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

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

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

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

<PAGE> 1

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.

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> 2

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 10-22

PACIFIC HORIZON U.S.
GOVERNMENT SECURITIES FUND
AND CORPORATE BOND FUND
Portfolios of Investments 23-25
Statements of Assets
and Liabilities 26-27
Statements of Operations 28-29
Statements of Changes
in Net Assets 30-31

PACIFIC HORIZON INTERMEDIATE
BOND FUND
Statement of Assets
and Liabilities 32
Statement of Operations 33
Statements of Changes
in Net Assets 34
NOTES TO FINANCIAL STATEMENTS 35-43
FINANCIAL HIGHLIGHTS 44-49
REPORT OF INDEPENDENT ACCOUNTANTS 50

MASTER INVESTMENT TRUST, SERIES
I -- INVESTMENT
GRADE BOND PORTFOLIO
Portfolio of Investments 51-52
Statement of Assets
and Liabilities 53
Statement of Operations 54
Statements of Changes
in Net Assets 55
Notes to Financial Statements 56-58
Supplementary Data 59
Report of Independent Accountants 60
</TABLE>

.................................................
<PAGE> 3

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 a 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> 4

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> 5

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> 6

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> 7

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> 8

[This page intentionally left blank.]

7
<PAGE> 9

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> 10

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> 11

PACIFIC HORIZON
U.S. GOVERNMENT SECURITIES FUND
CORPORATE BOND FUND
INTERMEDIATE BOND FUND

KIRK HARTMAN PHOTO

U.S. GOVERNMENT SECURITIES FUND
GOAL:

The Pacific Horizon U.S. Government Securities Fund seeks to achieve a high
level of current income consistent with preservation of capital.
INVESTMENTS:

The Fund invests primarily in instruments issued by the Government National
Mortgage Association (GNMA), which are backed by the full faith and credit of
the U.S. Government, and other securities of the U.S. Government, its agencies
and instrumentalities.
APPROPRIATE FOR:

Investors who want to participate in a diversified portfolio of U.S. Government
securities and who are willing to accept some price and yield fluctuations.
INCEPTION:

January 7, 1988
SIZE OF FUND AS OF
FEBRUARY 28, 1997:

Over $74 million

CORPORATE BOND FUND
GOAL:

The Pacific Horizon Corporate Bond Fund seeks to provide investors with high
current income consistent with reasonable investment risk.
INVESTMENTS:

The Fund invests primarily in a diversified portfolio of investment-grade
corporate debt securities, although it may invest a portion of its assets in
other types of securities and money-market instruments.
APPROPRIATE FOR:

Investors looking for high current income who are willing to accept some price
and yield fluctuations.
SIZE OF FUND AS OF
FEBRUARY 28, 1997:

Approximately $33 million KIRK HARTMAN
Chief Investment Officer
Bank of America NT&SA

The Pacific Horizon Income Funds
are managed by a Bank of America
NT&SA investment team led by Kirk
Hartman, Chief Investment Officer.
<PAGE> 12

INTERMEDIATE BOND FUND

GOAL:

The Pacific Horizon Intermediate Bond Fund (formerly the Pacific Horizon
Flexible Bond Fund) seeks interest income and capital appreciation.

INVESTMENTS:

The Fund invests in a diversified portfolio of investment-grade, intermediate-
and longer-term bonds, including corporate and government fixed-income
obligations, mortgage-backed securities, municipal securities and cash
equivalents.

APPROPRIATE FOR:

Investors who want interest income and capital appreciation from a diversified
portfolio of fixed-income securities.

INCEPTION:

January 24, 1994

SIZE OF FUND AS OF
FEBRUARY 28, 1997:

Over $23 million

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

A
Over the last 12 months, the economy continued to grow, further extending
the current economic expansion, while inflation, especially for this stage of
the business cycle, remained quite tame. There had been fear of resurgent
inflation causing interest rates to rise across the yield curve. During the
year, interest rates rose .20% in three month Treasury Bills, .68% in three year
Treasury Notes, and .33% in the 30 year Bond, causing the yield curve to steepen
in the front end, and flatten in intermediate and longer maturities.*

Interest rates rose sharply in March and April of 1996, then traded in a
relatively tight trading range for the remainder of the period ended February
28, 1997. This period was also marked by gradual tightening in the mortgage and
corporate sectors. As measured by the Lehman family of indices,** the mortgage
sector had the best total return for the year with 6.58%, followed by both
corporate bonds and asset-backed bonds at 5.71%, agencies at 5.30% and
treasuries at 4.42%.**

A notable adjustment to the mortgage index was the tiering of coupons by age, or
seasoning. In July, a number of rating agencies began to price seasoned
mortgages differently than newly-issued mortgages. The theory is that seasoned
mortgages, having been through previous prepayment cycles, will have a more
stable prepayment profile, and would therefore justify a higher dollar price
than their newly originated counterparts.

Within the corporate sector, utilities led the way with a total return of 6.00%
followed by industrials at 5.83%, Yankee Bonds at 5.68% and finance at 5.36%.
(Yankee Bonds, which are registered bonds issued in the U.S. by foreign
governments, banks and institutions, tend to pay higher interest than other
bonds of comparable credit quality when market conditions are better in the U.S.
than abroad.) On a duration adjusted basis, however, the finance sector had the
best performance at 6.57% compared to utilities at 6.22% and both industrials
and Yankee Bonds at 5.83%.**

11
<PAGE> 13

Q
WHAT WERE THE FUNDS' RETURNS IN THAT ENVIRONMENT?

A
The U.S. Government Securities Fund invests primarily in mortgages, which
had the best total return of the year among the major sectors of the fixed
income market. The Fund posted a 5.23%*** (without the sales charge) return for
A Shares during the 12 months ended February 28, 1997, compared to a 6.58%
return for the Fund's benchmark, the Lehman Brothers GNMA Index.** During the
period, the Funds introduced K Shares, which are primarily offered to Daily
Advantage 401(k) plan participants, although they are also available to certain
other eligible individuals, as outlined in the prospectus. For the year ended
February 28, 1997, K Shares returned 4.57%.****

The Pacific Horizon Corporate Bond Fund Class A shares returned 4.13%***
(without the sales charge), for the year ended February 28, 1997, and K Shares
returned 4.03%,**** compared to 5.71%** for the Lehman Brothers Corporate Bond
Index. During the year, we moved from a more aggressive stance to one that was
moderately defensive. The change was somewhat premature, as lower-quality,
longer-maturity corporate bonds were the strongest performers in the sector
during the year. For example, the Fund's investment in Tele-Communications,
Inc., a 9.88% issue due in June 2022 (4.7% of net assets as of February 28,
1997), which came under increasing pressure, was an additional factor in the
Fund's under-performance relative to its benchmark.*****

By virtue of its relatively short maturity and higher credit quality holdings,
the Intermediate Bond Fund underperformed the Fund's benchmark on a total return
basis, posting a return of 3.92% (without the sales charge) for A Shares, during
the 12 months ended February 28, 1997.*** For the year ended February 28, 1997,
K Shares gained 3.80%.**** The Fund's benchmark, the Lehman Brothers Inter-
mediate Government /Corporate Index returned 5.00% for the same period.**
Q
HOW DID YOU STRUCTURE THE FUNDS' DURATIONS?

A
The Pacific Horizon Funds seek to use a duration-neutral philosophy. Since
duration, a measure of a bonds price sensitivity to changes in interest rates,
is the principal component of both risk and return, we seek to deliver returns
consistent with the returns of the appropriate benchmark by maintaining the
duration of the fund close to that of the benchmark. We then attempt to add
value by applying our relative value methodology to sector allocation, yield
curve positioning and security selection as appropriate for each fund. Our
relative value methodology strategy enables us to compare and select
opportunities that represent some of the best values from the universe of
available issues in the market.
Q
WHAT OPPORTUNITIES DID YOU FIND TO ADD VALUE THROUGH SECTOR ALLOCATION IN
THE U.S. GOVERNMENT SECURITIES, INTERMEDIATE BOND AND CORPORATE BOND FUNDS?

A
The Pacific Horizon Intermediate Bond Fund is managed against the Lehman
Brothers Intermediate Government/Corporate Index and the Corporate Bond Fund is
managed against the Lehman Brothers Corporate Bond Index. Since neither index
includes mortgages, the primary opportunity to add value in these funds is in
the corporate sector.**

As the period began, spreads in the corporate sector were trading at
historically tight levels, the credit curve was flat and quality spreads were
tight. The credit curve is a measure of the incremental spread for extending
maturities in the same credit. Quality spreads are a measure of the incre-

12
<PAGE> 14

mental spread for accepting lower-rated credits.

The Fund predominantly held corporate debt obligations, and was overweighted to
the finance sector and underweighted to the utility sector due to litigation at
that time involving deregulation uncertainties. We positioned the Fund this way
because of the positive fundamentals of the finance sector. Our decision to
overweight our holdings in finance proved beneficial. Utilities also performed
quite well as the regulatory environment became much more favorable.*****

In light of the historic tightness at the beginning of the period, we moved from
a more aggressive stance to one that is moderately defensive. In hind sight,
this change was somewhat premature as lower quality, longer maturity corporate
bonds were the strongest performers over the past year, and our performance
lagged. We continue to believe, however, that our defensive strategy should
ultimately prove to be correct. If spreads continue to tighten, we will likely
underperform marginally. Conversely, if spreads do widen, our performance should
be considerably better.

The U.S. Government Securities Fund is managed against the Lehman Brothers GNMA
Index** and therefore invests primarily in securities issued by the Government
National Mortgage Association and the U.S. Treasury. With the economy slowing
sharply in late 1995 and early 1996, the Federal Reserve having recently eased
interest rates, and the perception that further declines in rates were
forthcoming, the portfolio was structured to take advantage of a slowing economy
and falling interest rates. As such, we were underweighted in the mortgage
sector.

Reflecting our forecast of lower interest rates, we had nearly a 30% exposure to
treasuries as a defensive position against the mortgage spread widening and
increased prepayment risk*****. As evidence of steady economic strength
continued to mount, and interest rates settled into a trading range, we
increased our allocation to mortgages. Currently, we are nearly 100% invested in
mortgages*****. With the index including seasoned securities, we too, have
focused on this sector using primarily current coupon and moderate premiums.
This strategy should perform very well in the range-bound environment that we
are forecasting--an environment where interest rates are trading within a
tighter range.
Q
WHAT'S AHEAD FOR THE BOND MARKET AND THE FUNDS?

