EXCELSIOR FUNDS INC, 497, 1999-08-13

EXCELSIOR FUNDS INC
497, 1999-08-13

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EXCELSIOR FUNDS, INC.

Money Fund
Government Money Fund
Treasury Money Fund

EXCELSIOR TAX-EXEMPT FUNDS, INC.

Tax-Exempt Money Fund
New York Tax-Exempt Money Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1999

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the Money, Government Money
and Treasury Money Funds of Excelsior Funds, Inc. and the Tax-Exempt Money and
New York Tax-Exempt Money Funds of Excelsior Tax-Exempt Funds, Inc.
(individually, a "Fund" and collectively, the "Funds") dated August 1, 1999 (the
"Prospectus"). A copy of the Prospectus may be obtained by writing Excelsior
Funds, Inc. or Excelsior Tax-Exempt Funds, Inc. c/o Chase Global Funds Services
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.

The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 1999 are incorporated herein by reference in
the section entitled "Financial Statements." No other parts of the annual report
are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.

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TABLE OF CONTENTS

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CLASSIFICATION AND HISTORY.....................................................1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS....................................1
Additional Investment Policies........................................1
Additional Information on Portfolio Instruments.......................4
Special Considerations Relating To New York Municipal
Securities...........................................................13
Investment Limitations...............................................24
NET ASSET VALUE AND NET INCOME................................................28
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................29
Purchase Of Shares...................................................31
Redemption Procedures................................................33
Other Redemption Information.........................................35
INVESTOR PROGRAMS.............................................................36
Systematic Withdrawal Plan...........................................36
Exchange Privilege...................................................37
Retirement Plans.....................................................37
Automatic Investment Program.........................................38
Additional Information...............................................38
DESCRIPTION OF CAPITAL STOCK..................................................38
MANAGEMENT OF THE FUNDS.......................................................40
Directors And Officers...............................................40
Investment Advisory And Administration Agreements....................45
Banking Laws.........................................................47
Shareholder Organizations............................................48
Expenses.............................................................49
Custodian And Transfer Agent.........................................49
PORTFOLIO TRANSACTIONS........................................................50
INDEPENDENT AUDITORS..........................................................51
COUNSEL.......................................................................52
ADDITIONAL INFORMATION CONCERNING TAXES.......................................52
Generally............................................................52
Taxable Funds........................................................53
Tax-Exempt Funds.....................................................53
YIELD INFORMATION.............................................................54
MISCELLANEOUS.................................................................56
FINANCIAL STATEMENTS..........................................................57
APPENDIX A...................................................................A-1
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CLASSIFICATION AND HISTORY

Excelsior Funds, Inc. ("Excelsior Fund") and Excelsior Tax-Exempt
Funds, Inc. ("Excelsior Tax-Exempt Fund" and collectively with Excelsior Fund,
the "Companies") are open-end, management investment companies. The Money,
Government Money and Treasury Money Funds are separate series of Excelsior Fund.
The Tax-Exempt Money and New York Tax-Exempt Money Funds are separate series of
Excelsior Tax-Exempt Fund. The Money, Government Money, Treasury Money and
Tax-Exempt Money Funds are classified as diversified under the Investment
Company Act of 1940, as amended (the "1940 Act"). The New York Tax-Exempt Money
Fund is classified as non-diversified under the 1940 Act. Excelsior Fund and
Excelsior Tax-Exempt Fund were organized as Maryland corporations on August 2,
1984 and August 8, 1984, respectively. Prior to December 28, 1995, Excelsior
Fund and Excelsior Tax-Exempt Fund were known as "UST Master Funds, Inc." and
"UST Master Tax-Exempt Funds, Inc.," respectively. This Statement of Additional
Information pertains to the Shares ("Retail Shares") of all the Funds and the
Institutional Shares of the Money and Government Money Funds (collectively with
the Retail Shares, the "Shares").

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of each of the Money, Government Money and
Treasury Money Funds (collectively, the "Taxable Funds") and the Tax-Exempt
Money Fund may not be changed without the vote of the holders of a majority of
its outstanding Shares (as defined below). The investment objective of the New
York Tax-Exempt Money Fund may be changed without shareholder approval. Except
as expressly noted below, each Fund's investment policies may be changed without
shareholder approval.

As discussed below under "Net Asset Value and Net Income," each Fund
uses the amortized cost method to value securities in its portfolio. As such,
each Fund is required to comply with Rule 2a-7 under the 1940 Act. Under Rule
2a-7, with respect to 100% of each of the Money, Government Money, Treasury
Money and Tax-Exempt Money Funds' total assets, and 75% of the New York
Tax-Exempt Money Fund's total assets, a Fund may not invest more than 5% of its
assets, measured at the time of purchase, in the securities of any one issuer
other than U.S. government securities, repurchase agreements collateralized by
such securities and securities subject to certain guarantees. The New York
Tax-Exempt Money Fund's compliance with the diversification provisions of Rule
2a-7 is deemed to be compliance with the diversification standards of the 1940
Act.

ADDITIONAL INVESTMENT POLICIES

The Funds may only invest in: (i) securities in the two highest
short-term rating categories of a nationally recognized statistical rating
organization ("NRSRO"), provided that if a security is rated by more than one
NRSRO, at least two NRSROs must rate the security in one of the two highest
short-term rating categories; (ii) unrated securities determined to be of

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comparable quality at the time of purchase; (iii) certain money market fund
shares; and (iv) U.S. government securities (collectively, "Eligible
Securities"). The rating symbols of the NRSROs which the Funds may use are
described in the Appendix attached hereto.

TREASURY MONEY FUND

Under normal market conditions, the Treasury Money Fund will invest at
least 65% of its total assets in direct U.S. Treasury obligations, such as
Treasury bills and notes. The Fund may also from time to time invest in
obligations issued or guaranteed as to principal and interest by certain
agencies or instrumentalities of the U.S. government, such as the Farm Credit
System Financial Assistance Corporation, Federal Financing Bank, General
Services Administration, Federal Home Loan Banks, Farm Credit System and the
Tennessee Valley Authority. Income on direct investments in U.S. Treasury
securities and obligations of the aforementioned agencies and instrumentalities
is generally not subject to state and local income taxes by reason of federal
law. In addition, the Fund's dividends from income that is attributable to such
investments will also be exempt in most states from state and local income
taxes. Shareholders in a particular state should determine through consultation
with their own tax advisors whether and to what extent dividends payable by the
Treasury Money Fund from its investments will be considered by the state to have
retained exempt status, and whether the Fund's capital gain and other income, if
any, when distributed will be subject to the state's income tax.

TAX-EXEMPT MONEY AND NEW YORK TAX-EXEMPT MONEY FUNDS (THE "TAX-EXEMPT FUNDS")

The Tax-Exempt Money Fund will invest substantially all of its assets
in high-quality debt obligations determined by the Adviser to present minimal
credit risks. Such obligations will be issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their respective authorities, agencies, instrumentalities and political
subdivisions, the interest on which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax ("Municipal Securities"). As a matter of
fundamental policy, except during temporary defensive periods, the Fund will
maintain at least 80% of its assets in tax-exempt obligations. (This policy may
not be changed with respect to the Fund without the vote of the holders of a
majority of its outstanding Shares.) The Tax-Exempt Money Fund also may invest
in certain tax-exempt derivative instruments, such as floating rate trust
receipts.

Under normal market conditions, at least 80% of the New York
Tax-Exempt Money Fund's net assets will be invested in Municipal Securities
which are determined by the Adviser to present minimal credit risks. The Fund
may also invest in tax-exempt derivative securities such as tender option bonds,
participations, beneficial interests in trusts and partnership interests.
Dividends paid by the Fund that are derived from interest on obligations that is
exempt from taxation under the Constitution or statutes of New York ("New York
Municipal Securities") are exempt from regular federal, New York State and New
York City personal income tax. New York Municipal Securities include municipal
securities issued by the State of New York and its political sub-divisions, as
well as certain other governmental issuers such as the Commonwealth of Puerto
Rico. Dividends derived from interest on Municipal Securities

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other than New York Municipal Securities are exempt from federal income tax but
may be subject to New York State and New York City personal income tax (see
"Additional Information Concerning Taxes" below). The Fund expects that under
normal market conditions, at least 65% of its total assets will be invested in
New York Municipal Securities.

The New York Tax-Exempt Money Fund is concentrated in securities
issued by New York State or entities within New York State and therefore
investment in the Fund may be riskier than an investment in other types of money
market funds. The Fund's ability to achieve its investment objective is
dependent upon the ability of the issuers of New York Municipal Securities to
meet their continuing obligations for the payment of principal and interest. New
York State and New York City face long-term economic problems that could
seriously affect their ability and that of other issuers of New York Municipal
Securities to meet their financial obligations.

