REPORT

FEBRUARY 28, 1997

NATIONAL MUNICIPAL BOND FUND
CALIFORNIA TAX-EXEMPT BOND FUND

INVESTING FOR ALL
THE TIMES OF YOUR LIFE

NOT FDIC INSURED

<PAGE> 2

PACIFIC HORIZON FUNDS, INC.
3435 Stelzer Road, Columbus, OH 43219
1-800-332-3863

INVESTMENT ADVISER
Bank of America National Trust
and Savings Association
555 California Street
San Francisco, CA 94104

ADMINISTRATOR
The BISYS Group, Inc.
3435 Stelzer Road
Columbus, OH 43219
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036

FUND COUNSEL
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107

DISTRIBUTOR
Concord Financial Group, Inc.
3435 Stelzer Road
Columbus, OH 43219

FUND SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE ENDORSED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENTAL AGENCY.

The Pacific Horizon Funds, Inc. are sponsored and distributed by Concord
Financial Group, Inc., which is unaffiliated with Bank of America. Bank of
America serves as investment adviser and receives fees for such services. From
time to time, Bank of America may provide other services to the Funds for
additional fees, as disclosed in the Funds' prospectuses.

For certain investors, a portion of the income earned on municipal bond funds
may be subject to the federal Alternative Minimum Tax (AMT), and to state and
local taxes.

This material must be preceded or accompanied by a current prospectus.

<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
INVESTMENTS IN PACIFIC HORIZON FUNDS, INC. ARE NOT
BANK DEPOSITS AND ARE NOT OBLIGATIONS OF, OR
GUARANTEED BY, BANK OF AMERICA OR ANY AFFILIATES. AN
INVESTMENT IN MUTUAL FUNDS INVOLVES INVESTMENT RISKS, NOT
INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT FDIC
INVESTED. INSURED
</TABLE>

================================================================================
<PAGE> 3

Contents

<TABLE>
<S> <C>
FUND FACTS 2-3
UNDERSTANDING YOUR SHAREHOLDER REPORT 4-6
ECONOMIC REVIEW FROM THE INVESTMENT
ADVISER 8-9
FUND OVERVIEW AND INTERVIEW WITH YOUR
INVESTMENT MANAGER 10-19
PORTFOLIOS OF INVESTMENTS
National Municipal Bond Fund 20-25
California Tax-Exempt Bond Fund 26-31
STATEMENTS OF ASSETS AND LIABILITIES
National Municipal Bond Fund 32
California Tax-Exempt Bond Fund 33
STATEMENTS OF OPERATIONS
National Municipal Bond Fund 34
California Tax-Exempt Bond Fund 35
STATEMENTS OF CHANGES IN NET ASSETS
National Municipal Bond Fund 36
California Tax-Exempt Bond Fund 37
NOTES TO FINANCIAL STATEMENTS 38-45
FINANCIAL HIGHLIGHTS 46-49
REPORT OF INDEPENDENT ACCOUNTANTS 50
</TABLE>
<PAGE> 4

PACIFIC HORIZON FUND FACTS

The Pacific Horizon Family of Funds offers a variety of mutual funds with
different investment objectives to help you diversify your portfolio and meet
your investment goals. Some Funds offer greater growth potential, while others,
such as the money market funds, strive to maintain stable net asset value but
offer no growth potential.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
FUND NAME INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------------
<S> <C>
International Equity Long-Term Capital Growth
.....................................................................................
Aggressive Growth Maximum Capital Appreciation
.....................................................................................
Blue Chip Long-Term Capital Appreciation
.....................................................................................
Capital Income Total Investment Return
.....................................................................................
Asset Allocation Long-Term Growth
.....................................................................................
Corporate Bond High Current Income
.....................................................................................
Intermediate Bond Income and Capital Appreciation
.....................................................................................
U.S. Government Securities High Level of Current Income
.....................................................................................
Short-Term Government High Current Income with Relative
Stability of Principal
.....................................................................................
National Municipal Bond* High Level of Federal Tax-Free
Current Income
.....................................................................................
California Tax-Exempt Bond* High Level of Federal and California
Tax-Free Current Income
.....................................................................................
Money Market Funds+ High Current Income Plus Principal
- Prime Stability
- Treasury
- Government
- Treasury Only
.....................................................................................
Tax-Exempt Money Market Funds*+
- Tax-Exempt Money High Level of Federal Tax-Free Current
Income Plus Principal Stability
- California Tax-Exempt Money Market High Level of Federal and California
Tax-Free Current Income Plus Principal
Stability
</TABLE>

- --------------------------------------------------------------------------------
* Certain investors may be subject to the federal Alternative Minimum Tax (AMT)
and to certain state and local taxes.

+ There can be no assurance that the Funds will be able to maintain a stable net
asset value of $1.00 per share. Fund shares are not insured or guaranteed by
the U.S. Government.

2
<PAGE> 5

With the help of an investment professional, you can develop a strategy tailored
to meet your goals. To receive any of the Funds' prospectuses, which include
more complete information such as charges and expenses, call your Investment
Specialist or the Pacific Horizon Funds. Read the prospectus carefully before
investing or sending money.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
PORTFOLIO CONSISTS PRIMARILY OF ... APPROPRIATE FOR INVESTORS WHO SEEK
- -----------------------------------------------------------------------------------------------
<S> <C>
Foreign Equity Securities Diversification into foreign equity markets with
associated risk.
................................................................................................
Small Capitalization Stocks Higher-than-average long-term growth potential with
higher-than-average risk.
................................................................................................
Blue Chip Stocks Long-term growth potential from investments in the
stocks of well-established companies.
................................................................................................
Convertible Bonds and Convertible Combined potential for current income and capital
Preferred Stocks appreciation.
................................................................................................
Stocks, Bonds and Cash Equivalents Long-term growth potential and current income from
stocks and bonds.
................................................................................................
Investment-Grade Corporate Debt High monthly income potential with reasonable
investment risk.
................................................................................................
Investment-Grade Corporate and U.S. Regular monthly income from a diversified portfolio
Government Securities of investment-grade securities.
................................................................................................
GNMAs and Other U.S. Government High monthly income potential and low credit risk.
Securities
................................................................................................
U.S. Government and Government Agency Monthly income and relative stability of investment.
Securities
................................................................................................
Investment-Grade Municipal Debt Monthly tax-free income.
Securities
................................................................................................
Investment-Grade California High monthly double tax-free income.
Municipal Securities
................................................................................................
High-Quality Corporate and/or U.S. A flexible, convenient way to manage or accumulate
Government Short-Term Obligations cash while waiting for other investment
opportunities.
................................................................................................
Short-Term Municipal Obligations A tax-free way to manage or accumulate cash while
waiting for other investment opportunities.
................................................................................................

Short-Term California Municipal A tax-free way to manage or accumulate cash while
Obligations waiting for other investment opportunities.
</TABLE>

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

3
<PAGE> 6

UNDERSTANDING YOUR SHAREHOLDER REPORT

As a mutual fund shareholder, you receive two financial reports a year that
contain important information about your investment. The Financial Statements
and Financial Highlights included in annual reports are audited by an
independent public accounting firm and cover the activity for the past fiscal
year. The independent public accountant provides an opinion letter in each
audited report. A semi-annual report is a six-month interim report that includes
financial statements that are generally not audited by an independent public
accounting firm.

This guide will help you extract the information from
the report.
The TABLE OF CONTENTS helps
you locate the information you
want.

The ECONOMIC REVIEW FROM THE
INVESTMENT ADVISER provides a
brief overview of the economy
and how it affects the
financial markets.

The FUND OVERVIEW AND
INTERVIEW WITH YOUR INVESTMENT
MANAGER enables you to gain
insight into the Fund's
investments and learn more
about the Fund manager's
strategies.

Because a picture or chart can help clarify the
text, the investment management team may have
illustrated the most important features of the Fund.
The illustrations may represent the portfolio
composition, the largest holdings or a
simplification of the investment adviser's
investment style.
LOGO LOGO
<PAGE> 7

The financial statements summarize and describe the Fund's financial
transactions. They are broken down into four different statements, which are
illustrated below:

The PORTFOLIO OF INVESTMENTS lists each investment holding in the Fund as of the
date of the report. Investments may be grouped by category (by industry or
security type, for example). The percentage of the Fund's net assets represented
by these groupings is also disclosed.

TYPE OF SECURITY

INDUSTRY SECTOR AND PERCENTAGE OF THE FUND'S
NET ASSETS REPRESENTED BY INVESTMENTS IN THAT
SECTOR (IF APPLICABLE)

ACTUAL PORTFOLIO HOLDINGS WITH SHARES AND
MARKET VALUE AS OF REPORT DATE

The STATEMENT OF ASSETS AND LIABILITIES lists all the assets and liabilities of
the Fund as of the date of the statement. This is an individual fund's "balance
sheet." Also disclosed in this statement are the Fund's net asset value per
share and its maximum offering price per share as of the date of the statement.
The statement also lists the accounts that comprise the Fund's
net assets (capital stock, undistributed
income, etc.).

SUMMARY OF THE FUND'S INVESTMENTS AND ALL
OTHER ASSETS OWNED BY THE FUND, INCLUDING
AMOUNTS OWED TO THE FUND BY OUTSIDE PARTIES

SUMMARY OF ALL AMOUNTS OWED TO OUTSIDE PARTIES
BY THE FUND

NET RESULTS OF ASSETS LESS LIABILITIES

THE MARKET VALUE OF THE FUND'S TOTAL NET
ASSETS DIVIDED BY THE NUMBER OF SHARES
OUTSTANDING

THE CURRENT NET ASSET VALUE PER SHARE PLUS SALES CHARGE, IF ANY
LOGO
LOGO
<PAGE> 8

The STATEMENT OF OPERATIONS shows the amount of dividend and interest income
earned from the Fund's investments, the expenses incurred by the Fund from its
operations and any
gains or losses realized and not yet realized
by the Fund from holding and/or selling any
investments.

ANY INCOME EARNED FROM THE FUND'S INVESTMENTS

OPERATING EXPENSES INCURRED BY THE FUND DURING
THE PERIOD

GAINS OR LOSSES REALIZED UPON THE SALE OF THE
FUND'S INVESTMENTS AND ANY CHANGE IN
UNREALIZED GAINS OR LOSSES ON FUND HOLDINGS
DURING THE PERIOD

NET CHANGE IN NET ASSETS DUE TO FUND
OPERATIONS

The STATEMENTS OF CHANGES IN NET ASSETS shows the changes in the net assets of
the Fund during each of the two most recent reporting periods. The changes in
net assets are generally
broken down into four distinct sections:

OPERATIONS: SEE STATEMENT OF OPERATIONS

DIVIDENDS TO SHAREHOLDERS: TOTAL INCOME
DIVIDENDS PAID TO SHAREHOLDERS DURING THE
PERIODS

DISTRIBUTIONS TO SHAREHOLDERS: TOTAL REALIZED
GAINS DISTRIBUTED TO SHAREHOLDERS DURING THE
PERIODS

FUND SHARE TRANSACTIONS: DOLLAR VALUE OF FUND
SHARES PURCHASED, REDEEMED OR REINVESTED
DURING THE PERIODS

The NOTES TO FINANCIAL STATEMENTS are footnotes to the statements listed above.
These notes include information on accounting methods used by the Fund,
contractual arrangements between the Fund and its service providers, certain
transactions effected by the Fund and other general information about the Fund.

The FINANCIAL HIGHLIGHTS shows, for a single share outstanding throughout each
period presented, the net investment income, the realized and unrealized gains
and losses and the dividends and distributions of the Fund. It also shows key
data and ratios, such as the total investment return for each period, the
portfolio turnover rate for Funds other than money market mutual funds, the
ratio of expenses to average net assets and the ratio of net investment income
to average net assets.
LOGO
LOGO
<PAGE> 9

[This page intentionally left blank.]

7
<PAGE> 10

ECONOMIC REVIEW
FROM THE INVESTMENT ADVISER

The Standard & Poor's Stock Index posted a total return of 26.18% during the 12
month period ended February 28, 1997, amply rewarding long-term investors who
rode out volatility early in the period.* The best performers were concentrated
among shares of large company stocks, which significantly outpaced shares of
smaller firms.

At the end of this period, however, the markets began to give serious
consideration to a possible tightening of monetary policy following Federal
Reserve Chairman Alan Greenspan's Humphrey-Hawkins testimony. Chairman
Greenspan's comments focused on current high levels of consumer confidence and
the potential for inflationary pressures to surface. His comments fueled renewed
volatility in the fixed-income markets, and the bellwether 30-year Treasury bond
ended the period with a 0.36% total return.**

THE CASE FOR
STOCKS AND BONDS

The stock market's gain raises some important issues. Late in the period, there
was considerable discussion concerning Federal Reserve Chairman Alan Greenspan's
comments of "irrational exuberance" in his reflections on the state of the U.S.
equity markets. Other observers felt that investors should be optimistic based
on the healthy business climate in the U.S., the moderate economic policies of
the current administration and the focus in Washington on balanced budgets.

Overall, the U.S. economy seems poised for continued moderate growth, which is
good news for stocks. The stock market's current price-to-earnings (P/E) ratio
of 17.8 times our 1997 earnings estimates is within the 16 to 19 times range of
the 1960s when we had similar inflation levels. We think it is reasonable to
expect P/E ratios to stay at current levels. That gives an estimated market
return over the next 12 months of 10% (8% from earnings growth and 2% from
dividend yield).