A
Currently, we are forecasting an economy that continues to grow at or near
the non-inflationary growth rate of 2.0-2.5% and a continuing, stable inflation
environment. With the current tightness in the labor market pointing to an
increased probability of rekindled inflation, and the recent comments from the
Federal Reserve, we would not be surprised to see the Federal Reserve raise
interest rates in the near future.******

We do not, however, see rates moving dramatically higher. We continue to believe
that interest rates will trade within a relatively tight range, and feel that we
are currently in the middle of that range. We will continue to manage the
portfolio within the context of our duration-neutral strategy, but with a
marginally more defensive bias in the near term.

- ---------------
* Source: Bloomberg, using Merrill Lynch Taxable Bond Indices which reflects
the One-Year Treasury Bill return. The One-Year Treasury Bill Index is an
unmanaged index generally representative of the Treasury bond market as a
whole, and cannot be invested in directly.

** The Lehman family of indices including the Lehman Brothers Corporate
Bond, Intermediate Government/Corporate Bond and

13
<PAGE> 15

the Mortgage Bond are unmanaged indices generally representative of the
different sectors within the bond market as a whole, and cannot be
invested in directly.

*** Return figures for the Fund include change in share price, reinvestment
of dividends and capital gain 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
U.S. Government Securities, Corporate Bond and Intermediate Bond Fund was
0.54%, -0.56% and -0.76% 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.

**** 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 until
November 20, 1996 for the Funds. For this reason, the performance results
for K Shares are those of A Shares without the sales charge for the
period from March 1, 1996 through November 19, 1996 combined with actual
K Share performance from November 20, 1996 through February 28, 1997. 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.

***** Percentage figures shown are as of February 28, 1997. The composition of
the Fund's holdings is subject to change.

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

Total return for the Pacific Horizon Corporate Bond Fund from 1984 through April
25, 1994 reflects performance of the predecessor fund, Bunker Hill Income
Securities, Inc., a closed-end fund. Total return of the closed-end fund is
calculated assuming a purchase of common stock at market value on the opening of
the first day of each period reported. Total return for the closed-end fund does
not reflect brokerage commissions. The annual operating expenses of the
predecessor fund were less than the current operating expenses of the Pacific
Horizon Corporate Bond Fund. Had current expenses been reflected in the
predecessor fund's performance, such performance would have been reduced.

14
<PAGE> 16

PACIFIC HORIZON
U.S. GOVERNMENT SECURITIES FUND
(AS OF FEBRUARY 28, 1997)

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

<TABLE>
<CAPTION>
LEHMAN
BROTHERS
MEASUREMENT PERIOD LIPPER MORTAGE- LEHMAN
(FISCAL YEAR GNMA FUNDS BACKED BROTHERS
COVERED) A SHARES K SHARES AVERAGE INDEX GNMA INDEX
<S> <C> <C> <C> <C> <C>
1/7/88 9550.00 10000.00 10000 10000 10000
2/29/88 9944.13 10412.72 10102.15 10128
2/28/89 10372.14 10860.89 10505.68 10594 10597.20
2/28/90 11632.91 12181.05 11746.42 12075 12103.59
2/28/91 13114.10 13732.02 13185.05 13703 13735.18
2/29/92 14747.35 15442.22 14748.46 15455 15543.29
2/28/93 16358.20 17128.97 16228.96 16953 17122.84
2/28/94 16914.03 17710.99 16861 17749 17881.20
2/28/95 16965.03 17764.40 17143.87 18241 18399.90
2/29/96 18402.24 19269.33 18996.11 20322 20524.62
2/28/97 19364.99 20150.03 20095.65 21659 21935.44
</TABLE>

HOW PERFORMANCE COMPARES
We have changed the Fund's benchmark
index from the Lehman Brothers
Mortgage-Backed Index to the Lehman
Brothers GNMA Index which more closely
resembles the composition of the Fund
and, we believe, is a more appropriate
benchmark for the Fund's holdings. In
order to complete the transition to
the new benchmark, we are providing a
hypothetical comparison of the Fund's
performance since January 7, 1988 with
both its former benchmark and its new
benchmark, the Lehman Brothers GNMA
Index. Both the Lehman
Brothers Mortgage-Backed Index and the Lehman Brothers GNMA Index are unmanaged
indices, which are typically used as performance benchmarks for mortgage-backed
investments.

As illustrated, the Fund tracked the performance of other GNMA funds. The
average of GNMA 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 U.S Government Securities Fund. An initial $10,000
investment in the Fund made on January 7, 1988 would now be worth $19,365 for A
Shares. The same investment made in the Lipper GNMA Funds Average would now be
worth $20,096. Correspondingly, a $10,000 investment in K Shares for the same
period would now be worth $20,150*.

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.
----------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
AVERAGE ANNUAL RETURN
---------------------------------------
A SHARES K SHARES*
Without With
Sales Sales
Charge Charge
---------------------------------------
<S> <C> <C> <C>
1 Year 5.23% 0.54% 4.57%
......................................
5 Year 5.60% 4.63% 5.47%
......................................
Since
Inception 8.03% 7.49% 7.96%
(1/7/88)
---------------------------------------
</TABLE>
<PAGE> 17

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 until November 20,
1996. For this reason, the performance results for K Shares are those of A
Shares without the sales charge for the period from March 1, 1996 through
November 19, 1996 combined with actual K Share performance from November 20,
1996 through February 28, 1997. 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 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 GNMA Funds Average, the Lehman Brothers
Mortgage-Backed Index, nor the Lehman Brothers GNMA Index may be invested in
directly. The hypothetical investments in the Lehman Brothers Mortgage-Backed
and GNMA indices do 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.

QUALITY

Investing Only in U.S.
Government-Backed Securities

The Pacific Horizon U.S. Government
Securities Fund maintains at least a
65% position in GNMA securities and
may invest in other types of
high-quality government-backed
securities. The flexibility to
invest in different types of
securities can help to increase
performance, while diversification
can help to reduce risk. By
investing only in high-quality
government-backed securities, the
Fund may provide the anchor for an
investor's long-range strategy.

PORTFOLIO COMPOSITION*
(PERCENTAGE BASED ON ASSETS)

<TABLE>
<S> <C> <C> <C> <C>
CASH & EQUIVALENTS 1.0
GNMA SECURITIES 99.0
</TABLE>

- -----------------------------------------------------------
* The composition of the Fund's
holdings is subject to change.
<PAGE> 18

PACIFIC HORIZON
CORPORATE 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
CORPORATE LEHMAN
DEBT FUNDS BROTHERS
MEASUREMENT PERIOD BBB RATED CORPORATE
(FISCAL YEAR COVERED) A SHARES K SHARES AVERAGE BOND INDEX
<S> <C> <C> <C> <C>
2/28/87 9551.5 10000 10000.00 10000.00
2/29/88 9074.8 9500.92 10456.23 10510
2/28/89 8647.01 9053.03 11030.06 10995
2/28/90 10125.14 10600.57 11770.14 12312
2/28/91 9905.79 10370.94 12918.04 13708
2/29/92 11565.45 12108.53 14762.20 15724
2/28/93 12632.83 13226.05 16814.76 17946
2/28/94 13640.34 14280.86 18255.2 19139
2/28/95 14176.73 14842.46 18065.84 19409
2/29/96 16178.72 16938.44 20743.83 22187
2/28/97 16846.84 17620.48 22165.32 23453
</TABLE>

HOW PERFORMANCE COMPARES
The chart compares the performance of
the Pacific Horizon Corporate Bond
Fund to the Lehman Brothers Corporate
Bond Index, which is an unmanaged
index typically used as a performance
benchmark for corporate debt
investments.
As illustrated, the Fund tracked the
performance of other corporate debt
funds. The average of corporate 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 Corporate Bond Fund. An initial $10,000 investment
in the Fund made for the ten year period commencing on February 28, 1987 would
now be worth $16,847 for A Shares. The same investment made in the Lipper
Corporate Debt Funds BBB Rated Average would now be worth $22,165.
Correspondingly, a $10,000 investment in K Shares for the same period would now
be worth $17,620*.

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>
CORPORATE BOND FUND
AVERAGE ANNUAL RETURN
---------------------------------------
A SHARES K SHARES*
Without With
Sales Sales
Charge Charge
---------------------------------------
<S> <C> <C> <C>
1 Year 4.13% -0.56% 4.03%
......................................

5 Year 7.81% 6.83% 7.79%
......................................
10 Year 5.84% 5.35% 5.83%
---------------------------------------
</TABLE>
<PAGE> 19

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 Corporate Debt Funds BBB Rated Average, nor the
Lehman Brothers Corporate Bond Index may be invested in directly. The
hypothetical investment in the Lehman Brothers Corporate Bond 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> 20

PACIFIC HORIZON
CORPORATE BOND FUND
(AS OF FEBRUARY 28, 1997)
The Pacific Horizon Corporate Bond
Fund is a diversified portfolio of
investment-grade corporate debt
obligations and other obligations
issued or guaranteed by the U.S.
Government, its agencies or
instrumentalities. The portfolio
manager's diversification strategy
focuses on industries that are
positioned for growth and companies
that provide high current income
potential consistent with reasonable
investment risk. While the portfolio
is heavily invested in banking and
finance, it is diversified with
investments in telecommunications,
retail and oil.
- --------------------------------------------------------------------------------
MATURITY*

<TABLE>
<S> <C> <C> <C> <C>
0 E 5 YEARS 31.4
5 E 10 YEARS 31.7
> 10 YEARS 36.9
</TABLE>

- ---------------
* The composition of the Fund's holdings is subject to change.
DIVERSIFICATION*

<TABLE>
<S> <C> <C> <C> <C>
BANKING/FINANCE 32.1
AUTOMOBILES 7.4
UTILITIES 3.1
RETAIL 6.5
TELECOMMUNICATIONS 9.1
FOOD & BEVERAGES 8.5
TOBACCO 3.1
INDUSTRIAL 13.8
INSURANCE 6.2
OTHER 7.2
ENTERTAINMENT 3.0
</TABLE>

The manager of the Pacific Horizon
Corporate Bond Fund concentrates on
intermediate-term and longer-term
bonds in the search for high current
income. The Fund's manager seeks to
diversify these holdings among
different maturity ranges with a
focus on the longer end of the
maturity spectrum.
<PAGE> 21

PACIFIC HORIZON
INTERMEDIATE 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 LEHMAN
INTERMEDIATE BROTHERS
INVESTMENT INTERMEDIATE
MEASUREMENT PERIOD FUNDS GOVERNMENT/CORPORATE
(FISCAL YEAR COVERED) A SHARES K SHARES AVERAGE BOND INDEX
1/24/94 9551.10 10000.00 10000 10000
<S> <C> <C> <C> <C> <C>
2/28/94 9456.02 9891.12 9819.37 9852
8/31/94 9395.02 9838.56 9626.41 9800
2/28/95 9660.90 10116.12 9939.23 10066
8/31/95 10282.74 10767.27 10596.36 10727
2/29/96 10670.30 11173.09 11000.04 11148
8/31/96 10569.34 11161.61 10985.88 11203
2/28/97 11088.51 11596.00 11553.85 11705
</TABLE>

HOW PERFORMANCE COMPARES
The chart compares the performance of
the Pacific Horizon Intermediate Bond
Fund to the Lehman Brothers
Intermediate Government/Corporate
Bond Index, which is an unmanaged
index typically used as a performance
benchmark for intermediate term
investments.
As illustrated, the Fund tracked the
performance of other intermediate
bond funds. The average of
intermediate investment 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 Intermediate Bond Fund. An initial
$10,000 investment in the Fund made on January 24, 1994, would now be worth
$11,089 for A Shares. The same investment made in the Lipper Intermediate
Investment Funds Average would now be worth $11,554. Correspondingly, a $10,000
investment in K Shares for the same period would now be worth $11,596.*

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.