Certain substantial issuers of New York Municipal Securities
(including issuers whose obligations may be acquired by the Fund) have
experienced serious financial difficulties in recent years. These difficulties
have at times jeopardized the credit standing and impaired the borrowing
abilities of all New York issuers and have generally contributed to higher
interest costs for their borrowings and fewer markets for their outstanding debt
obligations. Although several different issues of Municipal Securities of New
York State and its agencies and instrumentalities and of New York City have been
downgraded by Standard & Poor's Ratings Services ("S&P") and Moody's Investors
Service, Inc. ("Moody's") in recent years, S&P and Moody's have recently placed
the debt obligations of New York State and New York City on CreditWatch with
positive implications and upgraded the debt obligations of New York City. Strong
demand for New York Municipal Securities has also at times had the effect of
permitting New York Municipal Securities to be issued with yields relatively
lower, and after issuance, to trade in the market at prices relatively higher,
than comparably rated municipal obligations issued by other jurisdictions. A
recurrence of the financial difficulties previously experienced by certain
issuers of New York Municipal Securities could result in defaults or declines in
the market values of those issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Municipal Securities. Although as of
the date of this Statement of Additional Information, no issuers of New York
Municipal Securities are in default with respect to the payment of their
municipal obligations, the occurrence of any such default could affect adversely
the market values and marketability of all New York Municipal Securities and,
consequently, the net asset value of the New York Tax-Exempt Money Fund's
portfolio. Other considerations affecting the Fund's investments in New York
Municipal Securities are summarized below under "Special Considerations Relating
to New York Municipal Securities."

From time to time on a temporary defensive basis due to market
conditions, the Tax-Exempt Funds may hold uninvested cash reserves or invest in
taxable obligations in such proportions as, in the opinion of the Adviser,
prevailing market or economic conditions may warrant. Uninvested cash reserves
will not earn income. Taxable obligations in which the Tax-Exempt Funds may
invest include: (i) obligations of the U.S. Treasury; (ii) obligations of
agencies and instrumentalities of the U.S. government; (iii) money market
instruments such as certificates of deposit, commercial paper, and bankers'
acceptances; (iv) repurchase agreements

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collateralized by U.S. government obligations or other money market instruments;
and (v) securities issued by other investment companies that invest in
high-quality, short-term securities.

The Tax-Exempt Funds may also invest from time to time in "private
activity bonds" (see "Municipal Securities" below), the interest on which is
treated as a specific tax preference item under the federal alternative minimum
tax. Investments in such securities, however, will not exceed under normal
market conditions 20% of a Fund's net assets when added together with any
taxable investments by the Fund.

Each Tax-Exempt Fund may invest more than 25% of its assets in
Municipal Securities the interest on which is paid solely from revenues on
similar projects if such investment is deemed necessary or appropriate by the
Adviser. To the extent that a Fund's assets are concentrated in Municipal
Securities payable from revenues on similar projects, the Fund will be subject
to the peculiar risks presented by such projects to a greater extent than it
would be if its assets were not so concentrated.

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

VARIABLE AND FLOATING RATE INSTRUMENTS

Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by a Fund, the Fund may, from time to time as specified in
the instrument, demand payment of the principal of the instrument or may resell
the instrument to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods that the Fund is
not entitled to exercise its demand rights, and the Fund could, for this or
other reasons, suffer a loss with respect to such instrument. While the Funds in
general will invest only in securities that mature within 13 months of the date
of purchase, they may invest in variable and floating rate instruments which
have nominal maturities in excess of 13 months if such instruments have demand
features that comply with conditions established by the Securities and Exchange
Commission (the "SEC").

Some of the instruments purchased by the Government Money and Treasury
Money Funds may also be issued as variable and floating rate instruments.
However, since they are issued or guaranteed by the U.S. government or its
agencies or instrumentalities, they may have a more active secondary market.

The Adviser will consider the earning power, cash flows and other
liquidity ratios of the issuers of variable and floating rate instruments and
will continuously monitor their financial ability to meet payment on demand. In
determining dollar-weighted average portfolio maturity and whether a variable or
floating rate instrument has a remaining maturity of 13 months or less, the
maturity of each instrument will be computed in accordance with guidelines
established by the SEC.

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REPURCHASE AGREEMENTS

The Money, Government Money, Tax-Exempt Money and New York Tax-Exempt
Money Funds may agree to purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser,
pursuant to guidelines established by the Companies' Boards of Directors. The
Funds will not enter into repurchase agreements with the Adviser or any of its
affiliates. Repurchase agreements with remaining maturities in excess of seven
days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).

Securities subject to repurchase agreements are held by the Funds'
custodian (or sub-custodian) or in the Federal Reserve/Treasury book-entry
system. The seller under a repurchase agreement will be required to maintain the
value of the securities which are subject to the agreement and held by a Fund at
not less than the repurchase price. Default or bankruptcy of the seller would,
however, expose a Fund to possible delay in connection with the disposition of
the underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
Repurchase agreements are considered loans by a Fund under the 1940 Act. Income
on repurchase agreements will be taxable.

SECURITIES LENDING

To increase return on their portfolio securities, the Money and
Government Money Funds may lend their portfolio securities to broker/dealers
pursuant to agreements requiring the loans to be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash, securities of the
U.S. government, its agencies or instrumentalities, or an irrevocable letter of
credit issued by a bank which meets the investment standards of these Funds, or
any combination thereof. Such loans will not be made if, as a result, the
aggregate of all outstanding loans of a Fund exceeds 30% of the value of its
total assets. When a Fund lends its securities, it continues to receive interest
or dividends on the securities lent and may simultaneously earn interest on the
investment of the cash loan collateral, which will be invested in readily
marketable, high-quality, short-term obligations. Although voting rights, or
rights to consent, attendant to lent securities pass to the borrower, such loans
may be called at any time and will be called so that the securities may be voted
by a Fund if a material event affecting the investment is to occur.

There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.

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WHEN-ISSUED AND FORWARD TRANSACTIONS

Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on
a "forward commitment" or "when-issued" basis are recorded as an asset and
are subject to changes in value based upon changes in the general level of
interest rates. When a Fund agrees to purchase securities on a "when-issued"
or "forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to
satisfy a purchase commitment and, in such case, the Fund may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that a Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash. Because a Fund will set
aside cash or liquid assets to satisfy its purchase commitments in the manner
described, its liquidity and ability to manage its portfolio might be
affected in the event its forward commitments or commitments to purchase
"when-issued" securities ever exceed 25% of the value of its assets.

It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.

A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.

When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.

The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.

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STAND-BY COMMITMENTS

Each Tax-Exempt Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a dealer or
bank agrees to purchase at the Fund's option, specified Municipal Securities at
a specified price. The amount payable to a Fund upon its exercise of a "stand-by
commitment" is normally (i) the Fund's acquisition cost of the Municipal
Securities (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. "Stand-by commitments" are exercisable by the Tax-Exempt
Funds at any time before the maturity of the underlying Municipal Securities,
and may be sold, transferred or assigned by a Fund only with the underlying
instruments.

The Tax-Exempt Funds expect that "stand-by commitments" will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, a Fund may pay for a "stand-by commitment"
either separately in cash or by paying a higher price for securities which are
acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). When a Tax-Exempt Fund has paid
any consideration directly or indirectly for a "stand-by commitment," its cost
will be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.

The Tax-Exempt Funds intend to enter into "stand-by commitments" only
with banks and broker/dealers which, in the Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information. The
Tax-Exempt Funds will acquire "stand-by commitments" solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. "Stand-by commitments" acquired by a Tax-Exempt Fund would be
valued at zero in determining the Fund's net asset value.

MUNICIPAL SECURITIES

Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "Municipal Securities" only if the interest paid
thereon is exempt from regular federal income tax and not treated as a specific
tax preference item under the federal alternative minimum tax.

The two principal classifications of Municipal Securities which may be
held by the Tax-Exempt Funds are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues

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derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as user fees of the facility being financed.

Each Tax-Exempt Fund's portfolio may also include "moral obligation"
securities, which are usually issued by public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund -- the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by a Tax-Exempt Fund.

The Tax-Exempt Funds may purchase custodial receipts evidencing the
right to receive either the principal amount or the periodic interest payments
or both with respect to specific underlying Municipal Securities. In general,
such "stripped" Municipal Securities are offered at a substantial discount in
relation to the principal and/or interest payments which the holders of the
receipt will receive. To the extent that such discount does not produce a yield
to maturity for the investor that exceeds the original tax-exempt yield on the
underlying Municipal Security, such yield will be exempt from federal income tax
for such investor to the same extent as interest on the underlying Municipal
Security. The Tax-Exempt Funds intend to purchase custodial receipts and
"stripped" Municipal Securities only when the yield thereon will be, as
described above, exempt from federal income tax to the same extent as interest
on the underlying Municipal Securities.

There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of NRSROs such as Moody's and S&P described in the Appendix
hereto represent their opinion as to the quality of Municipal Securities. It
should be emphasized that these ratings are general and are not absolute
standards of quality, and Municipal Securities with the same maturity, interest
rate, and rating may have different yields while Municipal Securities of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease
to be rated, or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation.

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extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.

Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the Fund are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.

Among other instruments, the Tax-Exempt Funds may purchase short-term
general obligation notes, tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax-exempt commercial paper, construction loan notes
and other forms of short-term loans. Such instruments are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues. In addition, the Funds may invest in
long-term tax-exempt instruments, such as municipal bonds and private activity
bonds, to the extent consistent with the applicable maturity restrictions.