Congress and the Clinton Administration continue to entertain the prospect of a
Balanced Budget Amendment, mandating the end of federal deficits within five to
seven years. While an agreement has not passed to date, this shift in attitude
bodes well for both stocks and bonds, as a balanced budget facilitates lower
interest rates, encouraging earnings growth.

POTENTIAL RISKS

Given the length of the current economic expansion, history tells us that the
bulls will run out of steam. Slowing economic growth is a double-edged sword as
lower corporate earnings lead to both a decline in prices and a reallocation of
savings. Companies with disappointing earnings may quickly fall into disfavor.
Broad equity indices may then decline as investors reallocate their assets into
more stable stocks.

The U.S. bond market and, indirectly, the U.S. equity market have benefited from
strong purchases of U.S. Treasuries by foreign investors. Supported by an
appreciating dollar, foreign purchases of U.S. Treasuries in 1996 were $265
billion compared to $118 billion in net sales by domestic investors (for four
quarters ended December 31, 1996).*** If the dollar should decline, there would
be less incentive to buy dollar denominated assets.

LOOKING FORWARD

In our view, investors should approach the remainder of 1997 with rational
exuberance tempered by a knowledge of history. Under the best case scenario, the
U.S. economy will see a move toward sustainable growth, higher real interest
rates and an anticipated 8% to 9% increase in corporate profits. Given these
projections, most investment professionals expect equities to perform well in
1997, although below 1996 levels. Bonds at this juncture seem attractive,
especially given the recommended revisions to real rates of inflation and the
trend toward a balanced federal budget.

8
<PAGE> 11

History, however, usually repeats itself, and we would not be surprised to see
some corrections ahead. Thus, investors may want to review their portfolios,
bearing in mind the importance of diversification in controlling risk. We see
the most value in equities characterized by growth at reasonable P/E multiples,
and find relative value in intermediate-term bonds, rather than long duration
plays. Investors seeking long-term growth after inflation and taxes should
remain biased toward stocks and positive on bonds.

Sincerely,
Kirk Hartman
Kirk Hartman
Chief Investment Officer,
Bank of America NT&SA,
Investment Adviser to the
Pacific Horizon Funds

- ---------------
* The S&P 500 is an index that is representative of the large capitalization
U.S. equity market as a whole, and cannot be invested in directly.

** Source: Bloomberg using Merrill Lynch Taxable Bond Indices which reflects
the 30-year Treasury bond return.

*** Source: ISI Group

9
<PAGE> 12

PACIFIC HORIZON
NATIONAL MUNICIPAL BOND FUND AND
CALIFORNIA TAX-EXEMPT BOND FUND

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

STEPHEN P. SCHARRE
Portfolio Manager
Bank of America NT&SA

GOAL:

The Pacific Horizon National Municipal Bond Fund seeks to achieve as high a
level of current interest income exempt from federal income tax as is consistent
with prudent investment management and preservation of capital.

INVESTMENTS:

The Fund invests primarily in investment-grade municipal securities issued on
behalf of states, territories and possessions of the United States, the District
of Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions.

APPROPRIATE FOR:

Investors seeking monthly interest income exempt from federal income tax.+

INCEPTION:

January 28, 1994

SIZE OF FUND AS OF
FEBRUARY 28, 1997:

Over $15 million

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

KIM MICHALSKI
Director of Tax-Exempt Fixed Income
Bank of America NT&SA

GOAL:

The Pacific Horizon California Tax-Exempt Bond Fund seeks to achieve as high a
level of current interest income exempt from federal and California state income
taxes as is consistent with prudent investment management and preservation of
capital.

INVESTMENTS:

The Fund invests primarily in municipal securities issued on behalf of the state
of California and its political subdivisions, agencies, authorities and other
governmental entities.

APPROPRIATE FOR:

California residents seeking monthly interest income exempt from both federal
and California personal income taxes.+

INCEPTION:

March 30, 1984

SIZE OF FUND AS OF
FEBRUARY 28, 1997:

Over $221 million

- ---------------
+Certain investors may be subject to the federal Alternative Minimum Tax (AMT)
and to certain state and local taxes.

10
<PAGE> 13

Q
HOW DID THE MUNICIPAL BOND MARKETS AND THE FUNDS PERFORM DURING THE PAST 12
MONTHS?

A
STEVE SCHARRE: Municipal bonds performed slightly better than Treasuries as
Treasury yields rose more than municipal yields during the last 12 months. The
period began just as investors' fears of tax reform were beginning to fade, and
as the period ended, those fears had disappeared. For the 12 months ended
February 28, 1997, the Pacific Horizon National Municipal Bond Fund had a total
return of 5.66% (without the sales charge) for A Shares.* The Pacific Horizon
California Tax-Exempt Bond Fund returned 4.29% (without the sales charge) for A
Shares during the same time period.* That compares to 5.52% for the Funds'
benchmark, the Lehman Brothers Municipal Bond Index.** During the period, both
the Pacific Horizon National Municipal Bond and California Tax-Exempt Bond Funds
introduced K Shares, and total return for the 12 months ended February 28, 1997
for the National Municipal Bond Fund and California Tax-Exempt Bond Fund were
5.66% and 4.29%, respectively.***

Q
WHAT FACTORS AFFECTED THE FUNDS' PERFORMANCE DURING THE 12 MONTHS ENDED
FEBRUARY 28, 1997?

A
STEVE SCHARRE: The fiscal year began with rates rising significantly as
stronger than anticipated economic data rattled the bond market in early 1996.
As we entered the summer, the economy continued to grow at a healthy pace and
yields remained at higher levels. Many investors were concerned that the economy
would soon overheat, and in response, the Federal Reserve would need to increase
short-term rates to slow the economy. During the third quarter, economic growth
slowed without a rate increase by the Federal Reserve, calming investors and
allowing yields to head lower until early December. By December, economic data
for the fourth quarter showed a reaccelerating economy, and that sent rates back
up.

The total return performance on fixed income securities primarily was a result
of income. Lower-rated bonds fared best as investors reached for yield, causing
yield spreads to narrow between bonds of different credit quality. This
condition was exacerbated by the increased prevalence of bond insurance in the
municipal bond market, which made it difficult to do relative value trades in
the municipal sector.

KIM MICHALSKI: The economic recovery in California translated into improved
market performance for California bondholders. The state has regained most of
the jobs lost during the recession. However, California's unemployment rate of
6.80% continues to exceed the 5.3% national average.****

Municipal yields ended the period only 15 to 30 basis points higher than they
began. However, interest rates traded within a fairly wide band as uncertainty
concerning the economy's strength caused investors to overreact to each economic
projection.

Q
HOW DID YOU MANAGE THE FUNDS IN THAT ENVIRONMENT?

A
STEVE SCHARRE: Trading in the National Municipal Bond Fund's portfolio was
dictated more on coupon and duration than by differences in yields between
sectors. For example, during the Fall of 1996, we expected yields to stay in a
fairly tight trading range. Thus, we purchased bonds that would perform well in
a low-volatility environment. Housing bonds, which provide relatively high
yields due to their uncertain call protection, perform well

11
<PAGE> 14

in that kind of market. For instance, we recently purchased Nevada Housing
Single Family Mortgage Bond, 6.25%, due in 2014 (3.4% of net assets as of
February 28, 1997).*****

We began the fiscal year neutral to the Lehman Brothers Municipal Bond Index,
having shortened our average duration several months prior as yields had dropped
significantly during 1995. Duration, which measures a bond's price sensitivity
to interest rates, is a principal component of risk and return. Our decision to
shorten the duration proved beneficial as rates rose during the first half of
1996. We extended the average duration during May and June, as the higher rates
available appeared to be taking into account stronger economic growth. Interest
rates then declined during the Fall of 1996, at which point the portfolio was
brought back to neutral as the market returned to a valuation more in line with
our outlook.

KIM MICHALSKI: The ongoing market volatility often was too strong to take
advantage of in an appreciable manner. Early in the period, however, we extended
the California Tax-Exempt Bond Fund's duration, which was at the time shorter
than the Lehman Brothers Municipal Bond Index and the Lipper California
universe.** This was done by selling bonds with short calls and purchasing bonds
in the 20-year range with 10-year call protection.

During the rest of the year, we maintained a duration-neutral strategy due to
the increased market volatility caused by uncertainty about the direction of
interest rates. A recent example of this strategy, which required us to replace
some longer-term issues with shorter-term issues, was the swap of California
Water Resources, 4.75%, due in 2025 (position sold on January 9, 1997) for the
purchase of Port of Oakland, 5.50%, due in 2015 (2.2% of net assets as of
February 28, 1997).*****

The portfolio's average maturity was 18.7 years at the beginning of the period
versus 17.9 years at the end of the period.***** That duration was neutral to
slightly short relative to the Lehman Brothers Municipal Bond Index.**

Q
DID THE FUNDS' CREDIT QUALITY CHANGE OVER THE PERIOD?

A
STEVE SCHARRE: The average credit quality in the National Municipal Bond
Fund improved slightly during the period, as the Fund's investments in triple A
securities increased from 39% to 46%. This was accomplished by reducing the
Fund's exposure to single A credits as tight credit spreads offered little
additional return for the increased risk in those securities. The Fund's average
credit quality remains very high at double A.

KIM MICHALSKI: The California Tax-Exempt Bond Fund's average credit quality
remains double A. However, during the last period, we have increased the Fund's
holdings of triple B rated bonds from 4.5% to 12% of assets. By making this
adjustment, the Fund should be better positioned to take advantage of specific
securities we believe are cheap relative to their inherent values, and this
adjustment will bring the Fund's exposure to such securities in line with its
benchmark and its typical competitor.*****

Q
WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE MUNICIPAL BOND MARKET FOR THE
YEAR AHEAD?

A
STEVE SCHARRE: The U.S. economy continues to grow at a moderate pace with
low inflation. The success of the Federal Reserve's monetary policy over the
last several years appears to have achieved a good balance which seeks to foster
a grow-

12
<PAGE> 15

ing economy. Due to the length of the current expansion, however, the labor
market has become increasingly tight. As a result, the possibility of an
increase in short-term rates by the Federal Reserve to slow the economy has
grown significantly.****** With this view, we cannot be overly aggressive with
longer-term maturities in the National Municipal Bond Fund, so we are continuing
to maintain a neutral stance relative to the Lehman Brothers Municipal Bond
Index.

We currently expect municipals to perform in line with taxable bonds this year.
Municipal-to-Treasury yield ratios are currently near historical averages, and
our current outlook for supply and demand forces within the municipal market
does not indicate that a major shift is likely.

KIM MICHALSKI: Cash flows into municipal bond funds have been relatively flat
during the past 12 months. Therefore, unless there is a significant pick up in
activity or a radical change in the market environment, the current structure of
the California Tax-Exempt Bond Fund's portfolio will not change dramatically.

- ---------------
* Return figures for the Fund include change in share price, reinvestment
of dividends and capital gains distributions. Performance figures do not
reflect the maximum 4.50% front-end sales load, which applies to some
investors. Fund performance with the 4.50% maximum sales charge for the
National Municipal and the California Tax-Exempt Bond Fund was 0.89% and
-0.39% respectively, for the period. The Funds are currently waiving a
portion of the advisory, administrative and/or shareholder servicing fee.
This voluntary waiver may be modified or terminated at any time, which
would reduce the Fund's performance.

** Source: Ibbotson Associates, 1997. The Lehman Brothers Municipal Bond
Index is an unmanaged index generally representative of the municipal
bond market as a whole, and cannot be invested in directly.

*** The inception date of the K Shares (the date K Shares were initially
funded) was July 22, 1996. The K Shares did not commence operations
during the period ended February 28, 1997. For this reason, the
performance results for K Shares are those of A Shares without the sales
charge. The performance results for K Shares included in the Financial
Highlights table in the financial statements represent actual performance
from the inception date of the K Shares.

**** U.S. Labor Department statistics as of February 28, 1997.

***** The composition of the Funds' holdings is subject to change.

****** Note: This move occurred in late March 1997, subsequent to the close of

the Fund year.

The performance data quoted represents past performance and is not an indication
of future results. The investment return and Net Asset Value will fluctuate so
than an investor's shares, when redeemed, may be worth more or less than the
original cost.

13
<PAGE> 16

PACIFIC HORIZON
NATIONAL MUNICIPAL BOND FUND
(AS OF FEBRUARY 28, 1997)

GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)

<TABLE>
<CAPTION>
LIPPER
GENERAL LEHMAN
MUNICIPAL BROTHERS
MEASUREMENT PERIOD DEBT FUNDS MUNICIPAL
(FISCAL YEAR COVERED) A SHARES K SHARES AVERAGE BOND INDEX
<S> <C> <C> <C> <C>
1/28/94 9551.10 10000.00 10000 10000
2/28/94 9455.22 9899.60 9735.08 9741
8/31/94 9413.22 9855.63 9550.93 9657
2/28/95 9718.35 10175.08 9796.43 9928
8/31/95 10288.30 10771.80 10255.19 10514
2/29/96 10802.54 11310.23 10767.76 11025
8/31/96 10846.72 11356.49 10749.19 11065
2/28/97 11414.08 11950.60 11270.02 11634
</TABLE>

HOW PERFORMANCE COMPARES
The chart compares the Pacific Horizon
National Municipal Bond Fund to the
Lehman Brothers Municipal Bond Index,
which is an unmanaged index typically
used as a performance benchmark for
municipal debt investments.
As illustrated, the Fund tracked the
performance of other municipal debt
funds. The average of municipal debt
reported by Lipper Analytical
Services, Inc. measures the perform-
ance of other funds with investment objectives and policies similar to those of
the Pacific Horizon National Municipal Bond Fund. An initial $10,000 investment
in the Fund made on January 28, 1994, would now be worth $11,414 for A Shares.
The same investment made in the Lipper General Municipal Debt Funds Average
would now be worth $11,270. Correspondingly, a $10,000 investment in K Shares
for the same period would now be worth $11,951.*

SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.