*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 until November 20,
1996. For this reason, the performance results for K Shares are those of A
Shares without the sales charge for the period from March 1, 1996 through
November 19, 1996 combined with
----------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE BOND FUND
AVERAGE ANNUAL RETURN
---------------------------------------
A SHARES K SHARES*
Without With
Sales Sales
Charge Charge
---------------------------------------
<S> <C> <C> <C>
1 Year 3.92% -0.76% 3.80%
......................................
3 Year 5.48% 3.88% 5.44%
......................................

Since
Inception 4.93% 3.39% 4.90%
(1/24/1994)
---------------------------------------
</TABLE>
<PAGE> 22

actual K Share performance from November 20, 1996 through February 28, 1997. 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 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 Intermediate Investment Funds Average, nor the
Lehman Brothers Intermediate Government/Corporate Bond Index may be invested in
directly. The hypothetical investment in the Lehman Brothers Intermediate
Government/Corporate Bond 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.

21
<PAGE> 23

PACIFIC HORIZON
INTERMEDIATE BOND FUND
(AS OF FEBRUARY 28, 1997)
QUALITY
The credit research team at Bank of
America, the Fund's adviser,
monitors debt instruments and issuer
quality to identify fixed-income
securities for the Fund. With its
emphasis on quality, the Fund
invests primarily in securities that
are rated investment grade by an
independent rating service or that
are issued by the U.S. Government.
The security selection process also
depends on information about broad
economic factors that can affect the
bond markets.

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

FLEXIBILITY
Capitalizing on Changing Markets

The Fund invests in a varied
portfolio of quality bonds in an
effort to protect principal against
sharp price fluctuations and
stabilize net asset value. The
Fund's adviser has great latitude in
deciding how assets are invested
among corporate, government and
mortgage-backed obligations. That
means the Fund enjoys total
flexibility to make the most of
changing market conditions.

- -----------------------------------------------------------
* THE COMPOSITION OF THE FUND'S
HOLDINGS IS SUBJECT TO CHANGE.

<PAGE> 24

PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
MATURITY PRINCIPAL VALUE
DESCRIPTION RATE DATE AMOUNT (NOTE 2)
- ------------------------------------ ------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 99.9%
Government National Mortgage
Association*..................... 11.50% 2/15/98 to 2/15/00 $ 28,606 $ 30,420
Government National Mortgage
Association*..................... 11.00% 2/15/98 to 9/20/19 657,525 709,795
Government National Mortgage
Association*..................... 10.50% 12/15/97 to 4/15/21 2,630,482 2,815,282
Government National Mortgage
Association*..................... 10.00% 10/15/98 to 3/15/21 1,075,006 1,154,758
Government National Mortgage
Association*..................... 9.50% 3/15/98 to 4/20/06 1,410,469 1,489,991
Government National Mortgage
Association*..................... 9.00% 6/15/01 to 6/15/07 386,010 406,588
Government National Mortgage
Association*..................... 8.50% 10/15/09 to 12/15/22 5,177,673 5,377,392
Government National Mortgage
Association*..................... 8.00% 1/15/20 to 7/15/26 15,435,087 15,748,573
Government National Mortgage
Association*..................... 7.50% 4/15/22 to 12/15/25 20,183,567 20,158,874
Government National Mortgage
Association*..................... 7.00% 12/15/08 to 8/15/25 14,511,276 14,333,299
Government National Mortgage
Association*..................... 6.50% 4/15/26 to 6/15/26 12,786,974 12,143,533
Government National Mortgage
Association*..................... 6.00% 12/15/10 449,998 432,416
-----------
Total U.S. Government Agency
Obligations
(Cost $74,658,891)................. 74,800,921
-----------
TOTAL INVESTMENTS -- 99.9%
(COST $74,658,891)(A).............. 74,800,921
Other assets in excess of
liabilities -- 0.1%................ 101,537
-----------
NET ASSETS -- 100.0%................ $74,902,458
===========
</TABLE>

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

Percentages indicated are based on net assets of $74,902,458.

(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..................................... $ 673,667
Unrealized depreciation..................................... (531,637)
-----------
Net unrealized appreciation................................. $ 142,030
===========
</TABLE>

* Mortgage-backed pass-through obligation.

See Notes to Financial Statements.

23
<PAGE> 25

PACIFIC HORIZON CORPORATE 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>
ASSET-BACKED SECURITIES -- 4.0%
The Money Store Home Equity Trust,
Series 1996-B .................. Aaa/AAA 7.38% 5/15/17 $1,300,000 $ 1,320,982
-----------
Total Asset-Backed Securities
(Cost $1,299,484) ................ 1,320,982
-----------
COLLATERALIZED MORTGAGE OBLIGATION -- 0.0%
Prudential Mortgage Cap .......... Aaa/AAA 11.58% 12/15/13 3,830 3,830
-----------
Total Collateralized Mortgage
Obligation (Cost $3,825) ......... 3,830
-----------
COMMERCIAL PAPER -- DISCOUNT -- 3.0%
Philip Morris Co., Inc. .......... A1/P1 5.36% 3/3/97 1,000,000 999,702
-----------
Total Commercial Paper -- Discount
(Cost $999,702)...................
CORPORATE OBLIGATIONS -- 66.1%
BANKING -- 13.6%
ABN-AMRO Bank NV ................. Aa2/AA- 7.75% 5/15/23 1,350,000 1,369,232
Chase Manhattan Corp. ............ A1/A- 8.13% 6/15/02 1,000,000 1,054,587
Comerica Bank .................... A2/A- 8.38% 7/15/24 1,000,000 1,043,552
Midland Bank PLC ................. A1/A 7.63% 6/15/06 1,000,000 1,025,938
-----------
4,493,309
-----------
BEVERAGES -- 2.9%
Anheuser Busch Cos., Inc. ........ A1/AA- 7.00% 12/1/25 1,000,000 947,997
-----------
DIVERSIFIED -- 6.0%
Allied Signal Corp. .............. A2/A 9.50% 6/1/16 719,000 869,047
Eaton Corp. ...................... A2/A 8.90% 8/15/06 1,000,000 1,125,400
-----------
1,994,447
-----------
ENTERTAINMENT -- 3.0%
Walt Disney Co. .................. A2/A 6.75% 3/30/06 1,000,000 983,823
-----------
FOOD & KINDRED PRODUCTS -- 5.6%
ConAgra, Inc. .................... Baa2/BBB 9.75% 3/1/21 1,500,000 1,839,682
-----------
INSURANCE -- 3.2%
Commercial Credit ................ A1/A+ 7.88% 2/1/25 1,000,000 1,071,115
-----------
RADIO & TELEVISION -- 9.0%
British Telecom Finance .......... Aa1/AAA 9.63% 2/15/19 1,300,000 1,427,642
Tele-Communications, Inc. ........ Ba1/BBB- 9.88% 6/15/22 1,400,000 1,554,032
-----------
2,981,674
-----------
RENTAL & LEASE EQUIPMENT -- 7.6%
Hertz Corp. ...................... A3/A- 7.38% 6/15/01 1,000,000 1,021,617
International Lease Finance ...... A1/A+ 6.20% 5/1/00 1,500,000 1,482,301
-----------
2,503,918
-----------
</TABLE>

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

24
<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>
BROKERAGE SERVICES -- 12.1%
Goldman Sachs Group .............. A1/A+ 7.13% 3/1/03 $1,500,000 $ 1,503,952
Lehman Brothers .................. Baa1/A 5.75% 11/15/98 1,000,000 989,855
Merrill Lynch & Co., Inc. ........ Aa3/AA- 7.00% 3/15/06 1,500,000 1,500,764
-----------
3,994,571
-----------
UTILITIES -- 3.1%
Pacific Gas & Electric ........... A3/A- 7.88% 4/8/14 1,000,000 1,024,062
-----------
Total Corporate Obligations
(Cost $21,142,332) ............... 21,834,598
-----------
MEDIUM TERM NOTES -- 22.7%
AUTOMOBILES -- 7.3%
Ford Motor Credit Co. ............ A1/A+ 5.75% 1/25/01 1,000,000 969,517
General Motors Acceptance Corp. .. A3/A 6.50% 4/25/00 1,450,000 1,444,857
-----------
2,414,374
-----------
FINANCIAL SERVICES -- 6.1%
Associates Corp. N.A. ............ Aa3/AA- 6.95% 8/1/02 1,000,000 1,004,019
Countrywide Funding Corp. ........ A3/A 6.54% 4/14/00 1,000,000 996,337
-----------
2,000,356
-----------
INSURANCE -- 2.9%
UNUM Corp. ....................... A1/A+ 5.88% 10/15/03 1,000,000 941,489
-----------
RETAIL -- 6.4%
J.C. Penney & Co. ................ A2/A 6.50% 12/15/07 1,000,000 946,397
Sears Roebuck & Co. .............. A2/A- 8.53% 3/1/02 1,100,000 1,181,035
-----------
2,127,432
-----------
Total Medium Term Notes
(Cost $7,354,043) ................ 7,483,651
-----------
MUNICIPAL BOND -- 3.1%
New York City General
Obligation ..................... Baa1/BBB+ 10.25% 6/1/97 1,000,000 1,008,882
-----------
Total Municipal Bond
(Cost $1,005,637) ................
TOTAL INVESTMENTS -- 98.9% ........ 32,651,645
(COST $31,805,023)(A)
Other assets in excess of
liabilities -- 1.1% .............. 375,847
-----------
NET ASSETS -- 100% ................ $33,027,492
===========
</TABLE>

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

Percentages indicated are based on net assets of $33,027,492.

(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 ................................... $1,014,861
Unrealized depreciation ................................... (168,239)
-----------
Net unrealized appreciation ............................... $ 846,622
===========
</TABLE>

See Notes to Financial Statements.