The New York Tax-Exempt Money Fund may invest in tax-exempt derivative
securities such as tender option bonds, participations, beneficial interests in
trusts, partnership interests, floating rate trust receipts or other forms. A
typical tax-exempt derivative security involves the purchase of an interest in a
Municipal Security or a pool of Municipal Securities which interest includes a
tender option, demand or other feature. Together, these features entitle the
holder of the interest to tender (or put) the underlying Municipal Security to a
third party at periodic intervals and to receive the principal amount thereof.
In some cases, Municipal Securities are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying municipal securities held by the custodian.
Under such arrangements, the holder of the custodial receipt has the option to
tender the underlying municipal security at its face value to the sponsor
(usually a bank or broker dealer or other financial institution), which is paid
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate that would cause the bond, coupled with the tender option, to trade at
par on the date of a rate adjustment.

Before purchasing a tax-exempt derivative for the New York Tax-Exempt
Money Fund, the Adviser is required by the Fund's Amortized Cost Procedures to
conclude that the tax-exempt security and the supporting short-term obligation
involve minimal credit risks and are Eligible Securities under the Procedures.
In evaluating the creditworthiness of the entity

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obligated to purchase the tax-exempt security, the Adviser will review
periodically the entity's relevant financial information.

Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax (and, with respect to New
York Municipal Securities, to the exemption of interest thereon from New York
State and New York City personal income taxes) are rendered by bond counsel to
the respective issuers at the time of issuance, and opinions relating to the
validity of and the tax-exempt status of payments received by the New York
Tax-Exempt Money Fund from tax-exempt derivatives are rendered by counsel to the
respective sponsors of such derivatives. The Funds and the Adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Securities, the creation of any tax-exempt
derivative securities, or the bases for such opinions.

INSURED MUNICIPAL SECURITIES

The New York Tax-Exempt Money Fund may purchase Municipal Securities
which are insured as to timely payment of principal and interest at the time of
purchase. The insurance policies will usually be obtained by the issuer of the
bond at the time of its original issuance. Bonds of this type will be acquired
only if at the time of purchase they satisfy quality requirements generally
applicable to Municipal Securities. Although insurance coverage for the
Municipal Securities held by the Fund reduces credit risk by insuring that the
Fund will receive timely payment of principal and interest, it does not protect
against market fluctuations caused by changes in interest rates and other
factors. The Fund may invest more than 25% of its net assets in Municipal
Securities covered by insurance policies.

MONEY MARKET INSTRUMENTS

"Money market instruments" that may be purchased by the Money,
Government Money, Tax-Exempt Money and New York Tax-Exempt Money Funds in
accordance with their investment objectives and policies include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.

Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations acquired
by the Money Fund may also include U.S. dollar-denominated obligations of
foreign branches of U.S. banks and obligations of domestic branches of foreign
banks. Investments in bank obligations are limited to the obligations of
financial institutions having more than $2 billion in total assets at the time
of purchase. Investments in bank obligations of foreign branches of domestic
financial institutions or of domestic branches of foreign banks are limited so
that no more than 5% of the value of the Fund's total assets may be invested in
any one branch, and that no more than 20% of the Fund's total assets at the time
of purchase may be invested in the aggregate in such obligations. Investments in
non-negotiable time deposits are

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limited to no more than 5% of the value of a Fund's total assets at time of
purchase, and are further subject to the overall 10% limit on illiquid
securities described below under "Illiquid Securities."

Investments in obligations of foreign branches of U.S. banks and of
U.S. branches of foreign banks may subject the Money Fund to additional
investment risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of U.S. banks. Investments in the obligations of U.S. branches
of foreign banks or foreign branches of U.S. banks will be made only when the
Adviser believes that the credit risk with respect to the instrument is minimal.

GOVERNMENT OBLIGATIONS

The Funds may purchase government obligations which include
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Such investments may include obligations issued by the Farm
Credit System Financial Assistance Corporation, the Federal Financing Bank, the
General Services Administration, Federal Home Loan Banks and the Tennessee
Valley Authority. Obligations of certain agencies and instrumentalities of the
U.S. government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; still others are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. government would
provide financial support to U.S. government-sponsored instrumentalities if it
is not obligated to do so by law. Obligations of such instrumentalities will be
purchased only when the Adviser believes that the credit risk with respect to
the instrumentality is minimal.

Securities issued or guaranteed by the U.S. government have
historically involved little risk of loss of principal if held to maturity.
However, due to fluctuations in interest rates, the market value of such
securities may vary during the period a shareholder owns Shares of a Fund.

The Treasury Money Fund primarily will purchase direct obligations of
the U.S. Treasury and obligations of those agencies or instrumentalities of the
U.S. government interest income from which is generally not subject to state and
local income taxes.

INVESTMENT COMPANY SECURITIES

The Funds may invest in securities issued by other investment
companies which invest in high-quality, short-term securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. The Tax-Exempt Funds normally will

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invest in securities of investment companies only if such companies invest
primarily in high-quality, short-term Municipal Securities. The Government Money
and Treasury Money Funds intend to limit their acquisition of shares of other
investment companies to those companies which are themselves permitted to invest
only in securities which may be acquired by the respective Funds. Securities of
other investment companies will be acquired by a Fund within the limits
prescribed by the 1940 Act. Except as otherwise permitted under the 1940 Act,
each Fund currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund. In addition to the advisory fees and other
expenses a Fund bears directly in connection with its own operations, as a
shareholder of another investment company, a Fund would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the Fund's shareholders would indirectly bear the expenses of the Fund and
the other investment company, some or all of which would be duplicative. Any
change by the Funds in the future with respect to their policies concerning
investments in securities issued by other investment companies will be made only
in accordance with the requirements of the 1940 Act.

BORROWING AND REVERSE REPURCHASE AGREEMENTS

Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and
broker-dealers and to repurchase them at a mutually agreed date and price (a
"reverse repurchase agreement"). The SEC views reverse repurchase agreements as
a form of borrowing. At the time a Fund enters into a reverse repurchase
agreement, it will place in a segregated custodial account liquid assets having
a value equal to the repurchase price, including accrued interest. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by a Fund may decline below the repurchase price of those securities.

ILLIQUID SECURITIES

Each Fund will not knowingly invest more than 10% of the value of its
net assets in securities that are illiquid. A security will be considered
illiquid if it may not be disposed of within seven days at approximately the
value at which the particular Fund has valued the security. Each Fund may
purchase securities which are not registered under the Securities Act of 1933,
as amended (the "Act"), but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Act. Any such security will not
be considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.

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MISCELLANEOUS

The Money, Government Money, Treasury Money and TaxExempt Money Funds
may not invest in oil, gas, or mineral leases.

SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES

Some of the significant financial considerations relating to the New
York Tax Exempt Fund's investments in New York Municipal Securities are
summarized below. This summary information is not intended to be a complete
description and is principally derived from the Annual Information Statement of
the State of New York as supplemented and contained in official statements
relating to issues of New York Municipal Securities that were available prior to
the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in those official statements have not
been independently verified.

STATE ECONOMY. New York is one of the most populous states in the
nation and has a relatively high level of personal wealth. The State's economy
is diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.

In the calendar years 1987 through 1997, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover.

State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York City (the "City") is a regional employment center for a
multi-state region, State personal income measured on a residence basis
understates the relative importance of the State to the national economy and the
size of the base to which State taxation applies.

There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.

STATE BUDGET. The State Constitution requires the governor (the
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.

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State law requires the Governor to propose a balanced budget each
year. In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). The State's 1998-99 fiscal year began on April 1, 1998 and
ended on March 31, 1999. The Legislature adopted the debt service component of
the State budget for the 1998-99 fiscal year on March 30, 1998 and the remainder
of the budget on April 18, 1998. In the period prior to adoption of the budget
for the 1998-99 fiscal year, the Legislature also enacted appropriations to
permit the State to continue its operations and provide for other purposes.

The 1998-99 State Financial Plan projected a closing balance in the
General Fund of $1.42 billion comprised of a reserve of $761 million available
for future needs, a balance of $400 million in the Tax Stabilization Reserve
Fund ("TSRF"), a balance of $158 million in the Community Projects Fund ("CPF")
and a balance of $100 million in the Contingency Reserve Fund ("CRF"). The TSRF
can be used in the event of an unanticipated General Fund cash operating
deficit, as provided under the State Constitution and State Finance Law. The CPF
is used to finance various legislative and executive initiatives. The CRF
provides resource to help finance any extraordinary litigation costs during the
fiscal year.

The Governor presented his 1999-2000 Executive Budget to the
Legislature on January 27, 1999. The 1999-2000 Financial Plan projected General
Fund disbursements and transfers to other funds of $37.10 billion, an increase
of $482 million over projected spending for the current year. Grants to local
governments constituted approximately 67 percent of all General Fund spending,
and included payments to local governments, non-profit providers and
individuals. Disbursements in this category were projected to decrease $87
million (0.4 percent) to $24.81 billion in 1999-2000, in part due to a $175
million decline in proposed spending for legislative initiatives.

The State is projected to close the 1999-2000 fiscal year with a
General Fund balance of $2.36 billion. The balance is comprised of $1.79 billion
in tax reduction reserves, $473 million in the TSRF and $100 million in the CFR.
The entire $226 million balance in the Community Projects Fund is expected to be
used in 1999-2000, with $80 million spent to pay for existing projects and the
remaining balance of $146 million, against which there are currently no
appropriations as a result of the Governor's 1998 vetoes, used to fund other
expenditures in 1999-2000.