Investment return and principal value are historical and will vary with market
conditions, so an investor's shares, when redeemed, may be worth more or less
than their original cost. Return figures for the Fund include change in share
price, reinvestment of dividends, and capital gain distributions, if any, and
the effect of the maximum 4.50% sales charge.

*The inception date of the K Shares (the date K Shares were initially funded)
was July 22, 1996. The K Shares did not commence operations during the period
ended February 28, 1997. For this reason, the performance results for K Shares
are those of A Shares without the sales charge. The performance results for K
Shares included in the Financial Highlights table in the financial statements
represent actual performance from the inception date of the K Shares. K Shares,
unlike A Shares, are sold without a front-end

<TABLE>
<CAPTION>
---------------------------------------
NATIONAL MUNICIPAL BOND FUND
AVERAGE ANNUAL RETURN
---------------------------------------
A SHARES K SHARES*
Without With
Sales Sales
Charge Charge
---------------------------------------
<S> <C> <C> <C>
1 Year 5.66% 0.89% 5.66%
......................................
Since
Inception 5.94% 4.38% 5.94%
(1/28/94)
---------------------------------------
</TABLE>

<PAGE> 17

sales load but have an ongoing .75% distribution or administrative services fee
(of which .25% are currently being waived) which would have reduced prior
performance.

Lipper Analytical Services, Inc. is an independent mutual fund-monitoring
organization. Neither the Lipper Municipal Debt Funds Average, nor the Lehman
Brothers Municipal Bond Fund Index may be invested in directly. The hypothetical
investment in the Lehman Brothers Municipal Bond Fund Index does not reflect any
sales or management fees that would be incurred if an investor were to actually
purchase individual securities or mutual funds, while the performance of the
Fund reflects all expenses and management fees and the effect of the maximum
sales charge.

15
<PAGE> 18

PACIFIC HORIZON
NATIONAL MUNICIPAL BOND FUND
(AS OF FEBRUARY 28, 1997)

TAX-EXEMPT INCOME
A Monthly Opportunity

Compare the difference between the after-tax income from the two hypothetical
$100,000 investments illustrated. This hypothetical example assumes a 31 percent
tax bracket and does not represent actual performance of the Pacific Horizon
National Municipal Bond Fund.

A tax-exempt investment, despite a lower yield, can actually provide certain
investors with greater after-tax income than a taxable investment. Past
performance is not a guarantee of future results. Some investors may be subject
to the federal Alternative Minimum Tax (AMT) and to certain state and local
taxes. Any capital gain distributions from the Fund will be taxable. Consult
with your tax adviser.

* Bond Buyer Municipal Index and Merrill Lynch Corporate Bond Index, as reported
in The Wall Street Journal, February 28, 1997.

TAXABLE EQUIVALENT YIELD:
THE INCOME YOU CAN KEEP

Tax-Exempt Yield on
$100,000 at 5.96%*

Taxable Yield on
$100,000 at 7.22%*

<TABLE>
<S> <C> <C> <C> <C>
You Keep 4982
Uncle Sam
Takes 2238
</TABLE>

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 FEDERAL TAX RATES+
- --------------------------------------------------------------------------------
28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joint $41,201 $99,601 $151,751 Over
Return: $99,600 $151,750 $271,050 $271,050
......................................................
Single $24,651 $59,751 $124,651 Over
Return: $59,750 $124,650 $271,050 $271,050
- --------------------------------------------------------------------------------
</TABLE>

=============================================
A FEDERAL
TAX-EXEMPT
INVESTMENT
YIELDING: IS EQUIVALENT TO A TAXABLE
INVESTMENT YIELDING:

<TABLE>
<S> <C> <C> <C> <C>
4.5% 6.25% 6.52% 7.03% 7.45%
........................................................
5.0 6.94 7.25 7.81 8.28
........................................................
5.5 7.64 7.97 8.59 9.11
........................................................

6.0 8.33 8.70 9.38 9.93
........................................................
6.5 9.03 9.42 10.16 10.76
........................................................
- -------------------------------------------------
- -------------------------------------------------
================================================
</TABLE>

- -
+ Source: Internal Revenue Service.
* Certain investors may be subject to the federal Alternative Minimum Tax (AMT)
and/or certain state and local taxes. Shareholders should consult with a tax
adviser. TAX-EQUIVALENT YIELD
The Bottom Line
Today's higher federal tax
rates make tax-exempt income
more attractive. This chart
enables you to determine what
the yield on a taxable
investment would have to be
to match a hypothetical tax-
exempt yield.* For example,
in order to equal a 5%
tax-exempt yield, a taxable
investment would have to
yield between 6.94% and
8.28%, depending on your
federal tax bracket. The
higher your tax bracket, the
better the potential
after-tax result of investing
in a tax-exempt fund. The
Pacific Horizon National
Municipal Bond Fund seeks to
provide a high level of
current income free from
federal income tax,
consistent with prudent
investment management and
preservation of capital.
<PAGE> 19

PACIFIC HORIZON
CALIFORNIA TAX-EXEMPT BOND FUND
(AS OF FEBRUARY 28, 1997)

GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)

<TABLE>
<CAPTION>
LIPPER
CALIFORNIA LEHMAN
MUNICIPAL BROTHERS
MEASUREMENT PERIOD BOND FUNDS MUNICIPAL
(FISCAL YEAR COVERED) A SHARES K SHARES AVERAGE BOND INDEX
<S> <C> <C> <C> <C>
2/28/87 9547.50 10000.00 10000 10000.00
2/29/88 9525.87 9977.35 10012.29 10262
2/28/89 9992.66 10466.26 10649.63 10899
2/28/90 10886.15 11402.26 11593.36 12018
2/28/91 11727.07 12282.85 12512.04 13126
2/29/92 12855.83 13465.10 13696.97 14438
2/28/93 14657.03 15351.66 15594.46 16425
2/28/94 15484.41 16218.25 16442.30 17333
2/28/95 15540.26 16276.75 16510.31 17665
2/29/96 17113.63 17924.67 18247.16 19617
2/28/97 17847.21 18693.02 19105.63 20700
</TABLE>

HOW PERFORMANCE COMPARES
The chart compares the Pacific Horizon
California Tax-Exempt Bond Fund to the
Lehman Brothers Municipal Bond Index,
which is an unmanaged index typically
used as a performance benchmark for
municipal debt investments.
As illustrated, the Fund tracked the
performance of other municipal debt
funds. The average of California
municipal debt funds reported by
Lipper Analytical Services, Inc.
measures
the performance of other funds with investment objectives and policies similar
to those of the Pacific Horizon California Tax-Exempt Bond Fund. An initial
$10,000 investment in the Fund for the ten year period commencing on February
28, 1987 would now be worth $17,847 for A Shares. The same investment made in
the Lipper California Municipal Bond Funds Average for the same time period
would now be worth $19,106. Correspondingly, the same $10,000 investment in K
Shares would now be worth $18,693.*

SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.

Investment return and principal value are historical and will vary with market
conditions, so an investor's shares, when redeemed, may be worth more or less
than their original cost. Return figures for the Fund include change in share
price, reinvestment of dividends, and capital gains distributions, if any, and
the effect of the maximum 4.50% sales charge.

<TABLE>
<CAPTION>
---------------------------------------
CALIFORNIA TAX-EXEMPT
AVERAGE ANNUAL RETURN
---------------------------------------
A SHARES K SHARES*
Without With
Sales Sales
Charge Charge
---------------------------------------
<S> <C> <C> <C>
1 year: 4.29% -0.39% 4.29%
......................................
5 years: 6.78% 5.81% 6.78%
......................................
10
years: 6.46% 5.96% 6.46%
----------------------------------------
</TABLE>

<PAGE> 20

the inception date of the K Shares. K Shares, unlike A Shares, are sold without
a front-end sales load but have an ongoing .75% distribution or administrative
services fee (of which .25% are currently being waived), which would have
reduced prior performance.

Lipper Analytical Services, Inc. is an independent mutual fund-monitoring
organization. Neither the Lipper California Municipal Debt Funds Average, nor
the Lehman Brothers Municipal Bond Fund Index may be invested in directly. The
hypothetical investment in the Lehman Brothers Municipal Bond Fund Index does
not reflect any sales or management fees that would be incurred if an investor
were to actually purchase individual securities or mutual funds, while the
performance of the Fund reflects all expenses and management fees and the effect
of the maximum sales charge.

18
<PAGE> 21

PACIFIC HORIZON
CALIFORNIA TAX-EXEMPT BOND FUND
(AS OF FEBRUARY 28, 1997)
TAX-EXEMPT
Dollars and Sense
for California
Residents
The top federal
income tax rate is
39.6 percent and
there is a 10
percent surtax on
those with incomes
above $250,000. By
investing in the
Pacific Horizon
California
Tax-Exempt Bond
Fund, Golden State
residents may
benefit from
regular income that
is free from
federal and state
taxes.* Use the
chart to determine
what the
hypothetical yield
on a taxable
investment
would have to be to match a tax-exempt yield. For example, in order to equal a 5
percent tax-exempt yield, a taxable investment would have to yield between 7.66%
and 9.13%, depending on your combined federal and state tax brackets. The higher
your tax bracket, the better the potential after-tax result of investing in a
tax-exempt fund.
- -------------
* Certain investors may be subject to the federal Alternative Minimum Tax (AMT)
and/or certain state and local taxes. Shareholders should consult with a tax
adviser. Federal and California tax rates are for 1996.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION*

QUALITY
Quality Counts

S&P/MOODY'S
LONG-TERM RATING OF
PORTFOLIO COMPOSITION

<TABLE>
<S> <C>
A 15.4
BBB 4.5
AA 13.2
AAA 54.9
NONRATED 12.0
</TABLE>

- ---------------
* The composition of the Fund's holdings is subject to change.
The Pacific Horizon California Tax-Exempt Bond Fund invests primarily in
investment-grade municipal securities that are rated in the four highest
categories by an independent rating agency such as Standard & Poor's or nonrated
securities deemed by the Fund's adviser to be of comparable quality. By
maintaining high standards, the Fund seeks to minimize risk while increasing
yield, offering an investor the opportunity for capital preservation as well as
consistent monthly dividends. Tax-exempt bond funds invest in securities issued
by states, local municipalities and governments, whose financial condition will
affect the value of their securities.
<TABLE>
<CAPTION>
COMBINED 1996 CALIFORNIA
STATE & FEDERAL EFFECTIVE RATE
-----------------------------------------------------------------
34.70% 37.42% 42.40% 45.22%
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Joint $40,101 $96,901 $147,701 over
Return: $96,900 $147,700 $263,750 $263,750
.................................................................
Single $24,001 $58,151 $121,301 over
Return: $58,150 $121,300 $263,750 $263,750
-----------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
===================================================================
A TAX-EXEMPT
INVESTMENT
YIELDING: IS EQUIVALENT TO A TAXABLE INVESTMENT
YIELDING:

<S> <C> <C> <C> <C>
4.5% 6.89% 7.19% 7.75% 8.21%
..................................................................
5.0 7.66 7.99 8.61 9.13
..................................................................
5.5 8.42 8.79 9.47 10.04
..................................................................
6.0 9.19 9.59 10.34 10.95
..................................................................
6.5 9.95 10.39 11.20 11.87
..................................................................

==================================================================
</TABLE>

<PAGE> 22

PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------

Portfolio of Investments
February 28, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ---------------------------------------- ----------- ----- -------- --------- ---------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS -- 98.7%
CALIFORNIA -- 8.6%
California Health Facilities, Ponoma
Valley Hospital Medical Center (MBIA
Insured), Callable on 1/1/00 @102.... Aaa/AAA 6.75% 1/1/07 $250,000 $ 268,438
California Pollution Control Financing
Authority, Southern California
Edison, Series D (Final maturity
2/28/08)*............................ A2/A+ 3.45% 3/3/97 200,000 200,000
California State Department of Veterans
Affairs, Home Purchase, Series A
(AMT), Callable on 3/27/97 @102...... Aa/A+ 7.375% 8/1/12 30,000 30,745
Del Mar California Race Track
Authority, Callable on 8/15/06 @102.. NR/NR 6.20% 8/15/11 250,000 253,125
Foothill/Eastern Corridor, California
Toll Road, Senior Lien, Series A,
Callable on 1/1/05 @100.............. Baa/BBB- 5.00% 1/1/35 400,000 344,500
Foothill/Eastern Corridor, California
Toll Road, Senior Lien, Series A,
Callable on 1/1/05 @102.............. Baa/BBB- 6.00% 1/1/34 150,000 150,187
West Covina, Certificates of
Participation, Queen of the Valley
Hospital, Callable on 8/15/04 @102... A2/A 6.50% 8/15/24 75,000 78,094
--------------
1,325,089
--------------
COLORADO -- 2.7%
Moffat County Pollution Control,
Pacificorp Project (AMBAC Insured)
(Final maturity 5/1/13)*............. Aaa/AAA 3.50% 3/3/97 200,000 200,000
Pueblo County Single Family Mortgage,
Series A, Callable on 6/1/02 @102.... NR/AA- 6.85% 12/1/25 210,000 218,400
--------------
418,400
--------------
CONNECTICUT -- 0.5%
Connecticut State Clean Water, Callable
on 6/1/04 @102....................... Aaa/AA+ 5.65% 6/1/10 75,000 77,344
--------------
FLORIDA -- 4.0%
Florida State Board of Education,
Capital Outlay, Series A, Callable on
6/1/04 @101.......................... Aa2/AA 6.10% 6/1/24 75,000 77,813
</TABLE>

- ---------------
See Notes to Financial Statements.