25
<PAGE> 27

PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $74,658,891)............... $74,800,921
Cash................................................................. 164,663
Interest receivable.................................................. 474,223
Receivable for capital shares sold................................... 79,786
Prepaid expenses..................................................... 7,699
-----------
Total Assets........................................................... 75,527,292
-----------
LIABILITIES:
Dividends payable.................................................... 420,654
Payable for capital shares redeemed.................................. 74,672
Investment advisory fees payable..................................... 4,076
Administration fees payable.......................................... 2,316
Shareholder service fees payable (A Shares).......................... 14,520
Shareholder service fees payable (K Shares).......................... 88
12b-1 fees (K Shares)................................................ 404
Transfer agent fees payable.......................................... 42,213
Audit fees payable................................................... 30,031
Legal fees payable................................................... 629
Other accrued expenses............................................... 35,231
-----------
Total liabilities...................................................... 624,834
-----------
NET ASSETS............................................................. $74,902,458
===========
Net Assets:
A Shares............................................................. $74,484,639
K Shares............................................................. 417,819
-----------
Total.................................................................. $74,902,458
===========
Shares Outstanding ($0.001 par value, 300 million shares authorized):
A Shares............................................................. 8,009,635
K Shares............................................................. 44,919
-----------
Total.................................................................. 8,054,554
-----------
NET ASSET VALUE
A Shares -- redemption price per share............................... $9.30
====
Maximum Sales Charge (A Shares)...................................... 4.50%
Maximum Offering Price (A Shares)
(Net Asset Value of A Shares/(100% -- Maximum Sales Charge))....... $9.74
====
K Shares -- offering price per share................................. $9.30
====
COMPOSITION OF NET ASSETS:
Shares of common stock at par........................................ $ 8,054
Additional paid-in capital........................................... 85,163,245
Distributions in excess of net investment income..................... (421,869)
Accumulated net realized (losses) on investment transactions......... (9,989,002)
Net unrealized appreciation on investments........................... 142,030
-----------
NET ASSETS, FEBRUARY 28, 1997.......................................... $74,902,458
===========
</TABLE>

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

26
<PAGE> 28

PACIFIC HORIZON CORPORATE BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $31,805,023)................ $32,651,645
Cash.................................................................. 82,811
Interest receivable................................................... 636,103
Receivable for capital shares sold.................................... 2,574
Prepaid expenses...................................................... 7,387
-----------
Total Assets............................................................ 33,380,520
-----------
LIABILITIES:
Dividends payable..................................................... 154,511
Payable for capital shares redeemed................................... 94,762
Shareholder service fees payable (A Shares)........................... 19,207
12b-1 fees (K Shares)................................................. 90
Transfer agent fees................................................... 21,198
Audit fees payable.................................................... 27,336
Other accrued expenses................................................ 35,924
-----------
Total Liabilities....................................................... 353,028
-----------
NET ASSETS.............................................................. $33,027,492
===========
Net Assets
A Shares.............................................................. $32,790,157
K Shares.............................................................. 237,335
-----------
Total................................................................... $33,027,492
===========
Shares Outstanding ($0.001 par value, 150 million shares authorized):
A Shares.............................................................. 2,076,625
K Shares.............................................................. 15,023
-----------
Total................................................................... 2,091,648
===========
NET ASSET VALUE
A Shares -- redemption price per share................................ $15.79
=====
Maximum Sales Charge (A Shares)....................................... 4.50%
Maximum Offering Price (A Shares)
(Net Asset Value of A Shares/(100% -- Maximum Sales Charge))........ $16.56
=====
K Shares -- offering price per share.................................. $15.80
=====
COMPOSITION OF NET ASSETS:
Shares of common stock, at par........................................ $ 2,092
Additional paid-in capital............................................ 38,932,139
Accumulated net realized (losses) on investment transactions.......... (6,753,361)
Net unrealized appreciation on investments............................ 846,622
-----------
NET ASSETS, FEBRUARY 28, 1997........................................... $33,027,492
===========
</TABLE>

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

27
<PAGE> 29

PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.............................................................. $5,635,763
----------
EXPENSES:
Investment advisory fees.............................................. 283,471
Administration fees................................................... 162,212
Shareholder service fees (A Shares)................................... 202,413
Shareholder service fees (K Shares)................................... 170
12b-1 fees (K Shares)................................................. 510
Custodian and fund accounting fees.................................... 88,876
Transfer agent fees................................................... 119,737
Legal fees............................................................ 1,319
Reports to shareholders............................................... 54,527
Other expenses........................................................ 97,388
----------
Total Expenses...................................................... 1,010,623
Less: Fee waivers and reimbursements.................................... (305,250)
Expenses paid by third parties..................................... (15,267)
----------
Total Net Expenses...................................................... 690,106
----------
NET INVESTMENT INCOME................................................... 4,945,657
----------
NET REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized losses on investment transactions........................ (1,656,989)
Net change in unrealized appreciation on investments.................. 682,024
----------
Net realized/unrealized (losses) on investments......................... (974,965)
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $3,970,692
==========
</TABLE>

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

28
<PAGE> 30

PACIFIC HORIZON CORPORATE BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
INVESTMENT INCOME:
Investment Income from Master Investment Trust, Series I -- Corporate
Bond Portfolio (a):
Interest............................................................... $1,124,596
Expenses............................................................... 116,052
Less: Fee waivers and expense reimbursements........................... (77,178)
-----------
38,874
Net Investment Income from Master Investment Trust, Series I -- Corporate
Bond Portfolio:........................................................ 1,085,722
Interest............................................................... 1,149,030
-----------
Total Income............................................................. 2,234,752
-----------
EXPENSES:
Investment advisory fees............................................... 70,991
Administration fees.................................................... 54,670
Shareholder service fees (A and K Shares).............................. 77,972
12b-1 fees (K Shares).................................................. 284
Custodian and fund accounting fees..................................... 36,510
Transfer agent fees.................................................... 71,692
Audit fees............................................................. 25,690
Legal fees............................................................. 7,400
Organization costs..................................................... 22,969
Registration and filing fees........................................... 44,952
Printing costs......................................................... 53,093
Other expenses......................................................... 414
-----------
Total Expenses....................................................... 466,639
Less: Fee waivers and reimbursements..................................... (109,799)
-----------
Total Net Expenses....................................................... 356,840
-----------
NET INVESTMENT INCOME.................................................... 1,877,912
NET REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investment transactions.......................... 63,577
Net change in unrealized depreciation on investments................... (691,865)
-----------
Net realized/unrealized (losses) on investments.......................... (628,288)
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................... $1,249,624
===========
</TABLE>

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

(a) On September 1, 1996, the Corporate Bond Fund withdrew its investment from
the Master Investment Trust, Series I and invested directly in investment
securities.

See Notes to Financial Statements.

29
<PAGE> 31

PACIFIC HORIZON U.S. GOVERNMENT SECURITIES 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............................... $ 4,945,657 $ 5,736,176
Net realized gain (loss) on investment
transactions...................................... (1,656,989) 2,942,308
Net changes in unrealized appreciation/depreciation
on investments.................................... 682,024 (1,443,927)
------------ -------------
Change in net assets resulting from operations........ 3,970,692 7,234,557
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
A Shares.......................................... (4,941,264) (5,736,176)
K Shares (a)...................................... (4,394) --
Excess of net investment income
A Shares.......................................... (183,185) (70,303)
Tax return of capital
A Shares.......................................... (126,969) (295,885)
K Shares.......................................... (712) --
------------ -------------
Change in net assets from shareholder distributions... (5,256,524) (6,102,364)
------------ -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued......................... 8,846,354 117,170,124
Dividends reinvested................................ 3,659,415 4,090,811
Cost of shares redeemed............................. (25,808,410) (120,256,427)
------------ -------------
Change in net assets from capital share
transactions........................................ (13,302,641) 1,004,508
------------ -------------
Change in net assets.................................. (14,588,473) 2,136,701
NET ASSETS:
Beginning of year................................... 89,490,931 87,354,230
------------ -------------
End of year......................................... $ 74,902,458 $ 89,490,931
============ =============
</TABLE>

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

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

See Notes to Financial Statements.

30
<PAGE> 32

PACIFIC HORIZON CORPORATE 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................................... $ 1,877,912 $ 1,964,098
Net realized gains on investment transactions........... 63,577 1,346,714
Net change in unrealized appreciation on investments.... (691,865) 885,897
----------- -----------
Change in net assets from operations...................... 1,249,624 4,196,709
----------- -----------
DISTRIBUTION TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Net investment income
A Shares.............................................. (1,874,744) (1,964,098)
K Shares (a).......................................... (3,168) --
Excess of net investment income
A Shares.............................................. -- (95,000)
----------- -----------
Change in net assets from shareholder distributions....... (1,877,912) (2,059,098)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued............................. 8,896,314 4,789,390
Dividends reinvested.................................... 623,621 566,762
Cost of shares redeemed................................. (8,251,569) (6,478,258)
----------- -----------
Change in net assets from capital share transactions...... 1,268,366 (1,122,106)
----------- -----------
Change in net assets...................................... 640,078 1,015,505
NET ASSETS:
Beginning of year....................................... 32,387,414 31,371,909
----------- -----------
End of year............................................. $33,027,492 $32,387,414
=========== ===========
</TABLE>

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

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

See Notes to Financial Statements.

31
<PAGE> 33

PACIFIC HORIZON INTERMEDIATE BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
ASSETS:
Investment in Master Investment Trust, Series I --
Investment Grade Bond Portfolio, at value......................... $23,301,598
Receivable from Administrator....................................... 12,319
Deferred organization costs and prepaid expenses.................... 15,684
-----------
Total Assets.......................................................... 23,329,601
-----------
LIABILITIES:
Reports to shareholders expenses payable............................ 19,389
Fund accounting fees and expenses payable........................... 12,781
Audit fees payable.................................................. 12,517
Transfer agent fees payable......................................... 7,568
Other accrued expenses.............................................. 8,325
-----------
Total Liabilities..................................................... 60,580
-----------
NET ASSETS............................................................ $23,269,021
===========
Net Assets:
A Shares............................................................ $22,936,555
K Shares............................................................ 332,466
-----------
Total................................................................. $23,269,021
===========
Shares Outstanding ($0.001 par value, 150 million shares authorized)
A Shares............................................................ 2,403,740
K Shares............................................................ 34,851
-----------
Total................................................................. 2,438,591
===========
NET ASSET VALUE
A Shares -- redemption price per share.............................. $9.54
====
Maximum Sales Charge (A Shares)..................................... 4.50%
Maximum Offering Price (A Shares)
(Net Asset Value of A Shares/(100%-Maximum Sales Charge))........... $9.99
====
K Shares -- offering price per share................................ $9.54
====
COMPOSITION OF NET ASSETS:
Shares of common stock, at par...................................... $ 2,439
Additional paid-in capital.......................................... 23,550,900
Accumulated undistributed net investment income..................... 4,095
Accumulated net realized (losses) on investment transactions........ (160,488)
Net unrealized depreciation on investments.......................... (127,925)
-----------
NET ASSETS, FEBRUARY 28, 1997......................................... $23,269,021
===========
</TABLE>