On February 12, 1999, the State issued a revised cash-basis Financial
Plan for the 1999-2000 fiscal year that reflected the Governor's amendments to
his 1999-2000 Executive Budget. The revised Financial Plan projects total
General Fund disbursements and transfers to other funds of $37.14 billion in
1999-2000, a net increase of $42 million over the amount estimated in the
Executive Budget. The revised estimate reflects $81 million in new funding for
school districts, $13 million for the Department of Law, $5 million of offset
the loss of budgeted federal funding in the Department of Corrections and $11
million in projected spending for other initiatives. These increases are
partially offset by $8 million in lower projected social service costs, $15
million from projected lower spending on fringe benefits for

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<PAGE>

State employees and $45 million in one-time savings from permanently deferring
one month of Supplemental Security Income payments.

The State also revised its receipts forecast for 1999-2000 in
conjunction with the Governor's 30-day amendments. The revised forecast projects
total General Fund receipts and transfers from other funds of $38.81 billion in
1999-2000, a net increase of $146 million over the amount estimated in the
Executive Budget. Projected receipts in all categories have been raised, with
the largest increases in personal income taxes ($49 million), miscellaneous
receipts ($35 million) and business taxes ($31 million). The State proposes
reserving $100 million of these additional receipts to cover the potential costs
is 1999-2000 of possible new collective bargaining agreements with State
employee unions. Most of the remaining recipes would finance the $42 million in
net new spending described above, with a balance of $4 million earmarked for the
tax reduction reserve that was proposed in the Executive Budget.

The State currently projects spending to grow by $1.09 billion (2.9
percent) in 2000-01 and an additional $1.8 billion (4.7 percent) in 2001-02.
General Fund spending increases at a higher rate in 2001-02 than in 2000-01,
driven primarily by higher growth rates for Medicaid, welfare, Children and
Families Services, and Mental Retardation, as well as the loss of federal money
that offsets General Fund spending.

For New York State, the economic outlook is also expected to be
brighter than anticipated in the 1999-2000 Executive Budget forecast, primarily
due to the connection between the State economy and the stronger-than-expected
national economy. Stronger national industrial output and exports have improved
the outlook for New York's goods-producing sector. Also, New York employment
growth remained strong in the fourth quarter of 1998 and Wall Street related
activity remains stable. Growth of employment, wages and personal income is
expected to be modestly faster than in the Executive Budget forecast.

Over the long-term, uncertainties with regard to the economy present
the largest potential risk to future budget balance in New York State. For
example, a downturn in the financial markets or the wider economy is possible, a
risk that is heightened by the lengthy expansion currently underway. The
securities industry is more important to the New York economy than the national
economy, potentially amplifying the impact of an economic downturn. A large
change in stock market performance during the forecast horizon could result in
wage and unemployment levels that are significantly different from those
embodied in the forecast. Merging and downsizing by firms, as a consequence of
deregulation or continued foreign competition, may also have more significant
adverse effects on employment than expected. Finally, a "forecast error" of one
percentage point in the estimated growth of receipts could cumulatively raise or
lower results by over $1 billion by 2002.

Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic

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activity. Economic forecasts have frequently failed to predict accurately the
timing and magnitude of changes in the national and the State economies. The DOB
believes that its projections of receipts and disbursements relating to the
current State Financial Plan, and the assumptions on which they are based, are
reasonable. The projections assume no changes in federal tax law, which could
substantially alter the current receipts forecast. In addition, these
projections do not include funding for new collective bargaining agreements
after the current contracts expire. Actual results, however, could differ
materially and adversely from their projections, and those projections may be
changed materially and adversely from time to time.

DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by
which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (I.E., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.

The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.

The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.

The proposed 1998-99 through 2003-04 Capital Program and Financing
Plan was released with the Executive Budget on January 27, 1999. The recommended
five-year Capital Program and Financing Plan reflects debt reduction initiatives
that would reduce future State-supported debt issuances by significantly
increasing the share of the Plan financed with pay-as-you-go resources. Compared
to the last year of the July 1998 update to the Plan,

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outstanding State-supported debt would be reduced by $4.7 billion (from $41.9
billion to $37.2 billion).

As described therein, efforts to reduce debt, unanticipated delays in
the advancement of certain projects and revisions to estimated proceeds needs
modestly reduced projected borrowings in 1998-99. The State's 1998-99 borrowing
plan projected issuances of $331 million in general obligation bonds (including
$154 million for purposes of redeeming outstanding BANs) and $154 million in
general obligation commercial paper. The State issued $179 million in
Certificates of Participation to finance equipment purchases (including costs of
issuance, reserve funds, and other costs) during the 1998-99 fiscal year. Of
this amount, approximately $83 million was used to finance agency equipment
acquisitions, and $96 million to address Statewide technology issues related to
Year 2000 compliance. Approximately $228 million for information technology
related to welfare reform, originally anticipated to be issued during the
1998-99 fiscal year, and now expected to be delayed until 1999-2000.

On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
5, 1999, S&P affirmed its A rating on the State's outstanding bonds.

On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.

New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.

LITIGATION. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (4) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; (5) a challenge to the Governor's
application of his constitutional line item veto authority; and (6) a challenge
to the enactment of the CLEAN WATER/CLEAN AIR BOND ACT OF 1996.

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Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of STATE OF DELAWARE v. STATE OF NEW YORK, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.

The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the current fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.

Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.

AUTHORITIES. The fiscal stability of New York State is related, in
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is
State-supported or State-related.

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Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.

In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since 1995. As a
result of the structural imbalances in JDA's capital structure, and defaults in
its loan portfolio and loan guarantee program incurred between 1991 and 1996,
JDA would have experienced a debt service cash flow shortfall had it not
completed its recent refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.

NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the State may
also be impacted by the fiscal health of its localities, particularly the City,
which has required and continues to require significant financial assistance
from the State. The City depends on State aid both to enable the City to balance
its budget and to meet its cash requirements. There can be no assurance that
there will not be reductions in State aid to the City from amounts currently
projected or that State budgets will be adopted by the April 1 statutory
deadline or that any such reductions or delays will not have adverse effects on
the City's cash flow or expenditures. In addition, the Federal budget
negotiation process could result in a reduction in or a delay in the receipt of
Federal grants which could have additional adverse effects on the City's cash
flow or revenues.

In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P.

On July 2, 1985, S&P revised its rating of City bonds upward to BBB+
and on November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998,
S&P assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with

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positive implications. On March 9, 1999, S&P assigned its A- rating to Series
1999H of New York City general obligation bonds and affirmed the A- rating on
various previously issued New York City bonds.

Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded approximately $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.

On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A.

New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do not
constitute an enforceable obligation or debt of either the State or the City.

Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.

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<PAGE>

On June 10, 1997, the City submitted to the Control Board the
Financial Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal
years, relating to the City, the Board of Education ("BOE") and City University
of New York ("CUNY") and reflected the City's expense and capital budgets for
the 1998 fiscal year, which were adopted on June 6, 1997. The 1998-2001
Financial Plan projected revenues and expenditures for the 1998 fiscal year
balanced in accordance with GAAP. The 1998-99 Financial Plan projected General
Fund receipts (including transfers from other funds) of $36.22 billion, an
increase of $1.02 billion over the estimated 1997-1998 level. Recurring growth
in the State General Fund tax base is projected to be approximately six percent
during 1998-99, after adjusting for tax law and administrative changes. This
growth rate is lower than the rates for 1996-97 or 1997-98, but roughly
equivalent to the rate for 1995-96.

The 1998-99 forecast for user taxes and fees also reflected the impact
of scheduled tax reductions that will lower receipts by $38 million, as well as
the impact of two Executive Budget proposals that were projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.

The Financial Plan is projected to show a GAAP-basis deficit of $1.3
billion for 1998-99 in the General Fund, primarily as a result of the use of the
1997-98 cash surplus. In 1998-99, the General Fund GAAP Financial Plan showed
total revenues of $34.68 billion, total expenditures of $35.94 billion, and net
other financing sources and uses of $42 million.

Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the current fiscal year,
there can be no assurance that the gap-closing actions proposed in the 1998-2001
Financial Plan can be successfully implemented or that the City will maintain a
balanced budget in future years without additional State aid, revenue increases
or expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.

The projections set forth in the 1998-2001 Financial Plan were based
on various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of

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<PAGE>

Federal and State welfare reform and any future legislation affecting Medicare
or other entitlements.

Implementation of the 1998-2001 Financial Plan is also dependent upon
the City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. Indebtedness subject to the
constitutional debt limit includes liability on capital contracts that are
expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation which is currently on
appeal to the Court of Appeals were voided, projected contracts for the City
capital projects would exceed the City's debt limit. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.

The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.

The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's 1998 fiscal year financial plan
projected $2.4 billion of seasonal financing, the City expected to undertake
only approximately $1.4 billion of seasonal financing. The City issued $2.4
billion of short-term obligations in fiscal year 1997. The delay in the adoption
of the State's budget in certain past fiscal years has required the City to
issue short-term notes in amounts exceeding those expected early in such fiscal
years.

Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
1997-98 fiscal year.

Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers

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<PAGE>

Board") by New York State in 1984. The Yonkers Board is charged with oversight
of the fiscal affairs of Yonkers. Future actions taken by the State to assist
Yonkers could result in increased State expenditures for extraordinary local
assistance.

On June 30, 1998, the City of Yonkers satisfied the statutory
conditions for ending the supervision of its finances by a State-ordered control
board. Pursuant to State law, the control board's powers over City finances
lapsed six months after the satisfaction of these conditions, on December 31,
1998.

Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.

The 1998-99 budget included $29.4 million in unrestricted aid targeted
to 57 municipalities across the State. Other assistance for municipalities with
special needs totals more than $25.6 million. Twelve upstate cities received
$24.2 million in one-time assistance from a cash flow acceleration of State aid.

Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. State law requires the Comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.

From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing the State assistance in
the future.

YEAR 2000 COMPLIANCE. The State is currently addressing Year 2000
("Y2K") data processing compliance issues. Since its inception, the computer
industry has used a two-digit date convention to represent the year. In the year
2000, the date field will contain "00" and, as a result, many computer systems
and equipment may not be able to process dates properly or may fail since they
may not be able to distinguish between the years 1900 and 2000. The Year 2000
issue not only affects computer programs, but also the hardware, software and
networks they operate on. In addition, any system or equipment that is

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<PAGE>

dependent on an embedded chip, such as telecommunication equipment and security
systems, may also be adversely affected.

The Office for Technology is monitoring compliance progress for the
State's mission-critical and high-priority systems and is reporting compliance
progress to the Governor's office on a quarterly basis. As of December 1998, the
State had completed 93 percent of overall compliance effort for its
mission-critical systems; 18 systems are now Year 2000 compliant and the
remaining systems are on schedule to be compliant by the first quarter of 1999.
As of December 1998, the State has completed 70 percent of overall compliance
effort on the high-priority systems; 168 systems are now Year 2000 compliant and
the remaining systems are on schedule to be compliant by the second quarter of
1999. Compliance testing is expected to be completed by the end of calendar
1999.

While New York State is taking what it believes to be appropriate
action to address Year 2000 compliance, there can be no guarantee that all of
the State's systems and equipment will be Year 2000 compliant and that there
will not be an adverse impact upon State operations or finances as a result.
Since Year 2000 compliance by outside parties is beyond the State's control to
remediate, the failure of outside parties to achieve Year 2000 compliance could
have an adverse impact on State operations or finances as well.

INVESTMENT LIMITATIONS

The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding shares.
As used herein, a "vote of the holders of a majority of the outstanding shares"
of a Company or a particular Fund means, with respect to the approval of an
investment advisory agreement or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of such Company or such Fund, or (b) 67% or more of the shares of such
Company or such Fund present at a meeting if more than 50% of the outstanding
shares of such Company or such Fund are represented at the meeting in person or
by proxy. Investment limitations which are "operating policies" with respect to
the Funds may be changed by the Companies' Boards of Directors without
shareholder approval.

No Fund may:

1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as the Taxable Funds might be deemed to
be underwriters upon disposition of certain portfolio securities acquired within
the limitation on purchases of restricted securities; and except to the extent
that purchase by the Tax-Exempt Money Fund of Municipal Securities or other
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;
and except to the extent that purchase by the New York Tax-Exempt Money Fund of
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;

2. Purchase or sell real estate, except that each Taxable Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate; and except that the
Tax-Exempt Money Fund may invest in Municipal Securities secured by real estate
or interests therein; and except that the New York Tax-Exempt Money Fund may
invest in securities secured by real estate or interests therein;

3. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or other mineral exploration or development programs; and

4. Issue any senior securities, except insofar as any borrowing in
accordance with a Fund's investment limitations might be considered to be the
issuance of a senior security.

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<PAGE>

Each of the Money, Government Money, Treasury Money and Tax-Exempt
Money Funds may not:

5. Purchase securities of any one issuer if immediately after such
purchase more than 5% of the value of its total assets would be invested in the
securities of such issuer, provided that up to 25% of the value of each Fund's
total assets may be invested without regard to this 5% limitation;
notwithstanding the foregoing restriction, each Fund may invest without regard
to the 5% limitation in Government Securities (as defined in the 1940 Act) and
as otherwise permitted in accordance with Rule 2a-7 under the 1940 Act or any
successor rule;

6. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes.) A Fund will not purchase
portfolio securities while borrowings in excess of 5% of its total assets are
outstanding;

7. Purchase securities on margin, make short sales of securities, or
maintain a short position; and

8. Invest in or sell puts, calls, straddles, spreads, or any
combination thereof.

Each of the Money, Government Money and Treasury Money Funds may not:

9. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and the
Money Fund and the Government Money Fund may enter into repurchase agreements
with respect to obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, and (ii) the Money Fund and the Government Money
Fund may lend portfolio securities in an amount not exceeding 30% of their total
assets;

10. Invest in bank obligations having remaining maturities in excess
of one year, except that securities subject to repurchase agreements may bear
longer maturities;

11. Invest in companies for the purpose of exercising management or
control;

12. Invest more than 5% of a Fund's total assets in securities issued
by companies which, together with any predecessor, have been in continuous
operation for fewer than three years;

13. Purchase foreign securities; except the Money Fund may purchase
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks and foreign branches of U.S. banks
in an amount not to exceed 20% of its total net assets;

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<PAGE>

14. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act;

15. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks, if immediately after such
purchase (i) more than 5% of the value of a Fund's total assets would be
invested in obligations of any one foreign branch of the financial institution
or domestic branch of a foreign bank; or (ii) more than 20% of its total assets
would be invested in foreign branches of financial institutions or in domestic
branches of foreign banks;

16. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
securities issued or guaranteed by the U.S. government or domestic bank
obligations, and (b) neither all finance companies, as a group, nor all utility
companies, as a group, are considered a single industry for purposes of this
policy; and

17. Knowingly invest more than 10% of the value of a Fund's total
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available.

The Tax-Exempt Money Fund may not:

18. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;

19. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation;

20. Knowingly invest more than 10% of the value of its total assets in
securities which may be illiquid in light of legal or contractual restrictions
on resale or the absence of readily available market quotations;

21. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the United
States; any state or territory; any possession of the U.S. government; the
District of Columbia; or any of their authorities, agencies, instrumentalities,
or political subdivisions; and

22. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's

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<PAGE>

shareholders), provided that the Fund may purchase shares of any registered,
open-end investment company, if immediately after any such purchase, the Fund
does not (a) own more than 3% of the outstanding voting stock of any one
investment company, (b) invest more than 5% of the value of its total assets in
the securities of any one investment company, or (c) invest more than 10% of the
value of its total assets in the aggregate in securities of investment
companies.

The New York Tax-Exempt Money Fund may not:

23. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;

24. Invest less than 80% of its net assets in securities the interest
on which is exempt from federal income tax, except during defensive periods or
periods of unusual market conditions;

25. Borrow money or mortgage, pledge, or hypothecate its assets except
to the extent permitted under the 1940 Act; and

26. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the U.S.
government, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions, and repurchase agreements secured by such securities.

The Treasury Money Fund may not:

27. Purchase securities other than obligations issued or guaranteed by
the U.S. Treasury or an agency or instrumentality of the U.S. government and
securities issued by investment companies that invest in such obligations.

In addition, the New York Tax-Exempt Money Fund is subject to the
following non-fundamental limitations, which may be changed without shareholder
approval. The New York Tax-Exempt Money Fund may not:

28. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that the Fund may obtain short-term credit as
may be necessary for the clearance of portfolio transactions;

29. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act;

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<PAGE>

30. Invest in companies for the purpose of exercising management or
control; and

31. Invest more than 10% of its net assets in illiquid securities.

* * *

If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.

In Investment Limitation No. 5 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed as to principal or interest by the United States, or by a
person controlled or supervised by and acting as an instrumentality of the
government of the United States, or any certificate of deposit for any of the
foregoing, are deemed to be Government Securities.

For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.

Notwithstanding Investment Limitations Nos. 17 and 20 above, the
Companies intend to limit the Funds' investments in illiquid securities to 10%
of each Fund's net (rather than total) assets.

Notwithstanding the proviso in Investment Limitation No. 21, to the
extent that the Tax-Exempt Money Fund has invested more than 20% of the value of
its assets in taxable securities on a temporary defensive basis, the industry
diversification limitation in Investment Limitation No. 21 shall apply to
taxable securities issued or guaranteed by any state, territory, or possession
of the U.S. government; the District of Columbia; or any of their authorities,
agencies, instrumentalities, or political subdivisions.

In order to obtain a rating from a rating organization, a Fund will
comply with special investment limitations.

NET ASSET VALUE AND NET INCOME

The Companies use the amortized cost method of valuation to value
Shares in the Funds. Pursuant to this method, a security is valued at its cost
initially, and thereafter a constant amortization to maturity of any discount or
premium is assumed, regardless of the impact of

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<PAGE>

fluctuating interest rates on the market value of the security. This method may
result in periods during which value, as determined by amortized cost, is higher
or lower than the price the Fund involved would receive if it sold the security.
The market value of portfolio securities held by the Funds can be expected to
vary inversely with changes in prevailing interest rates.