20
<PAGE> 23

- ---------------
See Notes to Financial Statements.

21
<PAGE> 24

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ---------------------------------------- ----------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
MASSACHUSETTS -- (CONTINUED)
Massachusetts State Housing Finance
Agency, Single Family Housing
Revenue, (MBIA Insured) (AMT),
Callable on 6/1/06 @102.............. Aaa/AAA 6.25% 12/1/15 $500,000 $ 509,375
Massachusetts State Water Resource
Authority, Series C, Callable on
12/1/04 @102......................... A/A 5.25% 12/1/20 100,000 93,625
--------------
1,088,625
--------------
MICHIGAN -- 3.6%
Greater Detroit Resource Recovery
Authority, Series B (AMBAC
Insured)............................. Aaa/AAA 6.25% 12/13/05 500,000 551,250
--------------
MINNESOTA -- 3.0%
Northern Municipal Power Agency, Series
A, Callable on 1/1/99 @102........... A2/A 7.25% 1/1/16 445,000 469,475
--------------
MISSISSIPPI -- 3.3%
Hattieburg, Mississippi Water & Sewer,
(AMBAC Insured), Callable on 8/1/05
@102................................. Aaa/AAA 5.25% 8/1/07 500,000 508,125
--------------
MISSOURI -- 3.6%
Sikeston Electric Revenue, Callable on
6/1/97 @100.......................... Aaa/AAA 6.25% 6/1/08 500,000 550,625
--------------
NEBRASKA -- 1.1%
Omaha Public Power District, Series C.. Aa2/AA 5.50% 2/1/14 175,000 176,969
--------------
NEVADA -- 9.9%
Clark County Convention & Visitors
Center (MBIA Insured)................ Aaa/AAA 4.80% 7/1/02 500,000 507,500
Clark County Passenger Facilities
Charge, Las Vegas/Macarran
International Airport, Series A,
(MBIA Insured) (AMT) Callable on
7/1/05 @102.......................... Aaa/AAA 5.75% 7/1/23 500,000 496,875
Nevada Housing Division, Single Family
Mortgage, Series D1, Callable on
4/1/06 @102.......................... Aa/NR 6.25% 4/1/14 500,000 518,750
--------------
1,523,125
--------------
</TABLE>

- ---------------
See Notes to Financial Statements.

22
<PAGE> 25

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ---------------------------------------- ----------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
NEW JERSEY -- 3.5%
New Jersey Economic Development
Authority, Market Transition
Facilities, Series A (MBIA Insured),
Callable on 7/1/04 @102.............. Aaa/AAA 5.70% 7/1/05 $150,000 $ 158,437
New Jersey State Turnpike Authority,
Series C (AMBAC Insured), Callable on
1/1/01 @101.5........................ Aaa/AAA 6.40% 1/1/07 350,000 375,375
--------------
533,812
--------------
NEW YORK -- 3.9%
New York City, Industrial Development
Agency, Special Facilities Revenue,
Terminal One Group Assistant Project
(AMT), Callable on 1/1/04 @102....... A/A 6.00% 1/1/15 75,000 75,000
New York State Energy Research and
Development Authority, Electric
Facility Revenue, Series A (AMT),
Callable on 1/1/98 @101.5............ A1/A+ 7.75% 1/1/24 65,000 67,668
New York State Local Government
Assistance Corp., Series B, Callable
on 4/1/02 @102....................... A3/A 6.00% 4/1/18 50,000 51,062
New York State Urban Development
Facilities........................... Baa1/BBB 5.75% 4/1/11 400,000 405,500
--------------
599,230
--------------
OREGON -- 1.0%
Portland International Airport, Series
10 (FGIC Insured) (AMT), Callable on
7/1/05 @101.......................... Aaa/AAA 5.875% 7/1/15 150,000 152,063
--------------
PENNSYLVANIA -- 4.8%
Pennsylvania State General Obligation
Bonds, First Series.................. A1/AA- 4.875% 5/1/02 250,000 255,313
Philadelphia Airport, Series A (AMBAC
Insured) (AMT), Callable on 6/15/05
@102................................. Aaa/AAA 5.70% 6/15/07 200,000 209,000
Philadelphia Wastewater (AMBAC-TCRS
Insured)............................. Aaa/AAA 5.50% 6/15/07 250,000 261,250
Pittsburgh Urban Redevelopment
Authority, Home Improvement, Series A
(AMT), Callable on 2/1/04 @102....... A/A 5.65% 8/1/15 20,000 19,600
--------------
745,163
--------------
</TABLE>

- ---------------
See Notes to Financial Statements.

23
<PAGE> 26

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ---------------------------------------- ----------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
TENNESSEE -- 3.9%
Humphreys County Industrial Development
Board, E.I. Du Pont De Nemours and
Co. Project (AMT), Callable on 5/1/04
@102................................. Aa3/AA- 6.70% 5/1/24 $ 75,000 $ 80,813
Maury County Industrial Development
Board Pollution Control, Callable on
9/1/04 @102.......................... A3/A- 6.50% 9/1/24 500,000 528,125
--------------
608,938
--------------
TEXAS -- 9.7%
Brazos River Authority, Special
Facilities (FGIC Insured), Callable
on 8/15/05 @100...................... Aaa/AAA 5.50% 8/15/15 200,000 197,250
Lower Colorado River Authority, Junior
Lien (AMBAC Insured) ETM, Callable on
1/1/02 @100.......................... NR/AAA 6.00% 1/1/17 10,000 10,662
Lower Colorado River Authority, Junior
Lien (AMBAC Insured), Callable on
1/1/02 @100.......................... Aaa/AAA 6.00% 1/1/17 40,000 40,550
Lower Neches Valley River Treatment
Project Callable on 2/1/04 @102...... Aa2/AA 5.65% 2/1/29 600,000 595,500
Texas State National Research, Lab
Community for Superconductor
Prerefunded 4/1/00 @ 102............. AAA/NR 7.125% 4/1/20 500,000 548,750
Texas Water Development Board, State
Revolving Fund, Senior Lien, Callable
on 7/15/02 @102...................... Aa1/AAA 6.00% 7/15/13 100,000 103,500
--------------
1,496,212
--------------
UTAH -- 6.4%
Ashley Valley Water and Sewer
Implementation, (AMBAC Insured)...... Aaa/AAA 9.50% 1/1/08 310,000 385,175
Intermountain Power Agency, Utah Power
Supply, Series C..................... Aa/A+ 5.25% 7/1/14 150,000 145,500
Intermountain Power Agency, Utah Power
Supply, Series D, Callable on 7/1/06
@102................................. Aa/A+ 5.00% 7/1/21 500,000 454,375
--------------
985,050
--------------
WASHINGTON -- 1.3%
Washington State Health Care Facilities
Authority, Sisters Providence, Series
C (Final maturity 10/1/05)*.......... A1/AA- 3.50% 3/3/97 200,000 200,000
--------------
</TABLE>

- ---------------
See Notes to Financial Statements.

24
<PAGE> 27

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ---------------------------------------- ----------- ----- -------- --------- ---------------
<S> <C> <C> <C> <C> <C>
WISCONSIN -- 1.4%
Wisconsin State General Obligation
Bond................................. Aa/AA 6.00% 5/1/03 $200,000 $ 215,750
--------------
WYOMING -- 0.7%
Wyoming Community Development
Authority, Single Family Mortgage,
Series G (AMT), Callable on 11/26/01
@103................................. Aa/AA 7.20% 6/1/10 100,000 107,750
--------------
TOTAL INVESTMENTS -- 98.7%
(COST $14,833,849) (A)................. 15,216,438
Other assets in excess of
liabilities -- 1.3%.................... 198,266
--------------
NET ASSETS -- 100.0%.................... $ 15,414,704
==============
</TABLE>

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

Percentages indicated are based on net assets of $15,414,704.
(a) Represents cost for federal income tax and book purposes and differs from
value by net unrealized appreciation of securities as follows:

<TABLE>
<S> <C>
Unrealized appreciation................................. $395,305
Unrealized depreciation................................. (12,716)
--------
Net unrealized appreciation............................. $382,589
========
</TABLE>

* Variable rate security. Maturity date reflects the next interest rate change
date.
AMT -- Interest on securities subject to federal Alternative Minimum Tax.
AMBAC -- AMBAC Indemnity Corporation.
ETM -- Escrowed to Maturity
FGIC -- Financial Guaranty Insurance Corporation.
MBIA -- Municipal Bond Insurance Association.
TCRS -- Trust Certificate Receipts.
NR -- No rating assigned by Moody's or S&P.

See Notes to Financial Statements.

25
<PAGE> 28

PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
- --------------------------------------------------------------------------------

Portfolio of Investments
February 28, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ----------------------------------------- ----------- ------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS -- 98.2%
CALIFORNIA -- 94.9%
ABAG Financial Corporation, Certificates
of Participation, Series A, Callable on
6/1/00 @102............................. NR/A 6.25% 6/1/11 $1,000,000 $ 1,026,630
Alameda County Water District Water
Systems Project (FGIC Insured), Callable
on 6/1/04 @102.......................... Aaa/AAA 6.00% 6/1/15 2,515,000 2,592,260
Alameda Santa Rita Jail, Certificates of
Participation (MBIA Insured), Callable
on 12/1/03 @102......................... Aaa/AAA 5.70% 12/1/14 3,000,000 3,039,090
Bodega Bay Fire Protection District,
Certificates of Participation, Fire
Station Project, Callable on 10/1/14
@102.................................... NR/BBB- 6.45% 10/1/31 1,185,000 1,201,945
California State General Obligation
Bond.................................... A1/A+ 6.75% 4/1/07 2,575,000 2,953,885
California State General Obligation Bond
(AMBAC-TCRS Insured), Callable on 5/1/04
@102.................................... Aaa/AAA 6.00% 5/1/12 2,645,000 2,780,873
California State General Obligation Bond
(FGIC-TCRS Insured), Callable on 10/1/05
@101.................................... Aaa/AAA 5.25% 10/1/17 2,600,000 2,487,940
California Health Facilities Authority,
Adventist Health Systems, Series A (MBIA
Insured), Callable on 3/1/01 @102....... Aaa/AAA 7.00% 3/1/13 1,000,000 1,101,090
California Health Facilities Authority,
Adventist Health Systems West, Series B
(MBIA Insured), Callable on 3/1/01
@102.................................... Aaa/AAA 6.50% 3/1/07 1,000,000 1,086,070
California Health Facilities Authority,
Kaiser Permanente Medical Care, Series
A, Callable on 12/1/00 @102............. Aa3/AA 6.50% 12/1/20 2,000,000 2,135,720
California Health Facilities Authority,
Sutter Health Systems, Series B
(LOC -- Morgan Guaranty Trust).......... Aa1/AAA 3.35% 3/1/20 1,000,000 1,000,000
California Pollution Control Financing
Authority, Pacific Gas & Electric Co.,
Series A (AMT), Callable on 6/1/02
@102.................................... A2/A 6.625% 6/1/09 1,000,000 1,061,190
California Pollution Control Financing
Authority, Pacific Gas & Electric Co.,
Series F (LOC -- Banque Nationale de
Paris).................................. NR/AA+ 3.35% 11/1/26 500,000 500,000
California Pollution Control Financing
Authority, Southern California Edison,
Series A (AMT), Callable on 9/1/99
@102.................................... NR/A+ 6.90% 9/1/06 1,000,000 1,065,160
California Pollution Control Financing
Authority, Southern California Edison,
Series B (AMT), Callable on 12/1/02
@102.................................... A2/A+ 6.40% 12/1/24 1,000,000 1,034,680
</TABLE>

- ---------------
See Notes to Financial Statements.