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

32
<PAGE> 34

PACIFIC HORIZON INTERMEDIATE BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
INVESTMENT INCOME:
Investment Income from Master Investment Trust, Series I--
Investment Grade Bond Portfolio:
Interest Income....................................................... $1,000,293
Expenses.............................................................. $ 105,287
Less: Fee waivers and expense reimbursements.......................... (49,409)
---------
55,878
Net Investment Income from Master Investment Trust, Series I--Investment
Grade Bond Portfolio.................................................. 944,415
---------
EXPENSES:
Registration fees..................................................... 54,579
Shareholder service fees (A Shares)................................... 40,161
Shareholder service fees (K Shares)................................... 116
12b-1 fees (K Shares)................................................. 401
Administration fees................................................... 24,165
Transfer agent fees................................................... 24,581
Fund accounting fees and expenses..................................... 34,796
Reports to shareholders............................................... 30,151
Amortization of organization costs.................................... 29,930
Audit fees............................................................ 10,042
Legal fees............................................................ 1,616
Directors' fees....................................................... 216
Other operating expenses.............................................. 2,070
---------
Total Expenses...................................................... 252,824
Less: Fee waivers and reimbursements.................................... (187,292)
---------
Total Net Expenses...................................................... 65,532
---------
NET INVESTMENT INCOME................................................... 878,883
---------
REALIZED/UNREALIZED (LOSSES) ON INVESTMENTS FROM MASTER INVESTMENT
TRUST, SERIES I--INVESTMENT GRADE BOND PORTFOLIO
Net realized (losses) on investment transactions...................... (159,361)
Net change in unrealized depreciation on investments.................. (86,639)
---------
Net realized/unrealized (losses) on investments from Master investment
Trust Series I--Investment Grade Bond Portfolio....................... (246,000)
---------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $ 632,883
=========
</TABLE>

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

33
<PAGE> 35

PACIFIC HORIZON INTERMEDIATE 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.................................. $ 878,883 $ 406,486
Net realized gain (loss) on investment transactions.... (159,361) 154,841
Net change in unrealized depreciation on investments... (86,639) (58,037)
----------- -----------
Change in net assets resulting from operations......... 632,883 503,290
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
A Shares............................................. (874,813) (406,485)
K Shares (a)......................................... (4,070) --
Net realized gains from investment transactions
A Shares............................................. (93,821) (26,279)
K Shares (a)......................................... (7) --
----------- -----------
Change in net assets from shareholder distributions...... (972,711) (432,764)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued............................ 16,917,463 12,184,154
Dividends reinvested................................... 488,201 273,214
Cost of shares redeemed................................ (6,976,214) (1,312,597)
----------- -----------
Change in net assets from capital share transactions..... 10,429,450 11,144,771
----------- -----------
Change in net assets..................................... 10,089,622 11,215,297
NET ASSETS:
Beginning of year...................................... 13,179,399 1,964,102
----------- -----------
End of year............................................ $23,269,021 $13,179,399
=========== ===========
</TABLE>

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

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

See Notes to Financial Statements.

34
<PAGE> 36

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 U.S. Government
Securities Fund (the "U.S. Government Securities Fund"), the Pacific Horizon
Corporate Bond Fund (the "Corporate Bond Fund") and the Pacific Horizon
Intermediate Bond Fund (the "Intermediate 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 U.S. Government Securities Fund seeks to provide investors with a high
level of current income, consistent with preservation of capital. The U.S.
Government Securities Fund does so by investing primarily in instruments issued
by the Government National Mortgage Association. The Corporate Bond Fund seeks
to provide investors with high current income consistent with reasonable
investment risk. The Corporate Bond Fund invests primarily in a diversified
portfolio of investment grade corporate debt securities. The Intermediate Bond
Fund seeks to achieve its investment objective by investing substantially all of
its assets in the Investment Grade Bond Portfolio (the "Portfolio") of the
Master Investment Trust, Series I (the "Trust"), an open-end management
investment company, that has the same investment objectives as that of the Fund.
The value of the Intermediate Bond Fund's investment in the Portfolio included
in the accompanying Statement of Assets and Liabilities reflects the
Intermediate Bond Fund's proportionate beneficial interest in the net assets of
the Portfolio (16.7% at February 28, 1997). The financial statements of the
Portfolio, including its portfolio of investments, are included elsewhere within
this report and should be read in conjunction with the Intermediate Bond Fund's
financial statements.

Prior to September 1, 1996, the Corporate Bond Fund sought to achieve its
investment objective by investing substantially all of its assets in the
Corporate Bond Portfolio of the Trust, which had the same investment objective
as that of the Fund. Effective September 1, 1996, the Fund withdrew its
investment in the Corporate Bond 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 U.S. Government
Securities Fund and the Corporate Bond Fund's investment adviser. The BISYS
Group, Inc. ("BISYS"), through

35
<PAGE> 37

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 its 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.

PORTFOLIO VALUATIONS:

The U.S. Government Securities Fund and the Corporate Bond Fund value
portfolio securities (other than debt securities with remaining maturities of 60
days or less) at the last reported sales price on the securities exchange on
which such securities are primarily traded or at the last sales price on the
NASDAQ National Securities Market. Securities not listed on an exchange or the
NASDAQ National Securities Market or securities for which there were no
transactions are valued at the mean between the current quoted bid and ask
prices on the date of valuation. Bid price is used when no ask price is
available. The Funds may also use an independent pricing service, approved by
the Board of Directors, to value certain of their securities. Such prices
reflect market values which may be established through the use of electronic
data processing techniques and matrix systems. Restricted securities and
securities for which market quotations are not readily available, if any, are
valued at fair value using methods approved by the Board of Directors. Debt
securities with remaining maturities of 60 days or less are valued at amortized
cost.

The valuation of securities of the Intermediate Bond Fund's investment in
the Portfolio is discussed in Note 2 to the Portfolio's financial statements.

SECURITIES TRANSACTIONS AND RELATED INCOME:

The U.S. Government Securities Fund and Corporate Bond Fund record security
transactions on a trade date basis. Interest income, including accretion of
discount and amortization of premium, is accrued daily. Dividend income is
recognized on the ex-dividend date. Realized gains and losses from security
transactions are recorded on the identified cost basis.

The Intermediate Bond Fund records its share of the investment income,
expenses and realized and unrealized gains and losses recorded by the Portfolio
on a daily basis. The investment income, expenses and realized and unrealized
gains and losses are allocated daily

36
<PAGE> 38

to investors in the Portfolio based upon the value of their investments in the
Portfolio. Such investments are adjusted on a daily basis.

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 Intermediate Bond Fund incurred certain costs in connection with its
organization. Such costs have been deferred and are being amortized on a
straight-line basis over five years.

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

The Funds' net investment income is declared daily and paid monthly as a
dividend 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 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.

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.

37
<PAGE> 39

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
UNDISTRIBUTED ACCUMULATED NET
NET INVESTMENT REALIZED GAIN/(LOSS)
INCOME ON INVESTMENTS
-------------- --------------------
<S> <C> <C>
U.S. Government Securities Fund............... $106,874 $ (6,926)
Corporate Bond Fund........................... 66,324 738,059
Intermediate Bond Fund........................ 4,095 (4,095)
</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.

At February 28, 1997, the U.S. Government Securities Fund, the Corporate
Bond Fund and the Intermediate Bond Fund had the following net capital loss
carryovers:

<TABLE>
<CAPTION>
CAPITAL LOSS EXPIRATION
FUND CARRYOVER DATE
- ---------------------------------------------------------- ------------ ----------
<S> <C> <C>
U.S. Government Securities................................ $8,325,087 2003
1,663,915 2005
------------
$9,989,002
===========
Corporate Bond Fund....................................... $ 442,467 1998
5,401,993 1999
882,649 2003
------------
$6,727,109
===========
Intermediate Bond Fund.................................... $ 160,488 2005
===========
</TABLE>

To the extent that these carryovers are used to offset future capital gains,
it is probable that the gains so offset will not be distributed to shareholders.
During the year the Corporate Bond Fund utilized $89,829 of its available
capital loss carryover to offset realized capital gains for federal income tax
purposes, while capital loss carryovers of $738,058 expired.

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
Corporate Bond Fund has incurred and will elect to defer such capital losses of
$26,252 after October 31, 1996.

38
<PAGE> 40

OTHER:

The U.S. Government Securities Fund maintains a cash balance with its
custodian and receives a reduction of its 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 $15,267. There was no effect on
net investment income. The Fund could have invested such cash amounts in an
income producing asset if it had not agreed to a reduction of fees or expenses
under the expense offset arrangement with its custodian.

NOTE 3 -- AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES

The U.S. Government Securities Fund and Corporate Bond Fund have an
Investment Advisory Agreement with Bank of America and the Funds have 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 U.S. Government Securities Fund and
Corporate Bond Fund, which is accrued daily and payable monthly, at an annual
rate of 0.35% and 0.45% of the U.S. Government Securities Fund's and Corporate
Bond Fund's respective average daily net assets. For the year ended February 28,
1997, Bank of America agreed to waive $134,763 and $129,971 for the U.S.
Government Securities Fund and Corporate Bond Fund, respectively. Pursuant to
the terms of the Administration Agreement, BISYS is entitled to a fee, which is
accrued daily and payable monthly, at an annual rate of 0.20%, 0.15% and 0.15%
of the average daily net assets of the U.S. Government Securities Fund,
Corporate Bond Fund, and Intermediate Bond Fund, respectively. For the year
ended February 28, 1997, BISYS agreed to waive $77,220, $56,709 and $24,165 of
its fee as Administrator for the U.S. Government Securities Fund, Corporate Bond
Fund and Intermediate Bond Fund, respectively. For the same period, Bank of
America and BISYS reimbursed $93,097, $297 and $146,716 of operating expenses of
the U.S. Government Securities Fund, Corporate Bond Fund and Intermediate Bond
Fund, respectively.

For the year ended February 28, 1997, the Distributor advised the Funds that
it retained $19,990, $11,522, and $10,026, respectively, from commissions earned
on sales of the U.S. Government Securities Fund, the Corporate Bond Fund and the
Intermediate Bond Fund's shares, respectively. For the same period, Bank of
America and its affiliates advised the Funds that they retained $161,482,
$90,340, and $82,259 from commissions earned on sales of shares of the U.S.
Government Securities Fund, Corporate Bond Fund, and Intermediate Bond Fund,
respectively.