The Funds invest only in high-quality instruments and maintain a
dollar-weighted average portfolio maturity appropriate to their objective of
maintaining a constant net asset value per Share. The Funds will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. The Companies' Boards of Directors have
established procedures that are intended to stabilize the net asset value per
Share of each Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Boards deem
appropriate, of the extent, if any, to which the net asset value per Share of a
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Boards
of Directors will promptly consider what action, if any, should be initiated. If
the Boards of Directors believe that the extent of any deviation from a Fund's
$1.00 amortized cost price per Share may result in material dilution or other
unfair results to new or existing investors, they will take appropriate steps to
eliminate or reduce, to the extent reasonably practicable, any such dilution or
unfair results. These steps may include selling portfolio instruments prior to
maturity; shortening the average portfolio maturity; withholding or reducing
dividends; redeeming Shares in kind; reducing the number of the Fund's
outstanding Shares without monetary consideration; or utilizing a net asset
value per Share determined by using available market quotations.

Net income of each of the Funds for dividend purposes consists of (i)
interest accrued and discount earned on a Fund's assets, less (ii) amortization
of market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses or the expenses common to more than one portfolio
of a Company (e.g., administrative, legal, accounting, and directors' fees)
prorated to each portfolio of the Company on the basis of their relative net
assets.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Companies' sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA
15237-5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.

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<PAGE>

for certain services or activities which are primarily intended to result in
sales of Shares of the Funds. If any such program is made available to any
dealer, it will be made available to all dealers on the same terms and
conditions. Payments made under such programs will be made by the Distributor
out of its own assets and not out of the assets of the Funds.

In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.

The net asset value of each of the Money, Government Money and
Treasury Money Funds is determined and the Shares of each such Fund are priced
for purchases and redemptions as of 1:00 p.m. (Eastern time) and the close of
regular trading hours on the New York Stock Exchange (the "Exchange"), currently
4:00 p.m. (Eastern time). The net asset value of each of the TaxExempt Money and
New York Tax-Exempt Money Funds is determined and the Shares of each such Fund
are priced for purchases and redemptions as of 12:00 p.m. (Eastern time) and the
close of regular trading hours on the Exchange. Net asset value and pricing for
each Fund are determined on each day the Exchange and the Adviser are open for
trading (a "Business Day"). Currently, the holidays which the Funds observe are
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas. Net asset value per Share for purposes of
pricing sales and redemptions is calculated by dividing the value of all
securities and other assets belonging to a Fund, less the liabilities charged to
the Fund, by the number of its outstanding Shares.

As described below, Shares may be sold to customers ("Customers") of
financial institutions ("Shareholder Organizations"). Shares are also offered
for sale directly to institutional investors or to members of the general
public. Different types of Customer accounts at the Shareholder Organizations
may be used to purchase Shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
Shares selected by the Customer. Investors purchasing Shares may include
officers, directors, or employees of the particular Shareholder Organization.

The Companies have authorized certain brokers to accept on their
behalf purchase, exchange and redemption requests. Such brokers are authorized
to designate other intermediaries to accept purchase, exchange and redemption
requests on behalf of the Companies. A Company will be deemed to have received a
purchase, exchange or redemption request when the request is received by an
authorized broker or designated intermediary in good order.

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<PAGE>

PURCHASE OF SHARES

Shares of the Funds are offered for sale at their net asset value per
Share next computed after a purchase request is received in good order by the
Companies' sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
Shares in order to accommodate different types of investors.

Institutional Shares may be purchased directly only by financial
institutions ("Institutional Investors"). Retail Shares may be purchased
directly by individuals ("Direct Investors") or by Institutional Investors
(collectively with Direct Investors, "Investors"). Retail Shares may also be
purchased by Customers of the Adviser, its affiliates and correspondent banks,
and other Shareholder Organizations that have entered into agreements with the
Companies.

A Shareholder Organization may elect to hold of record Shares for its
Customers and to record beneficial ownership of Shares on the account statements
provided by it to its Customers. If it does so, it is the Shareholder
Organization's responsibility to transmit to the Distributor all purchase
requests for its Customers and to transmit, on a timely basis, payment for such
requests to Chase Global Funds Services Company ("CGFSC"), the Funds'
sub-transfer agent, in accordance with the procedures agreed to by the
Shareholder Organization and the Distributor. Confirmations of all such Customer
purchases (and redemptions) will be sent by CGFSC to the particular Shareholder
Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with CGFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase (and
redemption) requests with the Funds, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Funds bear the expense of fees payable to Shareholder
Organizations for such services. See "Shareholder Organizations."

Customers wishing to purchase Shares through their Shareholder
Organization should contact such entity directly for appropriate instructions.
(For a list of Shareholder Organizations in your area, call (800) 446-1012.) An
Investor purchasing Shares through a registered investment adviser or certified
financial planner may incur transaction charges in connection with such
purchases. Such Investors should contact their registered adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly from the Distributor in accordance with procedures
described in the Prospectus.

Investors may purchase Shares by completing the Application
accompanying the Prospectus and mailing it, together with a check payable to
Excelsior Funds, Inc. (or Excelsior Tax- Exempt Funds, Inc., with respect to the
Tax-Exempt Funds), to:

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<PAGE>

Excelsior Funds, Inc. (or Excelsior Tax-Exempt Funds, Inc.)
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

Subsequent investments in an existing account in a Fund may be made at
any time by sending to the above address a check payable to Excelsior Funds,
Inc. (or Excelsior Tax-Exempt Funds, Inc.) along with: (a) the detachable form
that regularly accompanies the confirmation of a prior transaction; (b) a
subsequent order form which may be obtained from CGFSC; or (c) a letter stating
the amount of the investment, the name of the Fund and the account number in
which the investment is to be made. Institutional Investors may purchase Shares
by transmitting their purchase orders to CGFSC by telephone at (800) 446-1012 or
by terminal access. Institutional Investors must pay for Shares with federal
funds or funds immediately available to CGFSC.

Investors may also purchase Shares by wiring federal funds to CGFSC.
Prior to making an initial investment by wire, an Investor must telephone CGFSC
at (800) 446-1012 (from overseas, call (617) 557-8280) for instructions. Federal
funds and registration instructions should be wired through the Federal Reserve
System to:

The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account No. 9102732915
For further credit to:
Excelsior Funds
Wire Control Number
Account Registration
(including account number)

Investors making initial investments by wire must promptly complete
the Application accompanying the Prospectus and forward it to CGFSC. Redemptions
by Investors will not be processed until the completed Application for purchase
of Shares has been received by CGFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.

Except as provided below, the minimum initial investment by an
Investor or initial aggregate investment by a Shareholder Organization investing
on behalf of its Customers in Retail Shares is $500 per Fund. The minimum
subsequent investment in Retail Shares for both types of investors is $50 per
Fund. There is no minimum initial or subsequent investment for an Institutional
Investor investing in Institutional Shares of a Fund. Customers may agree with a
particular Shareholder Organization to make a minimum purchase with respect to
their accounts. Depending upon the terms of the particular account, Shareholder
Organizations may charge a Customer's account fees for automatic investment and
other cash management services provided. The Companies reserve the right to
reject any purchase order, in whole or in part, or to waive any minimum
investment requirements. Third party checks will not be accepted as payment for
Fund Shares.

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<PAGE>

REDEMPTION PROCEDURES

A request for the redemption of Shares will receive the net asset
value per share next computed after the request is received in good order by the
Companies' sub-transfer agent or an authorized broker or designated
intermediary.

Customers of Shareholder Organizations holding Shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Companies, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming Shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their Shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

Shares may be redeemed by an Investor by submitting a written request
for redemption to:

Excelsior Funds, Inc. (or Excelsior Tax-Exempt Funds, Inc.)
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

A written redemption request to CGFSC must (i) state the number of
Shares to be redeemed, (ii) identify the shareholder account number and tax
identification number, and (iii) be signed by each registered owner exactly as
the Shares are registered. If the Shares to be redeemed were issued in
certificate form, the certificates must be endorsed for transfer (or accompanied
by a duly executed stock power) and must be submitted to CGFSC together with the
redemption request. A redemption request for an amount in excess of $50,000 per
account, or for any amount if the proceeds are to be sent elsewhere than the
address of record, must be accompanied by signature guarantees from any eligible
guarantor institution approved by CGFSC in accordance with its Standards,
Procedures and Guidelines for the Acceptance of Signature Guarantees ("Signature
Guarantee Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. All
eligible guarantor institutions must participate in the Securities Transfer
Agents Medallion Program ("STAMP") in order to be approved by CGFSC pursuant to
the Signature Guarantee Guidelines. Copies of the

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<PAGE>

Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.

CGFSC may require additional supporting documents for redemptions. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for Retail Shares
redeemed will ordinarily be made by mail within five Business Days after receipt
by CGFSC of the redemption request in good order. Payment for Institutional
Shares redeemed will normally be sent the next Business Day after receipt by
CGFSC of the redemption request in good order. Questions with respect to the
proper form for redemption requests should be directed to CGFSC at (800)
446-1012 (from overseas, call (617) 557-8280).

Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem Shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Investor's account at any commercial bank in the United States. Direct Investors
who are shareholders of record may also redeem Shares by instructing CGFSC by
telephone to mail a check for redemption proceeds of $500 or more to the
shareholder of record at his or her address of record. Institutional Investors
may also redeem Shares by instructing CGFSC by telephone at (800) 446-1012 or by
terminal access. Only redemptions of $500 or more will be wired to a Direct
Investor's account. The redemption proceeds for Direct Investors must be paid to
the same bank and account as designated on the Application or in written
instructions subsequently received by CGFSC.

In order to arrange for redemption by wire or telephone after an
account has been opened or to change the bank or account designated to receive
redemption proceeds, an Investor must send a written request to a Company c/o
CGFSC, at the address listed above. Such requests must be signed by the
Investor, with signatures guaranteed, as discussed above. Further documentation
may be requested.

CGFSC and the Distributor reserve the right to refuse a wire or
telephone redemption if it is believed advisable to do so. Procedures for
redeeming Shares by wire or telephone may be modified or terminated at any time
by the Companies, CGFSC or the Distributor. The Companies, CGFSC and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions that are reasonably believed to be genuine.
In attempting to confirm that telephone instructions are genuine, the Companies
will use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration.

If any portion of the Shares to be redeemed represents an investment
made by personal check, the Companies and CGFSC reserve the right not to honor
the redemption until CGFSC is reasonably satisfied that the check has been
collected in accordance with the applicable banking regulations, which may take
up to 15 days. Investors who anticipate the need for more immediate access to
their investment should purchase Shares by federal funds or bank wire or by
certified or cashier's check. Banks normally impose a charge in connection with
the use of bank wires, as well as certified checks, cashier's checks and federal
funds. If a check is

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<PAGE>

not collected, the purchase will be cancelled and CGFSC will charge a fee of
$25.00 to the Investor's account.

During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.

Except as described in "Investor Programs" below, Direct Investors in
the Funds may redeem Retail Shares, without charge, by check drawn on the Direct
Investor's particular Fund account. Checks may be made payable to the order of
any person or organization designated by the Direct Investor and must be for
amounts of $500 or more. Direct Investors will continue to earn dividends on the
Retail Shares to be redeemed until the check clears at The Chase Manhattan Bank.

Checks are supplied free of charge, and additional checks are sent to
Direct Investors upon request. Checks will be sent only to the registered owner
at the address of record. Direct Investors who want the option of redeeming
Retail Shares by check must indicate this in the Application for purchase of
Retail Shares and must submit a signature card with signatures guaranteed with
such Application. The signature card is included in the Application for the
purchase of Retail Shares contained in the Prospectus. In order to arrange for
redemption by check after an account has been opened, a written request must be
sent to the Companies, c/o CGFSC, at the address listed above and must be
accompanied by a signature card with signatures guaranteed.

Stop payment instructions with respect to checks may be given to the
Companies by calling (800) 446-1012 (from overseas, call (617) 557-8280). If
there are insufficient Shares in the Direct Investor's account with the Fund to
cover the amount of the redemption check, the check will be returned marked
"insufficient funds," and CGFSC will charge a fee of $25.00 to the account.
Checks may not be used to close an account.

OTHER REDEMPTION INFORMATION

Except as described in "Investor Programs" below, Investors may be
required to redeem Shares in a Fund after 60 days' written notice if due to
Investor redemptions the balance in the particular account with respect to the
Fund remains below $500. If a Customer has agreed with a particular Shareholder
Organization to maintain a minimum balance in his or her account at the
institution with respect to Shares of a Fund, and the balance in such account
falls below that minimum, the Customer may be obliged by the Shareholder
Organization to redeem all or part of his or her Shares to the extent necessary
to maintain the required minimum balance.

The Companies may suspend the right of redemption or postpone the date
of payment for Shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.

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<PAGE>

In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.

The Companies reserve the right to honor any request for redemption or
repurchase of a Fund's Shares by making payment in whole or in part in
securities chosen by the Companies and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. Each Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its Shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.

Under certain circumstances, the Companies may, in their discretion,
accept securities as payment for Shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a BONA FIDE
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

An Investor who owns Retail Shares with a value of $10,000 or more may
begin a Systematic Withdrawal Plan. The withdrawal can be on a monthly,
quarterly, semiannual or annual basis. There are four options for such
systematic withdrawals. The Investor may request:

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

(3) A fixed-percentage withdrawal (based on the current value of the
account); or

(4) A declining-balance withdrawal.

Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for Retail Shares with CGFSC. Under
this Plan, dividends and distributions are automatically reinvested in
additional Retail Shares of a Fund. Amounts paid to investors under this Plan
should not be considered as income. Withdrawal payments represent proceeds from
the sale of Retail Shares, and there will be a reduction of the shareholder's
equity in the Fund involved if the amount of the withdrawal payments exceeds the
dividends and distributions paid on the Retail Shares and the appreciation of
the Investor's investment in the Fund. This in turn may result in a complete
depletion of the shareholder's investment. An

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<PAGE>

Investor may not participate in a program of systematic investing in a Fund
while at the same time participating in the Systematic Withdrawal Plan with
respect to an account in the same Fund. Customers of Shareholder Organizations
may obtain information on the availability of, and the procedures and fees
relating to, the Systematic Withdrawal Plan directly from their Shareholder
Organizations.

EXCHANGE PRIVILEGE

Investors and Customers of Shareholder Organizations may exchange
Retail Shares having a value of at least $500 for Shares of any other portfolio
of the Companies or for Shares of Excelsior Institutional Trust. Institutional
Shares may be exchanged for Institutional Shares of any portfolio of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.

Shares may be exchanged by wire, telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. The Companies and Excelsior
Institutional Trust may modify or terminate the exchange program at any time
upon 60 days' written notice to shareholders, and may reject any exchange
request. Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, such program directly
from their Shareholder Organizations.

For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.

RETIREMENT PLANS

Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):

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<PAGE>

IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;

Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit themselves and
their employees; and

Keogh Plans for self-employed individuals.

Investors investing in the Funds pursuant to Profit Sharing and
Money-Purchase Plans and Keogh Plans are not subject to the minimum investment
and forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase Shares
of the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.

AUTOMATIC INVESTMENT PROGRAM

The Automatic Investment Program permits Investors to purchase Retail
Shares (minimum of $50 per Fund per transaction) at regular intervals selected
by the Investor. The minimum initial investment for an Automatic Investment
Program account is $50 per Fund. Provided the Investor's financial institution
allows automatic withdrawals, Retail Shares are purchased by transferring funds
from an Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and Retail Shares will be purchased, once a month, on
either the first or fifteenth day, or twice a month, on both days.

ADDITIONAL INFORMATION

Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.

DESCRIPTION OF CAPITAL STOCK

Excelsior Fund's Charter authorizes its Board of Directors to issue up
to thirty-five billion full and fractional shares of common stock, $0.001 par
value per share; and Excelsior Tax-Exempt Fund's Charter authorizes its Board of
Directors to issue up to fourteen billion full and fractional shares of common
stock, $0.001 par value per share. Both Charters authorize the respective Boards
of Directors to classify or reclassify any unissued shares of the respective
Companies into one or more additional classes or series by setting or changing
in any one or more respects their respective preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.

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<PAGE>

Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the particular Company's Board of
Directors.

Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued for
payment as described in the Prospectus, Shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of a Fund,
shareholders of that Fund are entitled to receive the assets available for
distribution belonging to that Fund and a proportionate distribution, based upon
the relative asset values of the portfolios of the Company involved, of any
general assets of that Company not belonging to any particular portfolio of that
Company which are available for distribution. In the event of a liquidation or
dissolution of either Company, shareholders of such Company will be entitled to
the same distribution process.

Shareholders of the Companies are entitled to one vote for each full
Share held, and fractional votes for fractional Shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of a Company's
aggregate outstanding Shares may elect all of that Company's directors,
regardless of the votes of other shareholders.

Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of each Company voting
without regard to class.

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<PAGE>

in connection therewith, to cause all outstanding Shares of any portfolio to be
redeemed at their net asset value or converted into shares of another class of
the Company's capital stock at net asset value. The exercise of such authority
by the Boards of Directors will be subject to the provisions of the 1940 Act,
and the Boards of Directors will not take any action described in this paragraph
unless the proposed action has been disclosed in writing to the particular
Fund's shareholders at least 30 days prior thereto.

Notwithstanding any provision of Maryland law requiring a greater vote
of a Company's Common Stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, each
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of its outstanding common stock voting without regard to class.

Certificates for Shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional Shares.

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

The business and affairs of the Funds are managed under the direction
of the Companies' Boards of Directors. The directors and executive officers of
the Companies, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:

<TABLE>
<CAPTION>
Position with the Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- ----------------- ------------------------------
<S> <C> <C>
Frederick S. Wonham Chairman of the Board, Retired; Director of the Companies (since
238 June Road President and Treasurer 1995); Trustee of Excelsior Funds and
Stamford, CT 06903 Excelsior Institutional Trust (since
Age: 68 1995); Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York (from
February 1990 until September 1995); and
Chairman, U.S. Trust Company (from March
1993 to May 1997).