26
<PAGE> 29

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ----------------------------------------- ----------- ----- ---- ------ --------
<S> <C> <C> <C> <C> <C>
CALIFORNIA -- (CONTINUED)
California Public Works Board,
Department of Corrections, Series A
(AMBAC Insured), Callable on 1/1/06
@102.................................... Aaa/AAA 5.50% 1/1/10 $2,000,000 $ 2,033,340
California Public Works Board,
Department of Corrections, State Prison,
Series E, Callable on 6/1/04 @102....... A/A 5.50% 6/1/19 7,970,000 7,591,186
California State Department of Water,
Central Valley Project, Series L,
Callable on 6/1/03 @101.5............... Aa/AA 5.70% 12/1/16 4,500,000 4,503,735
Capital Area Development Authority,
Series A (MBIA Insured)................. Aaa/AAA 6.50% 4/1/12 1,000,000 1,093,310
Central Coast Water Authority, State
Water Project, Regal Facility (AMBAC
Insured), Prerefunded 10/1/02 @102...... Aaa/AAA 6.50% 10/1/14 1,750,000 1,966,598
Central Valley Financing Authority,
Cogeneration Project, Carson Ice,
Callable on 7/1/03 @102................. NR/BBB- 6.00% 7/1/09 3,000,000 3,043,920
Chino Unified School District California
Convertible Capital Appreciation,
Certificates of Participation, Series A
(FSA Insured), Callable on 3/27/97
@85.415!................................ Aaa/AAA 0.00% 9/1/14 2,000,000 1,777,160
Coachella Valley Water District No. 71,
Certificates of Participation, Flood
Control Project, Callable on 10/1/02
@102.................................... A/NR 6.75% 10/1/12 1,000,000 1,071,920
Del Mar Race Track Revenue Authority,
Callable on 8/15/06 @102................ NR/NR 6.00% 8/15/08 1,000,000 1,002,110
Del Mar Race Track Revenue Authority,
Callable on 8/15/06 @102................ NR/NR 6.20% 8/15/11 1,000,000 1,025,130
Delta County Home Mortgage Financing
Authority, Single Family Mortgage,
Series A, Callable on 6/1/02 @102....... NR/AAA 6.75% 12/1/25 1,790,000 1,859,327
Duarte Certificates of Participation,
City of Hope National Medical Center,
Callable on 4/1/03 @102................. Baa1/NR 6.00% 4/1/08 5,000,000 5,085,150
East Bay Municipal Utility District
System (FGIC Insured), Callable on
6/1/06 @102............................. Aaa/AAA 5.00% 6/1/16 3,000,000 2,800,980
East Bay Municipal Utility District
System (FGIC Insured), Callable on
6/1/06 @102............................. Aaa/AAA 5.00% 6/1/26 1,750,000 1,591,433
Eastern Municipal Water District,
Certificates of Participation (FGIC
Insured)................................ Aaa/AAA 6.75% 7/1/12 1,000,000 1,161,800
Eastern Municipal Water District,
Certificates of Participation, Series A
(FGIC Insured), Callable on 7/1/03
@102.................................... Aaa/AAA 5.375% 7/1/13 2,000,000 1,982,680
Elsinor Valley Municipal Water District
Certificates of Participation, Series A
(FGIC Insured).......................... Aaa/AAA 6.00% 7/1/12 1,500,000 1,626,480
Emeryville Public Financing Agency,
Emeryville Redevelopment Project, Series
A, Callable on 5/1/02 @102.............. NR/A- 6.50% 5/1/21 1,500,000 1,562,745
</TABLE>

- ---------------
See Notes to Financial Statements.

27
<PAGE> 30

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ----------------------------------------- ----------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
CALIFORNIA -- (CONTINUED)
Escondido Joint Powers Financing
Authority, California Center for the
Arts, (AMBAC Insured), Callable on
9/1/05 @102............................. Aaa/AAA 6.00% 9/1/18 $1,500,000 $ 1,547,775
Fremont Public Financing Authority,
Local Improvement District 39R, Callable
on 9/2/97 @102.......................... NR/NR 6.00% 9/1/11 1,965,000 1,979,148
Fresno Health Facilities Agency, Holy
Cross Health Systems, St. Agnes Project,
Callable on 6/1/02 @102................. Aa3/AA 6.625% 6/1/21 2,450,000 2,636,004
Fresno Sewer, Series A-1 (AMBAC
Insured)................................ Aaa/AAA 6.25% 9/1/14 5,000,000 5,534,500
Industry Urban Development Tax
Allocation Transportation District,
Project 3, Callable on 11/1/02 @101.75.. NR/A- 6.90% 11/1/16 1,000,000 1,069,850
Irvine Ranch Water District, Joint
Powers Agency, Issue II, Callable on
8/15/98 @100............................ NR/A+ 8.25% 8/15/23 2,400,000 2,524,152
Long Beach Harbor Revenue (AMT) (MBIA
Insured), Callable on 5/15/05 @102...... Aaa/AAA 5.375% 5/15/20 3,000,000 2,847,360
Los Angeles Convention & Exhibition
Center Authority, Series A (MBIA
Insured)................................ Aaa/AAA 6.00% 8/15/10 3,000,000 3,262,140
Los Angeles County, Sanitation District
Financing Authority, Revenue Capital
Projects, Series A, Callable on 10/1/03
@102.................................... Aa/AA 5.375% 10/1/13 1,500,000 1,455,090
Los Angeles County Transportation, Sales
Tax Revenue, Series A, Prerefunded
7/1/01 @102............................. Aaa/AA- 6.90% 7/1/21 1,100,000 1,233,870
Los Angeles County Transportation, Sales
Tax Revenue, Series A, Callable on
7/1/99 @102............................. A1/AA- 7.40% 7/1/15 2,000,000 2,165,980
Los Angeles County Transportation, Sales
Tax Revenue, Series B, Callable on
7/1/01 @102............................. A1/AA- 6.50% 7/1/13 2,500,000 2,651,100
Los Angeles Department of Water and
Power, Callable on 4/15/03 @102......... Aa/AA 5.75% 4/15/12 2,000,000 2,048,740
Los Angeles General Obligation Bond,
Series A (MBIA Insured), Callable on
9/1/04 @102............................. Aaa/AAA 6.00% 9/1/11 2,000,000 2,105,800
Los Angeles Harbor, Series B (AMT),
Callable on 8/1/02 @102................. Aa/AA 6.625% 8/1/25 2,000,000 2,129,620
Los Angeles Waste Water Systems Revenue,
Series A (MBIA Insured), Callable on
6/1/03 @102............................. Aaa/AAA 5.70% 6/1/20 2,650,000 2,648,039
Manhattan Beach Unified School District,
Certificates of Participation,
Convertible Capital Appreciation, Series
B (MBIA Insured), Callable on 8/1/05
@102!................................... Aaa/AAA 0.00% 8/1/20 2,000,000 1,741,940
Metropolitan Water District, Southern
California Waterworks, Prerefunded
7/1/01 @102............................. NR/AA 6.75% 7/1/18 1,000,000 1,114,120
Metropolitan Water District, Southern
California Waterworks, Series A......... Aa/AA 5.75% 7/1/21 4,500,000 4,671,135
</TABLE>

- ---------------
See Notes to Financial Statements.

28
<PAGE> 31

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ----------------------------------------- ----------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
CALIFORNIA -- (CONTINUED)
Metropolitan Water District, Southern
California Waterworks, Series A,
Callable on 7/1/05 @102 (MBIA
Insured)................................ Aaa/AAA 5.75% 7/1/21 $3,000,000 $ 3,010,170
Natomas Unified School District, Series
A (MBIA Insured), Callable on 9/1/03
@102.................................... Aaa/AAA 5.75% 9/1/17 1,000,000 1,005,670
Northern California Transmission, Ore
Transmission Project, Series A (MBIA
Insured), Prerefunded on 5/1/00 @101.5.. Aaa/AAA 7.00% 5/1/24 1,000,000 1,098,780
Northern California Transmission, Ore
Transmission Project, Series A (MBIA
Insured), Callable on 5/1/02 @102....... Aaa/AAA 6.25% 5/1/10 2,000,000 2,141,200
Northridge Water District, Certificates
of Participation (AMBAC Insured),
Callable on 2/1/06 @102................. Aaa/AAA 5.25% 2/1/18 2,500,000 2,379,525
Orange County Community Facilities
District, Special Tax No. 86-1 (FSA
Insured), Callable on 8/15/99 @102...... Aaa/AAA 7.125% 8/15/17 1,500,000 1,622,295
Orange County Community Facilities
District, Special Tax No. 87-4, Foothill
Ranch, Series A, Prerefunded on 8/15/02
@102.................................... NR/AAA 7.20% 8/15/08 2,000,000 2,297,360
Pasadena Community Multifamily Housing,
Civic Center, Series A (AMT) (FSA
Insured), Callable on 12/1/02 @102...... Aaa/AAA 6.40% 12/1/12 2,500,000 2,605,050
Pleasanton Joint Powers Financing
Authority, Reassessment, Series A,
Callable on 9/2/03 @102................. Baa/NR 6.15% 9/2/12 4,825,000 4,974,720
Port Oakland, Series H (AMT) (MBIA
Insured), Callable on 11/1/07 @102...... Aaa/AAA 5.50% 11/1/15 5,000,000 4,835,350
Poway Certificates of Participation,
Poinsettia Mobilehome Park (FSA
Insured), Callable on 6/1/02 @102....... Aaa/AAA 6.375% 6/1/18 2,500,000 2,668,575
Rancho Water District Financing
Authority (AMBAC Insured), Callable on
8/15/91 @101.5.......................... Aaa/AAA 6.40% 8/15/04 1,000,000 1,082,640
Rancho Water District Financing
Authority (FGIC Insured), Callable on
11/1/05 @102............................ Aaa/AAA 5.90% 11/1/15 2,000,000 2,067,200
Sacramento Power Authority Cogeneration
Project, Callable on 7/1/06 @102........ NR/BBB- 5.875% 7/1/15 2,900,000 2,877,235
San Bernardino County Certificates of
Participation, Capital Facilities
Project, Series B, Prerefunded on 8/1/01
@102.................................... NR/AAA 7.00% 8/1/28 4,000,000 4,510,040
San Diego County Water Authority
Certificates of Participation, Series A,
Callable on 5/1/01 @102................. Aa/AA- 6.40% 5/1/08 2,000,000 2,141,020
San Diego Industrial Development, San
Diego Gas & Electric, Series A ,
Callable on 9/1/02 @102................. A1/A+ 6.40% 9/1/18 1,500,000 1,560,060
San Diego Special Tax Community
Facilities District No. 1, Series B ,
Callable on 9/1/05 @102................. NR/NR 7.00% 9/1/15 2,000,000 2,065,280
San Francisco Bay Area Rapid Transit
District, (FGIC Insured), Callable on
7/1/05 @101............................. Aaa/AAA 5.50% 7/1/20 1,095,000 1,070,286
</TABLE>

- ---------------
See Notes to Financial Statements.

29
<PAGE> 32

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ----------------------------------------- ----------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
CALIFORNIA -- (CONTINUED)
San Francisco Building Authority,
General Service, Series A (MBIA-IBC).... Aaa/AAA 5.00% 10/1/08 $1,000,000 $ 1,004,760
San Francisco City & County Airport,
Second Series Issue 2 (MBIA Insured),
Callable on 5/1/03 @102................. Aaa/AAA 6.75% 5/1/13 1,730,000 1,922,791
San Francisco City & County, Community
International Airport, Second Series
Issue 10 A (AMT) (MBIA Insured),
Callable on 5/1/06 @102................. Aaa/AAA 5.70% 5/1/26 3,000,000 2,939,160
San Francisco City & County School
District, Facilities Improvements
Projects, Series C (FGIC Insured),
Callable on 6/15/02 @102................ Aaa/AAA 6.30% 6/15/14 2,000,000 2,139,180
San Francisco City & County Public
Utilities Callable on 11/1/02 @100...... Aa/AA- 6.00% 11/1/15 1,000,000 1,031,610
San Joaquin County Certificates of
Participation, Capital Facilities
Project (MBIA Insured).................. Aaa/AAA 5.50% 11/15/13 1,750,000 1,781,518
San Joanquin Transit Corridor Agency,
Senior Lien, Callable on 1/1/03 @102.... NR/NR 7.00% 1/1/30 2,500,000 2,679,175
San Jose Financing Authority, Convention
Center, Series C, Callable on 9/1/01
@102.................................... A1/A+ 6.40% 9/1/17 3,000,000 3,116,970
San Jose Redevelopment Agency, Tax
Allocation, Merged Area Redevelopment
Project (MBIA Insured).................. Aaa/AAA 6.00% 8/1/15 3,670,000 3,940,442
Santa Ana Financing Authority, Police
Administration and Holding Facility,
Series A (MBIA Insured), Callable on
7/1/04 @102............................. Aaa/AAA 5.625% 7/1/09 1,130,000 1,170,590
Santa Clara County Transit Sales Tax,
Series A Callable on 12/1/00 @102....... A1/AA 6.75% 6/1/11 1,000,000 1,088,930
Santa Clarita Public Financing
Authority, Callable on 10/1/01 @102..... NR/A- 6.75% 10/1/21 1,000,000 1,067,530
Shasta Dam Area Public Utility District
Certificates of Participation, Special
Tax Lease Financing, Prerefunded on
3/1/02 @102............................. Baa/NR 7.25% 3/1/12 1,000,000 1,135,920
Southern California Public Power
Authority, Power Project................ A/A 6.75% 7/1/13 1,000,000 1,132,950
Southern California Rapid Transit
District Certificates of Participation,
Workers Compensation Fund (MBIA
Insured), Callable on 1/1/01 @102.5..... Aaa/AAA 6.00% 7/1/10 1,000,000 1,046,730
Thousand Oaks Redevelopment Agency,
Thousand Oaks Boulevard Redevelopment
(MBIA Insured), Callable on 12/1/05
@102.................................... Aaa/AAA 5.25% 12/1/08 1,370,000 1,391,852
Thousand Oaks Redevelopment Agency,
Thousand Oaks Boulevard Redevelopment
(MBIA Insured), Callable on 12/1/05
@102.................................... Aaa/AAA 5.40% 12/1/09 1,290,000 1,315,103
Turlock Industrial Refunded Revenue
District, Series A (MBIA Insured)....... Aaa/AAA 6.00% 1/1/09 2,000,000 2,168,560
Union City Community Redevelopment
Agency, Tax Allocation Redevelopment
Project (AMBAC Insured), Callable on
10/1/03 @102............................ Aaa/AAA 5.85% 10/1/23 1,250,000 1,268,025
</TABLE>

- ---------------
See Notes to Financial Statements.