The Funds have a Shareholder Services Plan (the "Plan") under which each
Fund pays the Distributor for shareholder servicing expenses incurred in
connection with A Shares of each Fund. 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,

39
<PAGE> 41

1997, the U.S. Government Securities Fund, Corporate Bond Fund, and Intermediate
Bond Fund incurred charges of $202,413, $77,972, and $40,161, respectively,
pursuant to the Plan. The Funds were advised that of these amounts, the
Distributor retained $7,966, $54,333, and $1,045, from the U.S. Government
Securities Fund, Corporate Bond Fund, and Intermediate Bond Fund, respectively,
and affiliates of Bank of America retained $185,292, $9,525, and $18,409,
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,
BISYS waived $16,286 for the Intermediate 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 distribution expenses may not
exceed 0.75% of the average daily net assets of each Fund's 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. For the year ended
February 28, 1997, $170 and $125 of shareholder services and administrative
services were waived by the U.S. Government Securities Fund and the Intermediate
Bond Fund, respectively.

BISYS Ohio serves the Funds as transfer agent and dividend disbursing agent.
In these capacities, BISYS Ohio earned $119,737, $71,692, and $24,581 from the
U.S. Government Securities Fund, Corporate Bond Fund, and Intermediate 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 $28,865, $20,039, and $9,171 for the U.S. Government
Securities Fund, Corporate Bond Fund, and the Intermediate Bond Fund,
respectively.

For the year ended February 28, 1997, the U.S. Government Securities Fund,
Corporate Bond Fund, and Intermediate Bond Fund incurred legal charges totaling
$1,319, $7,400, and $1,616, respectively, which were earned by a law firm, a
partner of which serves as Secretary of the Company.

40
<PAGE> 42

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 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 $1,095 and $7, for the U.S. Government Securities Fund and
Intermediate 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 U.S. Government Securities Fund portfolio securities (excluding
short-term investments) amounted to $89,458,415 and $92,937,277, respectively.
The cost of purchases and the proceeds from sales of Corporate Bond Fund
portfolio securities (excluding short-term investments) amounted to $19,201,349
and $17,465,309, respectively.

41
<PAGE> 43

NOTE 6 -- CAPITAL SHARE TRANSACTIONS

Transactions in capital shares for the Funds are summarized below:

<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES 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......................................... 909 $ 8,426 11,393 $ 117,170
Reinvested..................................... 394 3,657 433 4,091
Redeemed....................................... (2,780) (25,808) (11,722) (120,256)
--------- ---------- --------- ----------
Net increase/(decrease)......................... (1,477) $ (13,725) 104 $ 1,005
========= ========== ========= ==========
K Shares (a)
Issued......................................... 44,725 $ 420,128 -- $ --
Reinvested..................................... 244 2,282 -- --
Redeemed....................................... (50) (465) -- --
--------- ---------- --------- ----------
Net increase.................................... 44,919 $ 421,945 -- $ --
========= ========== ========= ==========
</TABLE>

<TABLE>
<CAPTION>
CORPORATE 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........................................ 549 $ 8,657 299 $ 4,789
Reinvested.................................... 40 622 33 567
Redeemed...................................... (525) (8,251) (406) (6,478)
--------- ---------- --------- ----------
Net increase/(decrease)........................ 64 $ 1,028 (74) $ (1,122)
========= ========== ========= ==========
K Shares (a)
Issued........................................ 14,923 $ 238,773 -- $ --
Reinvested.................................... 135 2,144 -- --
Redeemed...................................... (35) (561) -- --
--------- ---------- --------- ----------
Net increase................................... 15,023 $ 240,356 -- $ --
========= ========== ========= ==========
</TABLE>

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

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

42
<PAGE> 44

<TABLE>
<CAPTION>
INTERMEDIATE 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........................................ 1,730 $ 16,588 1,249 $ 12,184
Reinvested.................................... 51 485 28 273
Redeemed...................................... (728) (6,976) (134) (1,312)
--------- ---------- --------- ----------
Net increase................................... 1,053 $ 10,097 1,143 $ 11,145
========= ========== ========= ==========
K Shares (a)
Issued........................................ 34,567 $ 329,738 -- $ --
Reinvested.................................... 285 2,728 -- --
Redeemed...................................... (1) (1) -- --
--------- ---------- --------- ----------
Net increase................................... 34,851 $ 332,465 -- $ --
========= ========== ========= ==========
</TABLE>

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

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

NOTE 7 -- FEDERAL INCOME TAX INFORMATION (UNAUDITED)

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

<TABLE>
<S> <C>
Intermediate Bond Fund..................................................... $14,797
</TABLE>

43
<PAGE> 45

PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 29, 28, 28, 28,
1997(B) 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
A SHARES
NET ASSET VALUE PER SHARE,
BEGINNING OF YEAR............... $ 9.43 $ 9.31 $ 9.85 $ 10.21 $ 10.22
-------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income........... 0.59 0.61 0.55 0.45 0.70
Net realized and unrealized
gains (losses) on investment
transactions.................. (0.12) 0.16 (0.54) (0.11) 0.37
-------- -------- -------- -------- --------
Total income from investment
operations...................... 0.47 0.77 0.01 0.34 1.07
-------- -------- -------- -------- --------
Less Dividends and Distributions:
Dividends to shareholders from
net investment income......... (0.59) (0.61) (0.52) (0.45) (0.70)
Distributions to shareholders
from net realized gains on
investment transactions....... -- (0.01) -- (0.16) (0.38)
Tax return of capital........... (0.01) (0.03) (0.03) (0.09)
-------- -------- -------- -------- --------
Total Dividends and
Distributions:.................. (0.60) (0.65) (0.55) (0.70) (1.08)
-------- -------- -------- -------- --------
Net change in net asset value per
share........................... (0.13) 0.12 (0.54) (0.36) (0.01)
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR............................ $ 9.30 $ 9.43 $ 9.31 $ 9.85 $ 10.21
======== ======== ======== ======== ========
Total return (excludes sales
charge)......................... 5.23% 8.47% 0.30% 3.40% 10.92%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(000)......................... $ 74,485 $ 89,491 87,354 $157,984 $119,127
Ratio of expenses to average net
assets........................ 0.85% 1.15% 1.15% 0.96% 0.51%
Ratio of net investment income
to average net assets......... 6.11% 6.36% 5.57% 4.45% 6.80%
Ratio of expenses to average net
assets*....................... 1.25%** 1.26%** (a) 1.00% 1.10%
Ratio of net investment income
to average net assets*........ 5.71% 6.28% (a) 4.41% 6.21%
Portfolio turnover rate......... 94% 137% 189% 255% 252%
</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.
** During the years ended February 28, 1997 and February 29, 1996, 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) There were no waivers or reimbursements during the period.
(b) As of July 22, 1996, the Portfolio designated the existing series of shares
as "A" Shares.

See Notes to Financial Statements.

44
<PAGE> 46

PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997(A)
------------
<S> <C>
K SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD........................ $ 9.22
--------
Income from Investment Operations:
Net investment income............................................... 0.35
Net realized and unrealized gains on investment transactions........ 0.08
--------
Total income from investment operations............................... 0.43
Less dividends to shareholders from net investment income............. (0.35)
--------
Net change in net asset value per share............................... 0.08
--------
NET ASSET VALUE PER SHARE, END OF PERIOD.............................. $ 9.30
========
Total return.......................................................... 4.75%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)..................................... $ 418
Ratio of expenses to average net assets............................. 1.35%(c)
Ratio of net investment income to average net assets................ 6.11%(c)
Ratio of expenses to average net assets*............................ 2.06%(c)**
Ratio of net investment income to average net assets*............... 5.73%(c)
Portfolio turnover rate............................................. 94%
</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.

** During the years ended February 28, 1997 and February 29, 1996, 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) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Not annualized.
(c) Annualized.

See Notes to Financial Statements.

45
<PAGE> 47

PACIFIC HORIZON CORPORATE BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
FOR THE
PERIOD
OCTOBER
1,
YEAR ENDED 1994 YEAR ENDED
------------------------ THROUGH ---------------------------------------
FEBRUARY FEBRUARY FEBRUARY SEPTEMBER SEPTEMBER SEPTEMBER
28, 29, 28, 30, 30, 30,
1997 1996(A) 1995 1994(B) 1993(C) 1992(C)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
A SHARES
NET ASSET VALUE PER SHARE,
BEGINNING OF YEAR.............. $ 16.09 $ 15.03 $ 14.86 $ 16.94 $ 16.12 $ 15.22
-------- -------- -------- -------- --------
Income from Investment
Operations
Net investment income.......... 0.93 0.98 0.45 1.58 1.34 1.48
Net realized and unrealized
gains/(losses) on investment
transactions................. (0.30) 1.11 0.17 (2.06) 0.82 0.95
-------- -------- -------- -------- --------
Total income/(loss) from
investment operations.......... 0.63 2.09 0.62 (0.48) 2.16 2.43
-------- -------- -------- -------- --------
Less Dividends and
Distributions:
Dividends to shareholders from
net investment income........ (0.93) (0.98) (0.45) (1.58) (1.34) (1.53)
Distributions to shareholders
from net realized gains on
investment transactions...... -- (0.05) -- (0.02) -- --
-------- -------- -------- -------- --------
Total Dividends and
Distributions.................. (0.93) (1.03) (0.45) (1.60) 1.34 (1.53)
-------- -------- -------- -------- --------
Net change in net asset value
per share...................... (0.30) 1.06 0.17 (2.08) 0.82 0.90
-------- -------- -------- -------- --------
NET ASSET VALUE PER SHARE, END
OF YEAR........................ $ 15.79 $ 16.09 $ 15.03 $ 14.86 $ 16.94 $ 16.12
======== ======== ======== ======== ========
Total return (excludes sales
charge)........................ 4.13% 14.12% 4.26% (2.29%) 7.05% 13.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year
(000)........................ $ 32,842 $ 32,387 $ 31,372 $ 33,046 $ 46,999 $ 44,642
Ratio of expenses to average
net assets*.................. 1.27% 1.33% 1.04%(d) 0.91% 1.02% 1.09%
Ratio of net investment income
to average net assets*....... 6.01% 6.12% 7.32%(d) 7.85% 8.14% 9.42%
Portfolio turnover rate **..... 59% N/A N/A N/A 154.34% 251.97%
</TABLE>

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

* Reflects the Fund's proportionate share of the Portfolio's expenses and fee
waivers and expense reimbursements by the Portfolio's Investment Advisor and
Administrator and the Fund's Administrator and Distributor. Such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 0.61% for the period ended February 28, 1997 and 0.90%
(annualized) for the periods ended February 29, 1996 and February 28, 1995
and 0.16% for the period ended February 28, 1994, respectively.
** Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(a) As of July 22, 1996, the Portfolio designated the existing series of shares
as "A" Shares.
(b) Includes the results of operations of Bunker Hill Income Securities, Inc.
and the Fund.
(c) The financial highlights for the years ended September 30, 1993 and 1992 are
for the Bunker Hill Income Securities Inc., a closed-end fund.
(d) Annualized.