30
<PAGE> 33

<TABLE>
<CAPTION>
MOODY'S/
S&P
RATINGS MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ----------------------------------------- ----------- ------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
CALIFORNIA -- (CONTINUED)
University of California, Hospital
Medical Center (AMBAC Insured), Callable
on 7/1/06 @101.......................... Aaa/AAA 6.00% 7/1/26 $3,500,000 $ 3,576,230
University of California, Hospital
Medical Center (AMBAC Insured), Callable
on 7/1/06 @101.......................... Aaa/AAA 5.75% 7/1/24 5,000,000 4,962,100
University of California, Research
Facilities, Series B, Callable on 9/1/03
@102.................................... NR/A 6.30% 9/1/15 2,500,000 2,563,600
West & Central Basin Financing
Authority, (AMBAC Insured), Callable on
8/1/02 @102............................. Aaa/AAA 6.125% 8/1/12 2,000,000 2,102,600
West Covina Redevelopment Agency,
Community Facilities Special Tax,
Fashion Plaza........................... NR/A 6.00% 9/1/17 3,000,000 3,091,470
Westwood Unified School District,
Callable on 8/1/06 @102................. NR/BBB 6.50% 8/1/21 1,025,000 1,026,158
------------
209,888,310
------------
PUERTO RICO -- 3.3%
Puerto Rico Electric Power Authority,
Series U, Callable on 7/1/04 @102....... Baa1/A- 6.00% 7/1/14 5,000,000 5,079,900
Puerto Rico Electric Power Authority,
Series P, Prerefunded on 7/1/01 @102.... Baa1/A- 7.00% 7/1/11 2,000,000 2,250,420
------------
7,330,320
------------
TOTAL INVESTMENTS -- 98.2%
(cost $207,748,971) (a)................. $217,218,630
Other assets in excess of
liabilities -- 1.8%..................... 3,892,208
------------
NET ASSETS -- 100.0%..................... $221,110,838
============
</TABLE>

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

Percentages indicated are based on net assets of $221,110,838.
(a) Represents cost for federal income tax and book purposes and differs from
value by net unrealized appreciation of securities as follows:

<TABLE>
<S> <C>
Unrealized appreciation.............................................. $9,779,281
Unrealized depreciation.............................................. (309,622)
----------
Net unrealized appreciation.......................................... $9,469,659
==========
! -- Zero coupon bonds.
AMBAC -- AMBAC Indemnity Corporation.
AMT -- Interest on securities subject to Federal Alternative Minimum Tax.
FGIC -- Financial Guaranty Insurance Company.
FSA -- Financial Security Assurance, Inc.
IBC -- Insured Bond Certificates.
MBIA -- Municipal Bond Insurance Association.
TCRS -- Trust Certificate Receipts.
NR -- No rating assigned by Moody's or S&P.
</TABLE>

See Notes to Financial Statements.

31
<PAGE> 34

PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------

Statement of Assets and Liabilities
February 28, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $14,833,849)............................. $15,216,438
Cash............................................................................... 86,836
Interest receivable................................................................ 205,273
Receivable for capital shares sold................................................. 15,064
Receivable from investment advisor................................................. 7,792
Prepaid expenses................................................................... 6,546
Deferred organizational costs...................................................... 23,683
-----------
Total Assets........................................................................ 15,561,632
-----------
LIABILITIES:
Dividends payable.................................................................. 58,035
Payable for capital shares redeemed................................................ 2,000
Custodian and fund accounting fees payable......................................... 13,934
Transfer agent fees payable........................................................ 6,288
Audit fees payable................................................................. 37,427
Legal fees payable................................................................. 7,876
Reports to shareholders expense payable............................................ 18,757
Other accrued expenses............................................................. 2,611
-----------
Total Liabilities................................................................... 146,928
-----------
NET ASSETS.......................................................................... $15,414,704
===========
Net Assets:
A Shares........................................................................... $15,413,655
K Shares........................................................................... 1,049
-----------
Total............................................................................... $15,414,704
===========
Shares Outstanding
($0.001 par value, 150 million shares authorized):
A Shares........................................................................... 1,513,439
K Shares........................................................................... 103
-----------
Total............................................................................... 1,513,542
===========
NET ASSET VALUE
A Shares -- redemption price per share............................................. $10.18
=====
Maximum Sales Charge (A Shares).................................................... 4.50%
Maximum Offering Price (A Shares)
(Net Asset Value of A Shares/(100%-Maximum Sales Charge))........................ $10.66
=====
K Shares -- offering price per share............................................... $10.18
=====
COMPOSITION OF NET ASSETS:
Shares of common stock, at par..................................................... $ 1,514
Additional paid-in capital......................................................... 15,029,343
Accumulated undistributed net investment income.................................... 5,282
Accumulated net realized (losses) on investment transactions....................... (4,024)
Net unrealized appreciation on investments......................................... 382,589
-----------
NET ASSETS, FEBRUARY 28, 1997....................................................... $15,414,704
===========
</TABLE>

- ---------------
See Notes to Financial Statements.

32
<PAGE> 35

PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
- --------------------------------------------------------------------------------

Statement of Assets and Liabilities
February 28, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $207,748,971).......................... $217,218,630
Interest receivable.............................................................. 3,275,700
Receivable for capital shares sold............................................... 2,153,070
Prepaid expenses................................................................. 443
------------
Total Assets...................................................................... 222,647,843
------------
LIABILITIES:
Cash overdraft................................................................... 109,859
Dividends payable................................................................ 812,219
Payable for capital shares redeemed.............................................. 341,472
Investment advisory fees payable................................................. 48,108
Administration fees payable...................................................... 36,081
Shareholder service fees payable (A and K Shares)................................ 42,094
Transfer agent fees payable...................................................... 45,303
Legal fees payable............................................................... 2,926
Other accrued expenses........................................................... 98,943
------------
Total Liabilities................................................................. 1,537,005
------------
NET ASSETS........................................................................ $221,110,838
============
Net Assets:
A Shares......................................................................... $221,109,794
K Shares......................................................................... 1,044
------------
Total............................................................................. $221,110,838
============
Shares Outstanding ($0.001 par value, 300 million shares authorized):
A Shares......................................................................... 30,085,974
K Shares......................................................................... 142
------------
Total............................................................................. 30,086,116
============
NET ASSET VALUE
A Shares -- redemption price per share........................................... $7.35
====
Maximum Sales Charge (A Shares).................................................. 4.50%
Maximum Offering Price (A Shares)
(Net Asset Value of A Shares/(100%-Maximum Sales Charge))........................ $7.70
====
K Shares -- offering price per share............................................. $7.35
====
COMPOSITION OF NET ASSETS:
Shares of common stock, at par................................................... $ 30,086
Additional paid-in-capital....................................................... 211,429,326
Accumulated undistributed net investment income.................................. 188,743
Accumulated net realized (losses) on investment transactions..................... (6,976)
Net unrealized appreciation on investments....................................... 9,469,659
------------
NET ASSETS, FEBRUARY 28, 1997..................................................... $221,110,838
============
</TABLE>

- ---------------
See Notes to Financial Statements.

33
<PAGE> 36

PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------

Statement of Operations
For the year ended February 28, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Investment Income from Master Investment Trust, Series II --
National Municipal Bond Portfolio(a):
Interest............................................................................. $ 233,484
Expenses............................................................................. 92,051
Less: Fee waivers and expense reimbursements......................................... (92,051)
--------
Total Net Expenses.................................................................... --
--------
Net Investment Income from Master Investment Trust, Series II -- National Municipal
Bond Portfolio....................................................................... 233,484
--------
Interest.............................................................................. 532,429
--------
Total Income....................................................................... 765,913
--------
EXPENSES:
Investment advisory fees............................................................. 34,135
Administration fees.................................................................. 25,897
Shareholder service fees (A and K shares)............................................ 35,035
Custodian and fund accounting fees................................................... 29,777
Transfer agent fees.................................................................. 12,254
Legal fees........................................................................... 3,209
Other expenses....................................................................... 78,630
--------
Total Expenses..................................................................... 218,937
Less: Fee waivers and reimbursements.................................................. (148,058)
Expenses paid by third parties.................................................... (1,459)
--------
Total Net Expenses.................................................................... 69,420
--------
NET INVESTMENT INCOME................................................................. 696,493
NET REALIZED/UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investment transactions........................................ 20,105
Net change in unrealized appreciation on investments................................. 107,766
--------
Net realized/unrealized gains on investments.......................................... 127,871
--------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................................... $ 824,364
========
</TABLE>

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

(a) On June 30, 1996, the National Municipal Bond Fund withdrew its investment
from the Master Investment Trust, Series II and invested directly in
municipal securities.

See Notes to Financial Statements.

34
<PAGE> 37

PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
- --------------------------------------------------------------------------------

Statement of Operations
For the year ended February 28, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest......................................................................... $12,381,614
-----------
EXPENSES:
Investment advisory fees......................................................... 857,206
Administration fees.............................................................. 642,905
Shareholder service fees (A and K Shares)........................................ 535,752
Transfer agent fees.............................................................. 108,551
Legal fees....................................................................... 11,612
Other expenses................................................................... 207,929
-----------
Total Expenses................................................................. 2,363,955
Less: Fee Waivers................................................................. (428,557)
Expenses paid by third parties............................................... (2,157)
-----------
Total Net Expenses................................................................ 1,933,241
-----------
NET INVESTMENT INCOME............................................................. 10,448,373
-----------
NET REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investment transactions.................................... 358,663
Net change in unrealized appreciation on investments............................. (1,868,867)
-----------
Net realized/unrealized losses on investments..................................... (1,510,204)
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................. $ 8,938,169
===========
</TABLE>

- ---------------
See Notes to Financial Statements.

35
<PAGE> 38

PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------

Statements of Changes in Net Assets
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
FEBRUARY FEBRUARY
28, 29,
1997 1996
----------- -----------
<S> <C> <C>
INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income........................................... $ 696,493 $ 369,257
Net realized gains on investment transactions................... 20,105 22,823
Net changes in unrealized appreciation on investments........... 107,766 288,587
----------- -----------
Change in net assets resulting from operations................... 824,364 680,667
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
A Shares...................................................... (691,409) (369,257)
K Shares (a).................................................. (28) --
Net realized gains from investment transactions
A Shares...................................................... (43,317) --
K Shares (a).................................................. (3) --
----------- -----------
Change in net assets from shareholder distributions.............. (734,757) (369,257)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued..................................... 7,848,104 10,755,826
Dividends reinvested............................................ 512,621 279,903
Cost of shares redeemed......................................... (5,278,031) (1,624,728)
----------- -----------
Change in net assets from capital share transactions............. 3,082,694 9,411,001
----------- -----------
Change in net assets............................................. 3,172,301 9,722,411
NET ASSETS
Beginning of year............................................... 12,242,403 2,519,992
----------- -----------
End of year..................................................... $15,414,704 $12,242,403
=========== ===========
</TABLE>

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

(a) Period from July 22, 1996 (inception date) to February 28, 1997.

See Notes to Financial Statements.

36
<PAGE> 39

PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
- --------------------------------------------------------------------------------

Statements of Changes in Net Assets
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
<S> <C> <C>
INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income....................................... $10,448,373 $10,474,790
Net realized gains on investment transactions............... 358,663 4,935,074
Net changes in unrealized appreciation on investments....... (1,868,867) 4,229,371
------------
Change in net assets resulting from operations............... 8,938,169 19,639,235
------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
A Shares.................................................. (10,448,345) (10,474,790)
K Shares (a).............................................. (28) --
Net realized gains from investment transactions
A Shares.................................................. (1,489,041) --
K Shares (a).............................................. (7) --
------------
Change in net assets from shareholder distributions.......... (11,937,421) (10,474,790)
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued................................. 43,958,663 41,159,400
Dividends reinvested........................................ 6,765,701 6,188,256
Cost of shares redeemed..................................... (47,755,621) (29,971,556)
------------
Change in net assets from capital share transactions......... 2,968,743 17,376,100
------------
Change in net assets......................................... (30,509) 26,540,545
NET ASSETS:
Beginning of year........................................... 221,141,347 194,600,802
------------
End of year................................................. $221,110,838 $221,141,347
============
</TABLE>

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

(a) Period from July 22, 1996 (inception date) to February 28, 1997.

See Notes to Financial Statements.

37
<PAGE> 40

PACIFIC HORIZON FUNDS, INC.
- --------------------------------------------------------------------------------

Notes to Financial Statements
- --------------------------------------------------------------------------------

NOTE 1 -- ORGANIZATION

Pacific Horizon Funds, Inc. (the "Company"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
an open-end management investment company. At February 28, 1997, the Company
operated as a series company comprised of seventeen funds. The accompanying
financial statements and notes are those of the Pacific Horizon National
Municipal Bond Fund (the "National Municipal Bond Fund") and the Pacific Horizon
California Tax-Exempt Bond Fund (the "California Tax-Exempt Bond Fund"),
collectively the "Funds", individually the "Fund". The Funds offer A Shares and
effective July 22, 1996, began offering K Shares. A Shares have a Shareholder
Services Plan while K Shares have a Distribution Plan and Administrative and
Shareholder Services Plan.

The Funds seek to achieve a high level of current income exempt from Federal
income tax and in the case of the California Tax-Exempt Bond Fund, exempt from
California State personal income tax as well, as is consistent with prudent
investment management and preservation of capital.

Prior to July 1, 1996, the National Municipal Bond Fund sought to achieve
its investment objective by investing substantially all of its assets in the
National Municipal Bond Portfolio of the Master Investment Trust, Series II (the
"Portfolio"), an open-end management investment company that had the same
investment objective as that of the National Municipal Bond Fund. Effective July
1, 1996, the National Municipal Bond Fund withdrew its investment in the
Portfolio and began investing its assets directly in investment securities.

Bank of America National Trust and Savings Association ("Bank of America"),
a subsidiary of BankAmerica Corporation, serves as the Fund's investment
adviser. The BISYS Group, Inc. ("BISYS"), through its wholly-owned subsidiary
BISYS Fund Services, Limited Partnership, serves as the Funds' administrator.
Concord Financial Group, Inc. (the "Distributor"), an indirect, wholly-owned
subsidiary of BISYS, serves as the distributor of the Funds' shares. BISYS Fund
Services, Inc. ("BISYS Ohio"), also a wholly-owned subsidiary of BISYS, serves
as transfer agent and dividend disbursing agent of the Funds.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.

38
<PAGE> 41

PORTFOLIO VALUATIONS:

The Funds value portfolio securities each business day through the use of an
independent pricing service approved by the Board of Directors. When, in the
judgement of the pricing service, quoted bid prices for portfolio securities are
readily available and are representative of the bid side of the market, these
investments are valued at the mean between quoted bid prices (as obtained by the
pricing service from dealers in such securities) and ask prices (as calculated
by the pricing service based upon its evaluation of the market for such
securities). Other investments are carried at fair value as determined by the
pricing service, through the use of electronic data processing techniques and
matrix systems. Restricted securities for which market quotations are not
readily available, if any, are valued at fair value using methods approved by
the Board of Directors. Securities with remaining maturities of 60 days or less
are valued at amortized cost, which approximates market value.

SECURITIES TRANSACTIONS AND RELATED INCOME:

The Funds record security transactions on a trade date basis. Interest
income, including accretion of discount and amortization of premiums, is accrued
daily. Realized gains and losses from security transactions are recorded on an
identified cost basis. Securities purchased or sold on a when-issued or delayed
delivery basis may be settled a month after the trade date.

EXPENSES:

The Company accounts separately for the assets, liabilities and operations
of each fund. Direct expenses of a fund are charged to that fund while general
Company expenses are allocated among the Company's respective portfolios.

The investment income and expenses of a fund (other than class specific
expenses) and realized and unrealized gains and losses on investments of a fund
are allocated to each class of shares based upon their relative net asset value
on the date income is earned or expenses and realized and unrealized gains and
losses are incurred.

The National Municipal Bond Fund incurred certain costs in connection with
its organization. Such costs have been deferred and are being amortized by the
Fund on a straight line basis over five years.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

The Funds' net investment income is declared as a dividend daily, and paid
monthly, to shareholders of record at the close of business on record date. Net
realized gains on portfolio securities, if any, are distributed at least
annually. However, to the extent net realized gains of the Funds can be offset
by capital loss carryovers of the Funds, such gains will not be distributed.
Dividends and distributions are recorded by the Funds on the ex-dividend date.

39
<PAGE> 42

The amount of dividends from net investment income and of distributions from
net realized gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the composition of net assets based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions to shareholders which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized gains. To the extent they exceed net
investment income and net realized gains for tax purposes, they are reported as
distributions of capital.

As of February 28, 1997, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to paid-in
capital:

<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN/(LOSS)
INCOME ON INVESTMENTS
-------------- --------------
<S> <C> <C>
National Municipal Bond Fund............................... $ 226 $ --
California Tax-Exempt Bond Fund............................ 188,743 (170,569)
</TABLE>

FEDERAL INCOME TAXES:

It is the Funds' policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
timely, all of its net investment company taxable income and net capital gains
to shareholders. Therefore, no federal income tax provision is required.

Capital losses incurred after October 31, for the Funds are deemed to arise
on the first business day of the following fiscal year for tax purposes. The
National Municipal Bond Fund and California Tax-Exempt Bond Fund have incurred
and will elect to defer such capital losses of $4,041 and $6,976 after October
31, 1996, respectively.

OTHER:

The National Municipal Bond Fund and the California Tax-Exempt Bond Fund
maintain a cash balance with their custodian and receive a reduction of their
custody fees and expenses for the amount of interest earned on such uninvested
cash balances. For financial reporting purposes for the year ended February 28,
1997, custodian fees and expenses paid by third parties were increased by $1,459
and $2,157, respectively. There was no effect on net investment income. The
Funds could have invested such cash amounts in income producing assets if they
had not agreed to a reduction of fees or expenses under the expense offset
arrangement with their custodian.

40
<PAGE> 43

NOTE 3 -- AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES

The Funds have an Investment Advisory Agreement with Bank of America, an
Administration Agreement with BISYS and a Distribution Agreement with the
Distributor. Pursuant to the terms of the Investment Advisory Agreement, Bank of
America is entitled to a fee from the Funds, which is accrued daily and payable
monthly, at an annual rate of 0.35% and 0.40% of the National Municipal Bond
Fund's and California Tax-Exempt Bond Fund's average daily net assets,
respectively. Pursuant to the terms of the Administration Agreement, BISYS is
entitled to a fee from the Funds, which is accrued daily and payable monthly, at
an annual rate of 0.20% and 0.30% of the average daily net assets of the
National Municipal Bond Fund and California Tax-Exempt Bond Fund, respectively.
Bank of America and BISYS voluntarily waived a portion of their respective fees.
The amount of such waivers totaled $49,131 and $28,040 for the National
Municipal Bond Fund and $244,720 and $183,837 for the California Tax-Exempt Bond
Fund, respectively. For the year ended February 28, 1997, BISYS reimbursed
$147,200 of operating expenses of the National Municipal Bond Fund.

For the year ended February 28, 1997, the Distributor advised the Funds that
it retained $21,986 and $45,746 from commissions earned on sales of the National
Municipal Bond Fund's and California Tax Exempt Bond Fund's shares, repectively.
For the same period, Bank of America and its affiliates advised the Funds that
they retained $180,834 and $542,086, respectively, from commissions earned on
sales of the National Municipal Bond Fund's and California Tax-Exempt Bond
Fund's shares, respectively.

The Funds have a Shareholder Services Plan (the "Plan") under which each
Fund pays for shareholder servicing expenses related to the Funds' shares. Under
the Plan, payments for shareholder servicing expenses may not exceed 0.25% of
each Fund's average daily net assets for A Shares. For the year ended February
28, 1997, the National Municipal Bond Fund and California Tax-Exempt Bond Fund
incurred charges of $35,033 and $535,750, respectively, pursuant to the Plan.
The Funds were advised that of these amounts, the Distributor retained $478 and
$205,096, from the National Municipal Bond Fund and California Tax-Exempt Bond
Fund, respectively, and affiliates of Bank of America retained $18,506 and
$303,684, respectively. The Plan provides that if, in any month, the fees paid
to the Distributor are less than the costs incurred by the Distributor, the
excess costs will be included in future computations of the fee, provided that
any excess costs will not be carried forward beyond the end of the fiscal year
in which such excess costs were incurred. For the year ended February 28, 1997,
the Distributor waived $15,738 for the National Municipal Bond Fund.

The Funds have adopted a Distribution Plan and an Administrative and
Shareholder Services Plan (the "Administrative Plan") with respect to K Shares
of the Funds. Under the Distribution Plan, the Funds pay the Distributor for
expenses primarily intended to result in the sale of the Funds' K Shares. Under
the Distribution Plan, payments by the Funds for the distribution expenses may
not exceed 0.75% of the average daily net assets of each Fund's

41
<PAGE> 44

K Shares. Payments for distribution expenses under the Distribution Plan are
subject to Rule 12b-1 under the Act. Under the Administrative Plan, the Funds
pay for expenses incurred in connection with shareholder services provided by
the Distributor and payments to Service Organizations for the provision of
support services with respect to beneficial owners of K Shares. Under the
Administrative Plan, payments for shareholder services and administrative
services may not exceed 0.25% and 0.75%, respectively, of the average daily net
assets of each Fund's K Shares. The total of all payments under the Distribution
Plan and the Administrative Plan may not exceed, in the aggregate, the annual
rate of 1.00% of the average daily net assets of each Fund's K Shares.

BISYS Ohio serves the Funds as transfer agent and dividend disbursing agent.
In these capacities, BISYS Ohio earned $12,254 and $108,551 from the National
Municipal Bond Fund and California Tax-Exempt Bond Fund, respectively, for the
year ended February 28, 1997. For the period January 1, 1996 to December 31,
1996, BISYS Ohio agreed to voluntarily limit aggregate transfer agency fees.
Absent this voluntary limit the Funds would have incurred additional costs of
$8,274 and $29,438 for the National Municipal Bond Fund and California
Tax-Exempt Bond Fund, respectively.

For the year ended February 28, 1997, the National Municipal Bond Fund and
California Tax-Exempt Bond Fund incurred legal charges totaling $21,579 and
$11,612, respectively, which were earned by a law firm, a partner of which
serves as Secretary of the Company.

Certain officers of the Company are affiliated with BISYS. Such persons are
not paid directly by the Company for serving in these capacities.

NOTE 4 -- DIRECTORS' COMPENSATION

Each Director of the Company is entitled to an annual retainer of $25,000,
plus $1,000 for each day the director participates in all or part of a Board or
Committee meeting, and the Chairman of each Committee receives a retainer of
$1,000 for services as Chairman of the Committee. In addition, the Company's
President is entitled to an annual salary of $20,000 for services as President.
The former President and Chairman of the Company received an additional $40,000
per year through February 28, 1997, in consideration of his years of service.

The Board has also established a retirement plan (the "Retirement Plan") for
the Directors. The Retirement Plan provides that each Director who dies or
resigns after five years of service as a director will be entitled to receive
ten annual payments each equal to the greater of: (i) 50% of the annual
Director's retainer that was payable during the year of that director's death or
resignation, or (ii) 50% of the annual Director's retainer then in effect for
Directors of the Company during the year of such payment. A Director who dies or
resigns after nine years of service as a director will be entitled to receive
ten annual payments equal to the greater of: (i) 100% of the annual Director's
retainer that was payable during the year of that Director's death or
resignation, or (ii) 100% of the annual Director's retainer then in

42
<PAGE> 45

effect for Directors of the Company during the year of such payment. In
addition, the amount payable each year to a Director who dies or resigns shall
be increased by $1,000 for each year of service that the Director served as
Chairman of the Board. Each Director may receive any benefits payable under the
Retirement Plan, at his or her election, either in one lump sum payment or ten
annual installments. A Director's years of service for the purpose of
calculating the payments described above shall be based upon service as a
Director or Chairman after February 28, 1994. Aggregate costs pursuant to the
Retirement Plan amounted to $248 and $2,190 for the National Municipal Bond Fund
and California Tax-Exempt Bond Fund, respectively, for the year ended February
28, 1997.

NOTE 5 -- SECURITIES TRANSACTIONS

For the year ended February 28, 1997, the cost of purchases and the proceeds
from sales of the National Municipal Bond Fund's portfolio securities (excluding
short-term investments) amounted to $4,686,622 and $1,569,959, respectively, and
the cost of purchases and the proceeds from sales of California Tax-Exempt Bond
Fund's portfolio securities (excluding short-term investments) amounted to
$74,437,155 and $72,440,873, respectively.

NOTE 6 -- CAPITAL SHARE TRANSACTIONS

Transactions in capital shares for the Funds are summarized below:

<TABLE>
<CAPTION>
NATIONAL MUNICIPAL BOND FUND
----------------------------------------------
YEAR ENDED YEAR ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------ -------- ------ --------
<S> <C> <C> <C> <C>
A Shares (000's)
Issued................................. 784 $ 7,850 1,077 $ 10,756
Reinvested............................. 51 513 28 280
Redeemed............................... (527) (5,278) (161) (1,625)
------ -------- ------ --------
Net increase............................. 308 $ 3,085 944 $ 9,411
====== ======== ====== ========
K Shares(a)
Issued................................. 100 $ 1,000 -- $ --
Reinvested............................. 3 28 -- --
Redeemed............................... -- -- -- --
------ -------- ------ --------
Net increase............................. 103 $ 1,028 -- $ --
====== ======== ====== ========
</TABLE>

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

(a) Period from July 22, 1996 (inception date) to February 28, 1997.