See Notes to Financial Statements.

46
<PAGE> 48

PACIFIC HORIZON CORPORATE BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997(A)
------------
<S> <C>
K SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD........................ $15.56
--------
Income from Investment Operations Net investment income............... 0.53
Net realized and unrealized gains on investment transactions........ 0.24
--------
Total income from investment operations............................... 0.77
--------
Less Dividends and Distributions:
Dividends to shareholders from net investment income................ (0.53)
Distributions to shareholders from net realized gains on investment
transactions...................................................... --
--------
Total Dividends and Distributions..................................... (0.53)
--------
Net change in net asset value per share............................... 0.24
--------
NET ASSET VALUE PER SHARE, END OF PERIOD.............................. $15.80
========
Total return.......................................................... 5.01%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (000)..................................... $ 237
Ratio of expenses to average net assets............................. 1.64%(c)
Ratio of net investment income to average net assets................ 5.60%(c)
Ratio of expenses to average net assets*............................ 2.25%(c)
Ratio of net investment income to average net assets*............... 4.99%(c)
Portfolio turnover rate**........................................... 59%
</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.

** Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(a) Period from July 22, 1996 (inception date) to February 28, 1997.
(b) Not annualized.
(c) Annualized.

See Notes to Financial Statements.

47
<PAGE> 49

PACIFIC HORIZON INTERMEDIATE BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 29, 28, 28,
1997(B) 1996 1995 1994(A)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
A SHARES
NET ASSET VALUE PER SHARE,
BEGINNING OF YEAR................ $ 9.75 $ 9.44 $ 9.81 $ 10.00
-------- -------- -------- --------
Income from Investment Operations:
Net investment income............ 0.52 0.59 0.59 0.08
Net realized and unrealized gain
(loss) on investment
transactions................... (0.15) 0.33 (0.37) (0.19)
-------- -------- -------- --------
Total income (loss) from investment
operations....................... 0.37 0.92 0.22 (0.11)
-------- -------- -------- --------
Less Dividends and Distributions:
Dividends to shareholders from
net investment income.......... (0.52) (0.59) (0.59) (0.08)
Distributions to shareholders
from net realized gains on
investment transactions........ (0.06) (0.02) -- --
-------- -------- -------- --------
Total Dividends and
Distributions.................... (0.58) (0.61) (0.59) (0.08)
-------- -------- -------- --------
Net change in net asset value per
share............................ (0.21) 0.31 (0.37) (0.19)
-------- -------- -------- --------
NET ASSET VALUE PER SHARE, END OF
YEAR............................. $ 9.54 $ 9.75 $ 9.44 $ 9.81
======== ======== ======== ========
Total return (excludes sales
charge).......................... 3.92% 10.45% 2.27% (1.10%)++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).... $ 22,937 $ 13,179 $ 1,964 $ 356
Ratio of expenses to average net
assets......................... 0.75% 0.27% 0.00% 0.00%+
Ratio of net investment income to
average net assets............. 5.45% 6.13% 6.43% 5.70%+
Ratio of expenses to average net
assets*........................ 2.26% 5.00% 17.95% 160.20%+
Ratio of net investment income
(loss) to average net
assets*........................ 3.94% 1.40% (11.52%) (154.50%)+
</TABLE>

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

* During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had
not occurred, the ratios would have been as indicated.
+ Annualized.
++ Not annualized.
(a) Period from January 13, 1994 (inception date) to February 28, 1994.
(b) As of July 22, 1996 the Fund designated the existing series of shares as "A"
shares.

See Notes to Financial Statements.

48
<PAGE> 50

PACIFIC HORIZON INTERMEDIATE BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997 (A)
------------
<S> <C>
K SHARES
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD........................ $ 9.53
Income from Investment Operations:
Net investment income............................................... 0.31
Net realized and unrealized gain on investments..................... 0.07
--------
Total income from investment operations............................... 0.38
--------
Less Dividends and Distributions:
Dividends to shareholders from net investment income................ (0.31)
Distributions to shareholders from net realized gains on
investments....................................................... (0.06)
--------
Total Dividends and Distributions..................................... (0.37)
--------
Net change in net asset value per share............................... 0.01
--------
NET ASSET VALUE PER SHARE, END OF PERIOD.............................. $ 9.54
========
Total return.......................................................... 3.73%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................................... $ 332
Ratio of expenses to average net assets............................. 1.43%+
Ratio of net investment income to average net assets................ 5.41%+
Ratio of expenses to average net assets*............................ 2.71%+
Ratio of net investment income to average net assets*............... 4.13%+
</TABLE>

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

(a) Period from July 22, 1996 (inception date) to February 28, 1997.
+ Annualized.
++ Not annualized.

See Notes to Financial Statements.

49
<PAGE> 51

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

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 the Pacific Horizon U.S. Government
Securities Fund, Pacific Horizon Corporate Bond Fund and Pacific Horizon
Intermediate Bond Fund (three of the portfolios constituting 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 and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, 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> 52

MASTER INVESTMENT TRUST, SERIES I --
INVESTMENT GRADE BOND PORTFOLIO
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
RATINGS
S&P/MOODY'S MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ------------------------------ ------------ ------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ASSET-BACKED SECURITIES -- 7.4%
Contimortgage Home Equity.... AAA/Aaa 6.60% 10/15/11 $2,000,000 $ 1,975,607
Nationsbank Credit Card
Master..................... AAA/Aaa 6.45% 04/15/03 2,700,000 2,703,520
Standard Credit Card Master.. AAA/Aaa 7.85% 02/07/02 2,500,000 2,588,630
The Money Store.............. AAA/Aaa 7.07% 12/15/16 2,000,000 2,015,625
The Money Store Trust
1996 -- B.................. AAA/Aaa 7.38% 05/15/17 1,000,000 1,012,583
------------
Total Asset-Backed Securities
(cost $10,379,814)........... 10,295,965
------------
CORPORATE BONDS -- 8.2%
Eaton Off Shore Ltd.+........ A/A2 9.00% 02/15/01 4,500,000 4,848,750
General Motors............... A-/A3 6.88% 07/15/01 2,000,000 2,002,500
Household Finance Co. ....... A/A2 6.45% 03/15/01 2,000,000 1,982,500
Texas Instruments............ A/A3 6.88% 07/15/00 2,500,000 2,518,750
------------
Total Corporate Bonds
(cost $11,439,260)........... 11,352,500
------------
EUROPEAN GOVERNMENT BONDS -- 1.8%
Republic of Italy Z.C.B+
(cost $2,536,075)............ AA/Aa3 0.00% 01/10/01 3,300,000 2,557,484
------------
MEDIUM TERM NOTES -- 21.2%
Associates Corp. N.A. ....... AA-/Aa3 6.35% 06/29/00 3,000,000 2,977,500
General Motors............... A-/A3 7.38% 04/25/00 3,000,000 3,060,000
Heller Financial............. BBB+/A2 6.88% 09/13/99 3,000,000 3,022,500
International Lease
Finance+................... A+/A1 6.18% 06/01/00 4,500,000 4,432,500
John Deere................... A/A2 5.76% 01/08/01 5,000,000 4,850,000
McDonnell Douglas Finance
Corp. ..................... A-/Baa2+ 6.05% 12/06/99 2,000,000 1,965,000
PaineWebber Group............ BBB+/Baa1 7.31% 08/09/00 3,000,000 3,041,250
Sears Roebuck Co. ........... A-/A2 6.58% 06/15/00 2,000,000 1,992,500
USL Capital Corp. ........... A+/A1 8.13% 02/15/00 4,000,000 4,145,000
------------
Total Medium Term Notes
(cost $29,712,091)........... 29,486,250
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 2.7%
Federal Home Loan Mortgage
Corp. Pool #160034......... 8.50% 12/01/07 62,311 65,154
Federal Home Loan Mortgage
Corp. Pool #549837......... 8.00% 07/01/10 192,547 198,505
Federal Home Loan Mortgage
Corp. Pool #284343......... 8.00% 12/01/16 9,209 9,448
Federal Home Loan Mortgage
Corp. Pool #297505......... 8.00% 06/01/17 17,858 18,400
Federal National Mortgage
Association Pool #3023528.. 6.00% 08/01/01 2,127,442 2,067,607
Federal National Mortgage
Association Pool #131579 .. 6.50% 07/01/04 141,889 134,883
Federal National Mortgage
Association Pool #286087... 8.00% 06/01/24 748,784 763,526
</TABLE>

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

51
<PAGE> 53

<TABLE>
<CAPTION>
RATINGS
S&P/MOODY'S MATURITY PRINCIPAL VALUE
DESCRIPTION (UNAUDITED) RATE DATE AMOUNT (NOTE 2)
- ------------------------------ ------------ ------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- (CONTINUED)
Government National Mortgage
Association
Pool #136688............... 10.00% 09/15/15 $ 26,058 $ 28,786
Government National Mortgage
Association
Pool #166744............... 10.00% 07/15/16 261,117 288,454
Government National Mortgage
Association
Pool #209480............... 10.00% 07/15/17 79,571 87,902
Government National Mortgage
Association
Pool #227082............... 10.00% 08/15/17 112,422 124,192
------------
Total U.S. Government Agency Obligations
(cost $3,752,039)............ 3,786,857
------------
U.S. TREASURY BOND -- 3.3%
U.S. Treasury Bond
(cost $4,873,362)............ 10.38% 11/15/09 3,800,000 4,649,414
------------
U.S. TREASURY NOTES -- 51.6%
U.S. Treasury Note .......... 7.75%* 11/30/99 4,500,000 4,670,415
U.S. Treasury Note .......... 7.75%* 01/31/00 18,500,000 19,236,483
U.S. Treasury Note .......... 5.88%* 06/30/00 17,000,000 16,799,400
U.S. Treasury Note .......... 5.63%* 11/30/00 22,500,000 21,976,200
U.S. Treasury Note .......... 7.88%* 11/15/04 5,500,000 5,937,799
U.S. Treasury Note .......... 7.00%* 07/15/06 3,000,000 3,082,710
------------
Total U.S. Treasury Notes
(cost $71,768,176) 71,703,007
------------
COMMERCIAL PAPER -- 2.8%
Philip Morris................
(cost $3,910,000)............ AAA/Aaa 5.36% 03/03/97 3,910,000 3,910,000
------------
TOTAL INVESTMENTS -- 99.0%
(cost $138,370,817)(a)....... 137,741,477
Other assets in excess of
liabilities -- 1.0%........ 1,415,442
------------
NET ASSETS -- 100.0% $139,156,919
============
</TABLE>

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

Percentages indicated are based on net assets of $139,156,919.

(a) Represents cost for federal income tax and book purposes and differs from
value by net unrealized depreciation of securities as follows:

<TABLE>
<S> <C>
Unrealized appreciation.................................................... $ 380,170
Unrealized depreciation.................................................... (1,009,510)
-----------
Net unrealized depreciation................................................ $ (629,340)
===========
</TABLE>

Z.C.B. -- Zero Coupon Bond.

+ Foreign issuer

* Effective yield

See Notes to Financial Statements.

52
<PAGE> 54

MASTER INVESTMENT TRUST, SERIES I --
INVESTMENT GRADE BOND PORTFOLIO
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $138,370,817)............. $137,741,477
Cash................................................................ 28,324
Contribution receivable............................................. 129,051
Interest receivable................................................. 1,810,436
Deferred organization costs......................................... 24,236
Prepaid expenses.................................................... 1,113
------------
Total Assets.......................................................... 139,734,637
============
LIABILITIES:
Withdrawal payable.................................................. 484,123
Advisory fees payable............................................... 31,710
Audit fees payable.................................................. 29,875
Fund accounting fees payable........................................ 11,883
Custodian fees payable.............................................. 4,309
Legal fees payable.................................................. 5,311
Administration fees payable......................................... 3,380
Other accrued expenses.............................................. 7,127
------------
Total Liabilities..................................................... 577,718
------------
NET ASSETS, FEBRUARY 28, 1997......................................... $139,156,919
============
</TABLE>

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

53
<PAGE> 55

MASTER INVESTMENT TRUST, SERIES I --
INVESTMENT GRADE BOND PORTFOLIO
- --------------------------------------------------------------------------------

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

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income....................................................... $ 5,908,449
------------
EXPENSES:
Advisory fees......................................................... 428,287
Administration fees................................................... 47,588
Fund accounting fees and expenses..................................... 66,719
Audit fees............................................................ 34,602
Custodian fees and expenses........................................... 14,502
Legal fees............................................................ 6,797
Trustees' fees........................................................ 4,660
Amortization of organization costs.................................... 13,860
Other operating expenses.............................................. 513
------------
Total Expenses.................................................... 617,528
Less: Fee waivers..................................................... (284,947)
------------
Total Net Expenses...................................................... 332,581
------------
NET INVESTMENT INCOME................................................... 5,575,868
------------
NET REALIZED/UNREALIZED (LOSSES) ON INVESTMENTS:
Net realized (losses) on investment transactions...................... (535,492)
Net change in unrealized (depreciation) on investments................ (681,210)
------------
Net realized/unrealized (losses) on investments......................... (1,216,702)
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $ 4,359,166
============
</TABLE>

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

54
<PAGE> 56

MASTER INVESTMENT TRUST, SERIES I --
INVESTMENT GRADE BOND PORTFOLIO
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
<S> <C> <C>
INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income.................................... $ 5,575,868 $ 3,879,980
Net realized gains (losses) on securities transactions... (535,492) 2,336,008
Net change in unrealized depreciation on investments..... (681,210) (247,652)
------------ ------------
Change in net assets resulting from operations............ 4,359,166 5,968,336
------------ ------------
TRUST SHARE TRANSACTIONS:
Contributions............................................ 94,643,822 21,358,278
Withdrawals.............................................. (26,135,644) (18,755,421)
------------ ------------
Change in net assets resulting from trust
share transactions....................................... 68,508,178 2,602,857
------------ ------------
Change in net assets...................................... 72,867,344 8,571,193
NET ASSETS:
Beginning of year........................................ 66,289,575 57,718,382
------------ ------------
End of year.............................................. $139,156,919 $66,289,575
============ ============
</TABLE>

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

55
<PAGE> 57

MASTER INVESTMENT TRUST, SERIES I--
INVESTMENT GRADE BOND PORTFOLIO
- --------------------------------------------------------------------------------

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

NOTE 1 -- ORGANIZATION

Master Investment Trust, Series I (the "Trust"), a Delaware business trust,
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 Trust
consisted of three portfolios. The accompanying financial statements and notes
are those of the Investment Grade Bond Portfolio (the "Portfolio") only.

The investment objective of the Investment Grade Bond Portfolio is to obtain
interest income and capital appreciation by investing in investment grade
intermediate and longer term bonds, including corporate and governmental fixed
income obligations and mortgage-backed securities.

Bank of America National Trust and Savings Association ("Bank of America"),
a subsidiary of BankAmerica Corporation, serves as the Portfolio's investment
adviser. The BISYS Group, Inc. through its wholly owned subsidiary, BISYS Fund
Services, Limited Partnership ("BISYS") serves as the Portfolio's administrator.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed by
the Portfolio in the preparation of its 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 in the financial statements. Actual
results could differ from those estimates.

PORTFOLIO VALUATIONS:

Securities for which market quotations are readily available (other than
debt securities with remaining maturities of 60 days or less) are valued at the
last reported sales price on the securities exchange on which such securities
are primarily traded or at the last reported sales price on the NASDAQ National
Securities Market. Securities not listed on an exchange or the NASDAQ National
Securities Market, or securities for which there were no transactions on the day
of valuation, are valued at the mean of the most recent bid and ask prices. Bid
price is used when no ask price is available. The Portfolio may use an
independent pricing service, approved by the Board of Trustees, to value certain
of their securities. Such prices reflect market values which may be established
through the use of electronic data processing techniques and matrix systems.
Restricted securities and securities for which market quotations are not readily
available, if any, are valued at fair value using methods approved by the Board
of Trustees.

56
<PAGE> 58

Debt securities with remaining maturities of 60 days or less are valued at
amortized cost, which approximates market value.

SECURITIES TRANSACTIONS AND RELATED INCOME:

Securities transactions are accounted for on a trade date basis. Interest
income, including accretion of discount and amortization of premium, is accrued
daily. Realized gains and losses on securities transactions are determined on
the identified cost basis.

EXPENSES:

Expenses directly attributable to a Portfolio are charged to that Portfolio,
while general Trust expenses are allocated among the respective portfolios of
the Trust.

FEDERAL INCOME TAXES:

The Portfolio will be treated as a partnership for federal income tax
purposes. As such, each investor in the Portfolio will be taxed on their share
of that Portfolio's ordinary income and capital gains. It is intended that the
Portfolio will be managed in such a way that an investor will be able to satisfy
the requirements of the Internal Revenue Code applicable to regulated investment
companies.

NOTE 3 -- AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES

The Portfolio has an Investment Advisory Agreement with Bank of America and
an Administration Agreement with BISYS.

As Adviser, Bank of America is responsible for managing the investment of
the assets of the Portfolio in conformity with the stated objectives and
policies of the Portfolio. Pursuant to the terms of the Investment Advisory
Agreement, Bank of America is entitled to a fee, accrued daily and paid monthly,
at an annual rate of 0.45% of the average daily net assets of the Portfolio. For
the year ended February 28, 1997, Bank of America waived $256,439 in fees as
Adviser of the Portfolio.

As Administrator, BISYS assists in supervising the operations of the
Portfolio. Pursuant to the terms of the Administration Agreement, BISYS is
entitled to a fee which is accrued daily and payable monthly, at an annual rate
of 0.05% of the Portfolio's average daily net assets. For the year ended
February 28, 1997, BISYS waived $28,508 in fees as Administrator of the
Portfolio.

For services provided to all three of the portfolios constituting the Trust,
each Trustee receives an annual fee of $3,000 and a meeting fee of $500 per
meeting.

For the year ended February 28, 1997, the Investment Grade Bond Portfolio
incurred legal expenses of $6,797, which was earned by a law firm, a partner of
which serves as Secretary of the Trust.

57
<PAGE> 59

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

NOTE 4 -- SECURITIES TRANSACTIONS

During the year ended February 28, 1997, the Portfolio purchased and sold
portfolio securities, excluding short-term securities, in the following amounts:

<TABLE>
<CAPTION>
PURCHASES SALES
------------ -----------
<S> <C> <C>
U.S. Government...................................................... $116,263,811 $52,673,446
Other................................................................ 32,420,943 23,288,268
------------ -----------
Total................................................................ $148,684,754 $75,961,714
============ ===========
</TABLE>

NOTE 5 -- CONCENTRATION OF CREDIT RISK

The Investment Grade Bond Portfolio had the following concentrations by
industry sector at February 28, 1997 (as a percentage of total investments):

<TABLE>
<S> <C>
Asset-Backed Securities.................................................................. 7.5
Commercial Paper......................................................................... 2.8
Corporate Bonds.......................................................................... 8.3
Euro Bonds............................................................................... 1.9
Medium Term Notes........................................................................ 21.4
U.S. Government Agency Obligations....................................................... 2.7
U.S. Treasury Bond....................................................................... 3.4
U.S. Treasury Notes...................................................................... 52.0
100.0%
=====
</TABLE>

58
<PAGE> 60

MASTER INVESTMENT TRUST SERIES I --
INVESTMENT GRADE BOND PORTFOLIO
- --------------------------------------------------------------------------------

Supplementary Data
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE FOR THE YEAR PERIOD
YEAR ENDED YEAR ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1997 1996 1995 1994*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Ratio of expenses to
average net assets....... 0.35% 0.18% 0.25% 0.41%**
Ratio of net investment
income to average net
assets................... 5.86% 6.47% 6.22% 4.93%**
Ratio of expenses to
average net assets (a)... 0.65% 0.68% 0.75% 0.91%**
Ratio of net investment
income to average net
assets (a)............... 5.56% 5.97% 5.72% 4.43%**
Portfolio Turnover......... 83% 172% 240% 32%
</TABLE>

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

<TABLE>
<C> <S>
(a) During the period, certain fees were voluntarily reduced and expenses
reimbursed. If such voluntary fee reductions and expense reimbursements had not
occurred, the ratios would have been as indicated.
* For the period December 6, 1993 ( commencement of operations) through February
28, 1994
** Annualized
</TABLE>

See Notes to Financial Statements.

59
<PAGE> 61

MASTER INVESTMENT TRUST, SERIES I
- --------------------------------------------------------------------------------

Report of Independent Accountants
- --------------------------------------------------------------------------------

To the Trustees
and Investors of
Master Investment Trust, Series I

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the supplementary data present fairly, in all material
respects, the financial position of Master Investment Trust, Series
I -- Investment Grade Bond Portfolio (the "Portfolio") at February 28, 1997, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and its supplementary data
for each of the periods presented, in conformity with generally accepted
accounting principles. These financial statements and supplementary data
(hereafter referred to as "financial statements") are the responsibility of the
Portfolio's 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 and brokers, provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

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

60
<PAGE> 62

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> 63
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 1

[LOGO]
PACIFIC HORIZON FUNDS

Concord Financial Group, Inc., Distributor

TFI-0007 4/97