43
<PAGE> 46

<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT BOND FUND
----------------------------------------------
YEAR ENDED YEAR ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------ -------- ------ --------
<S> <C> <C> <C> <C>
A Shares (000's)
Issued................................. 6,009 $ 43,958 5,640 $ 41,159
Reinvested............................. 926 6,766 847 6,188
Redeemed............................... (6,548) (47,756) (4,122) (29,971)
------ -------- ------ --------
Net increase............................. 387 $ 2,968 2,365 $ 17,376
====== ======== ====== ========
K Shares(a)
Issued................................. 138 $ 1,000 -- $ --
Reinvested............................. 4 31 -- --
Redeemed............................... -- -- -- --
------ -------- ------ --------
Net increase............................. 142 $ 1,031 -- $ --
====== ======== ====== ========
</TABLE>

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

(a) Period from July 22, 1996 (inception date) to February 28, 1997.

NOTE 7 -- CONCENTRATION OF CREDIT RISK

The California Tax-Exempt Bond Fund invests substantially all of its assets
in a diversified portfolio of tax-exempt debt obligations primarily consisting
of issuers in the State of California. The issuers' ability to meet their
obligations may be affected by California economic or political developments.

The National Municipal Bond Fund invests substantially all of its assets in
debt obligations issued by or on behalf of states, territories and possessions
of the United States, the District of Columbia, and their respective
authorities, agencies, instrumentalities, and political sub-divisions.

44
<PAGE> 47

The Funds had the following concentrations by type of obligation at February
28, 1997 (as a percentage of total investments).

<TABLE>
<CAPTION>
NATIONAL CALIFORNIA
MUNICIPAL TAX-EXEMPT
BOND BOND
--------- ----------
<S> <C> <C>
Air Transportation................................................... --% 2.2%
Airport Facilities................................................... 8.0 0.9
Certificates of Participation........................................ -- 0.5
Education............................................................ 2.5 5.4
General Obligations.................................................. 8.1 2.3
Health & Medical Facilities.......................................... 2.9 5.0
Home Building and Land Development................................... 4.3 2.1
Hospital Supplies.................................................... 1.3 2.3
Industrial Development............................................... 1.8 1.1
Leases............................................................... -- 1.0
Leasing.............................................................. -- 1.8
Miscellaneous........................................................ 0.7 --
Parking Facilities................................................... 3.3 --
Pollution Control Revenue & Industrial Development................... 1.3 1.7
Port & Waterway Development.......................................... -- 1.0
Power Projects....................................................... 3.0 6.5
Property Redevelopment............................................... 1.4 --
Public Facilities.................................................... -- 7.2
Revenue.............................................................. 43.7 28.8
Sewer Projects....................................................... 1.0 3.8
Transportation....................................................... 4.2 2.8
Utilities............................................................ 7.8 6.8
Water & Power Projects............................................... 4.7 16.8
------ ------
100.0% 100.0%
====== ======
</TABLE>

NOTE 8 -- FEDERAL INCOME TAX INFORMATION (UNAUDITED)

During the year ended February 28, 1997, the Funds declared tax-exempt
income distributions in the following amounts:

<TABLE>
<S> <C>
National Municipal Bond Fund........................................................ $ 686,824
California Tax-Exempt Bond Fund..................................................... 10,417,963
</TABLE>

During the year ended February 28, 1997, the Funds declared long-term
capital distributions in the following amounts:

<TABLE>
<S> <C>
National Municipal Bond Fund........................................................ 27,582
California Tax-Exempt Bond Fund..................................................... $ 1,489,048
</TABLE>

45
<PAGE> 48

PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------

Financial Highlights
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED PERIOD
--------------------------------------- ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 29, 28, 28,
1997(A) 1996 1995 1994(B)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
A SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR.......... $ 10.15 $ 9.64 $ 9.89 $ 10.00
-------- -------- -------- --------
Income from Investment Operations:
Net investment income................................ 0.50 0.54 0.50 0.01
Net realized and unrealized gains/(losses) on
investment transactions............................ 0.06 0.51 (0.25) (0.11)
-------- -------- -------- --------
Total income/(loss) from investment operations........ 0.56 1.05 0.25 (0.10)
-------- -------- -------- --------
Less Dividends and Distributions:
Dividends to shareholders from net investment
income............................................. (0.50) (0.54) (0.50) (0.01)
Distributions to shareholders from net realized gains
on investment transactions......................... (0.03) -- -- --
-------- -------- -------- --------
Total Dividends and Distributions..................... (0.53) (0.54) (0.50) (0.01)
-------- -------- -------- --------
Net change in net asset value per share............... 0.03 0.51 (0.25) (0.11)
-------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF YEAR................ $ 10.18 $ 10.15 $ 9.64 $ 9.89
======== ======== ======== ========
Total return (excludes sales charge).................. 5.66% 1.16% 2.78% (1.00%)**
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)...................... $ 15,414 $ 12,242 $ 2,520 $ 733
Ratio of expenses to average net assets.............. 0.49% 0.12% 0.00% 0.00%***
Ratio of net investment income to average net
assets............................................. 4.96% 5.24% 5.30% 1.15%***
Ratio of expenses to average net assets*............. 2.22%(c) 2.71% 17.46% 170.99%***
Ratio of net investment income/(loss) to average net
assets*............................................ 3.25% 2.65% (12.16%) (169.84%)
Portfolio turnover rate.............................. 12% 38% 20% 15%
</TABLE>

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

<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee
reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
** Not annualized.
*** Annualized.
(a) As of July 22, 1996, the Portfolio designated the existing series of shares as "A" Shares.
(b) Period from January 28, 1994 (inception date) to February 28, 1994.
(c) During the year ended February 28, 1997, the Portfolio received credits from its custodian for
interest earned on uninvested balances which were used to offset custodian fees and expenses. If
such credits had not occurred, the expense ratios would have been as indicated. The ratio of net
investment income was not affected.
</TABLE>

See Notes to Financial Statements.

46
<PAGE> 49

PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------

Financial Highlights
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1997(A)
--------------------
<S> <C>
K SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD............................ $ 9.96
------
Income from Investment Operations:
Net investment income.................................................... 0.28
Net realized and unrealized gains on investment transactions............. 0.25
------
Total income from investment operations................................... 0.53
------
Less Dividends and Distributions:
Dividends to shareholders from net investment income..................... (0.28)
Distributions to shareholders from net realized gains on investment
transactions........................................................... (0.03)
------
Total Dividends and Distributions......................................... (0.31)
------
Net change in net asset value per share................................... 0.22
------
NET ASSET VALUE PER SHARE, END OF PERIOD.................................. $10.18
======
Total return.............................................................. 5.38%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000).......................................... $ 1
Ratio of expenses to average net assets.................................. 0.76%(c)
Ratio of net investment income to average net assets..................... 4.54%(c)
Ratio of expenses to average net assets*................................. 1.68%(c)**
Ratio of net investment income to average net assets*.................... 3.62%(c)
Portfolio turnover rate.................................................. 12%
</TABLE>

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

* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.

** Fees paid by third parties had no effect on the ratios.

(a) Period from July 22, 1996 (inception date) to February 28, 1997.

(b) Not annualized.

See Notes to Financial Statements.

47
<PAGE> 50

PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
- --------------------------------------------------------------------------------

Financial Highlights
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 (A) 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
A SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF
YEAR.................................... $ 7.45 $ 7.12 $ 7.49 $ 7.51 $ 7.07
---- ---- ---- ---- ----
Income from Investment Operations:
Net investment income................... 0.36 0.37 0.38 0.38 0.43
Net realized and unrealized
gains/(losses) on securities.......... (0.05) 0.33 (0.37) 0.04 0.52
---- ---- ---- ---- ----
Total income from investment
operations.............................. 0.31 0.70 0.01 0.42 0.95
---- ---- ---- ---- ----
Less Dividends and Distributions:
Dividends to shareholders from net
investment income..................... (0.36) (0.37) (0.38) (0.38) (0.43)
Distributions to shareholders from net
realized gains on investment
transactions.......................... (0.05) 0.00 0.00 (0.06) (0.08)
---- ---- ---- ---- ----
Total Dividends and Distributions........ (0.41) (0.37) (0.38) (0.44) (0.51)
---- ---- ---- ---- ----
Net change in net asset value per
share................................... (0.10) 0.33 (0.37) (0.02) 0.44
---- ---- ---- ---- ----
NET ASSET VALUE PER SHARE, END OF YEAR... $ 7.35 $ 7.45 $ 7.12 $ 7.49 $ 7.51
==== ==== ==== ==== ====
Total return (excludes sales charge)..... 4.29% 10.12% 0.36% 5.65% 14.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (millions).... $ 221 $ 221 195 $ 245 $ 189
Ratio of expenses to average net
assets................................ 0.90% 0.94% 0.95% 0.96% 0.62%
Ratio of net investment income to
average net assets.................... 4.88% 5.11% 5.43% 4.96% 5.95%
Ratio of expenses to average net
assets*............................... 1.10%** 1.14% 1.15% 1.11% 1.14%
Ratio of net investment income to
average net assets*................... 4.68% 4.91% 5.23% 4.81% 5.43%
Portfolio turnover rate................. 34% 57% 20% 15% 32%
</TABLE>

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

<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee
reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
** During the year ended February 28, 1997, the Portfolio received credits from its custodian for
interest earned on uninvested balances which were used to offset custodian fees and expenses. If
such credits had not occurred, the expense ratios would have been as indicated. The ratio of net
investment income was not affected.
(a) As of July 22, 1996, the Portfolio designated the existing series of shares as "A" Shares.
</TABLE>

See Notes to Financial Statements.

48
<PAGE> 51

PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
- --------------------------------------------------------------------------------

Financial Highlights
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PERIOD
ENDED
FEBRUARY
28, 1997
(A)
---------
<S> <C>
K SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD...................... $ 7.25
--------
Income from Investment Operations:
Net investment income............................................. 0.20
Net realized and unrealized gains on investment transactions...... 0.15
--------
Total income from investment operations............................. 0.35
--------
Less Dividends and Distributions:
Dividends to shareholders from net investment income.............. (0.20)
Distributions to shareholders from net realized gains on
investment transactions......................................... (0.05)
--------
Total Dividends and Distributions................................... (0.25)
--------
Net change in net asset value per share............................. 0.10
--------
NET ASSET VALUE PER SHARE, END OF PERIOD............................ $ 7.35
========
Total return........................................................ 4.90%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)................................... $ 1
Ratio of expenses to average net assets........................... 1.21%(c)
Ratio of net investment income to average net assets.............. 4.51%(c)
Ratio of expenses to average net assets*.......................... 1.56%(c)**
Ratio of net investment income to average net assets*............. 4.16%(c)
Portfolio turnover rate........................................... 34%
</TABLE>

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

<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the ratios
would have been as indicated.
** Fees paid by third parties had no effect on the ratios.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Not annualized.
(c) Annualized.
</TABLE>

See Notes to Financial Statements.

49
<PAGE> 52

REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Board of Directors
and Shareholders of
Pacific Horizon Funds, Inc.

In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Pacific Horizon National Municipal
Bond Fund and Pacific Horizon California Tax-Exempt Bond Fund (two of the
portfolios constituting the Pacific Horizon Funds, Inc., hereafter referred to
as the "Funds") at February 28, 1997, the results of each of their operations
for the year then ended, the changes in each of their net assets for each of the
two years in the period then ended and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1997 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.

PRICE WATERHOUSE LLP

1177 Avenue of the Americas
New York, New York
April 21, 1997

50
<PAGE> 53

For more information, complete the following form and mail it to:

Pacific Horizon Funds
1230 Columbia Street, Suite 500
San Diego, CA 92101

..............................................................................
First Name Last Name

..............................................................................
Street Address

..............................................................................
City State Zip Code

..............................................................................
Area Code and Telephone Number

PLEASE CHECK ONE OF THE TWO BOXES BELOW SO WE CAN BETTER MEET YOUR NEED FOR
SERVICE.
[ ] A broker assisted me with the purchase of my Pacific Horizon Fund.

..............................................................................
Name of Broker

..............................................................................
Name of Brokerage Firm

[ ] I purchased my Pacific Horizon Fund without the assistance of a broker.

Please send me a free investing kit on the Pacific Horizon Fund(s) checked
below. The kit includes a prospectus, which has more complete information on
the Fund(s) such as charges and expenses. Read the prospectus carefully
before investing or sending money.

PACIFIC HORIZON FUNDS

<TABLE>
<S> <C>
[ ] International Equity Fund [ ] Intermediate Bond Fund
[ ] Aggressive Growth Fund [ ] U.S. Government Securities Fund
[ ] Blue Chip Fund [ ] Short-Term Government Fund
[ ] Capital Income Fund [ ] National Municipal Bond Fund
[ ] Asset Allocation Fund [ ] California Tax-Exempt Bond Fund
[ ] Corporate Bond Fund
Money Market Funds
[ ] Prime Fund [ ] Treasury Only Fund
[ ] Treasury Fund [ ] Tax-Exempt Money Fund
[ ] Government Fund [ ] California Tax-Exempt Money Market Fund
</TABLE>

Additional Comments:
..............................................................................
..............................................................................
..............................................................................
..............................................................................
..............................................................................
..............................................................................
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
<PAGE> 54

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