Donald L. Campbell Director Retired; Director of the Companies (since
333 East 69th Street 1984); Director of UST Master Variable
Apt. 10-H Series, Inc. (from 1994 to June 1997);
New York, NY 10021 Trustee of Excelsior Institutional Trust
Age: 73 (since 1995); and Director, Royal Life
Insurance Co. of New York (since 1991).

- -------------------
(1) This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.

-40-
<PAGE>

Rodman L. Drake Director Director of the Companies (since 1996);
Continuation Investments Group, Inc. Trustee of Excelsior Institutional Trust
1251 Avenue of the Americas and Excelsior Funds (since 1994);
9th Floor Director, Parsons Brinkerhoff, Inc.
New York, NY 10020 (engineering firm) (since 1995);
Age: 56 President, Continuation Investments Group,
Inc. (since 1997); President, Mandrake
Group (investment and consulting firm)
(1994-1997); Director, Hyperion Total
Return Fund, Inc. and four other funds for
which Hyperion Capital Management, Inc.
serves as investment adviser (since 1991);
Co-Chairman, KMR Power Corporation (power
plants) (from 1993 to 1996); Director, The
Latin America Smaller Companies Fund, Inc.
(1993-1998); Member of Advisory Board,
Argentina Private Equity Fund L.P. (from
1992 to 1996) and Garantia L.P. (Brazil)
(from 1993 to 1996); and Director, Mueller
Industries, Inc. (from 1992 to 1994).

Joseph H. Dugan Director Retired; Director of the Companies (since
913 Franklin Lake Road 1984); Director of UST Master Variable
Franklin Lakes, NJ 07417 Series, Inc. (from 1994 to June 1997); and
Age: 74 Trustee of Excelsior Institutional Trust
(since 1995).

Wolfe J. Frankl Director Retired; Director of the Companies (since
2320 Cumberland Road 1986); Director of UST Master Variable
Charlottesville, VA 22901-7726 Series, Inc. (from 1994 to June 1997);
Age: 78 Trustee of Excelsior Institutional Trust
(since 1995); Director, Deutsche Bank
Financial, Inc. (since 1989); Director,
The Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1988).

Jonathan Piel Director Director of the Companies (since 1996);
558 E. 87th Street Trustee of Excelsior Institutional Trust
New York, NY 10128 and Excelsior Funds (since 1994); Vice
Age: 60 President and Editor, Scientific American,
Inc. (from 1986 to 1994); Director, Group
for The South Fork, Bridgehampton, New
York (since 1993); and Member, Advisory
Committee, Knight Journalism Fellowships,
Massachusetts Institute of Technology
(since 1984).

Robert A. Robinson Director Director of the Companies (since 1987);
Church Pension Group Director of UST Master Variable Series,
445 Fifth Avenue Inc. (from 1994 to June 1997); Trustee of
New York, NY 10017 Excelsior Institutional Trust (since
Age: 73 1995); President Emeritus, The Church
Pension Fund and its affiliated companies
(since 1966); Trustee, H.B. and F.H.
Bugher Foundation and Director of its
wholly owned subsidiaries -- Rosiclear
Lead and Flourspar Mining Co. and The
Pigmy Corporation (since 1984); Director,
Morehouse Publishing Co. (1974-1998);
Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1982); and Director,
Infinity Funds, Inc. (since 1995).

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<PAGE>

Alfred C. Tannachion (1) Director Retired; Director of the Companies (since
6549 Pine Meadows Drive 1985); Chairman of the Board of Excelsior
Spring Hill, FL 34606 Fund and Excelsior Tax-Exempt Fund (1991-
Age: 73 1997) and Excelsior Institutional Trust
(1996-1997); President and Treasurer of
Excelsior Fund and Excelsior Tax-Exempt
Fund (1994-1997) and Excelsior
Institutional Trust (1996-1997); Chairman
of the Board, President and Treasurer of
UST Master Variable Series, Inc. (1994-
1997); and Trustee of Excelsior
Institutional Trust (since 1995).

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle
One Logan Square & Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle
One Logan Square & Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40

Eddie Wang Assistant Secretary Manager of Blue Sky Compliance, Chase
Chase Global Funds Services Company Global Funds Services Company (November
73 Tremont Street 1996 to present); and Officer and Manager
Boston, MA 02108-3913 of Financial Reporting, Investors Bank &
Age: 38 Trust Company (January 1991 to November
1996).

Patricia M. Leyne Assistant Treasurer Assistant Vice President, Senior Manager
Chase Global Funds Services Company of Fund Administration, Chase Global Funds
73 Tremont Street Services Company (since July 1998);
Boston, MA 02108-3913 Assistant Treasurer, Manager of Fund
Age: 32 Administration, Chase Global Funds
Services Company (from November 1996 to
July 1998); Supervisor, Chase Global
Funds Services Company (from September
1995 to November 1996); Fund
Administrator, Chase Global Funds Services
Company (from February 1993 to September
1995).
</TABLE>

- -------------------
(1) This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.

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<PAGE>

Each director receives an annual fee of $9,000 with respect to each
Company plus a per - Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum with respect to each
Company for services in such capacity. Drinker Biddle & Reath LLP, of which
Messrs. McConnel and Malloy are partners, receives legal fees as counsel to the
Companies. The employees of CGFSC do not receive any compensation from the
Companies for acting as officers of the Companies. No person who is currently an
officer, director or employee of the Adviser serves as an officer, director or
employee of the Companies. As of July 13, 1999, the directors and officers of
each Company as a group owned beneficially less than 1% of the outstanding
shares of each fund of each Company, and less than 1% of the outstanding shares
of all funds of each Company in the aggregate.

-43-
<PAGE>

The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal year.

<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Total Compensation
Compensation Accrued as from the Companies
Name of from Part of and Fund Complex*
Person/Position the Companies Fund Expenses Paid to Directors
- --------------- ------------- ------------- -----------------
<S> <C> <C> <C>
Donald L. Campbell $28,500 None $33,250(3)**
Director

Rodman L. Drake $31,500 None $41,250(4)**
Director

Joseph H. Dugan $31,500 None $36,500(3)**
Director

Wolfe J. Frankl $36,500 None $36,500(3)**
Director

W. Wallace McDowell, Jr.*** $21,000 None $28,000(4)**
Director

Jonathan Piel $31,500 None $41,500(4)**
Director

Robert A. Robinson $31,500 None $36,500(3)**
Director

Alfred C. Tannachion $31,500 None $36,500(3)**
Director

Frederick S. Wonham $41,500 None $51,500(4)**
Chairman of the Board,
President and Treasurer
</TABLE>

- -------------------
* The "Fund Complex" consists of the Excelsior Fund, Excelsior Tax-Exempt
Fund, Excelsior Funds and Excelsior Institutional Trust.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.

*** Mr. McDowell resigned from Excelsior Fund, Excelsior Tax-Exempt Fund,
Excelsior Funds and Excelsior Institutional Trust on May 21, 1999.

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<PAGE>

INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS

U. S. Trust New York and U.S. Trust Company (collectively with U.S.
Trust New York, "U.S. Trust" or the "Adviser") serve as investment advisers to
the Funds. In the Investment Advisory Agreements, the Adviser has agreed to
provide the services described in the Prospectus. The Adviser has also agreed to
pay all expenses incurred by it in connection with its activities under the
respective agreements other than the cost of securities, including brokerage
commissions, if any, purchased for the Funds.

Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Money, Government Money, Treasury Money and Tax-Exempt Money
Funds pursuant to advisory agreements substantially similar to the Investment
Advisory Agreements currently in effect for the Funds.

For the services provided and expenses assumed pursuant to its
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly, at the annual rate of 0.25% of the average
daily net assets of each of the Money, Government Money and Tax-Exempt Money
Funds; 0.30% of the Treasury Money Fund's average daily net assets; and 0.50% of
the New York Tax-Exempt Money Fund's average daily net assets.

From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.

For the fiscal year or period ended March 31, 1999, Excelsior Fund
paid U.S. Trust advisory fees of $1,475,748, $1,381,779 and $1,403,045 with
respect to the Money, Government Money and Treasury Money Funds, respectively.
For the same period, Excelsior Tax-Exempt Fund paid U.S. Trust advisory fees of
$2,696,982 and $277,593 with respect to the Tax-Exempt Money and New York
Tax-Exempt Money Funds, respectively. For the fiscal year or period ended March
31, 1999, U.S. Trust waived advisory fees totaling $358,360, $184,188, $151,843,
$827,107 and $532,521 with respect to the Money, Government Money, Treasury
Money, Tax-Exempt Money and New York Tax-Exempt Money Funds, respectively.

For the fiscal year ended March 31, 1998, Excelsior Fund paid U.S.
Trust advisory fees of $1,036,066, $1,216,265 and $1,108,480 with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Excelsior Tax-Exempt Fund paid U.S. Trust advisory fees of $2,325,765
with respect to the Tax-Exempt Money Fund. For the fiscal year ended March 31,
1998, U.S. Trust waived advisory fees totaling $231,368, $168,737, $82,614 and
$627,413 with respect to the Money, Government Money, Treasury Money and
Tax-Exempt Money Funds, respectively.

For the fiscal year ended March 31, 1997, Excelsior Fund paid U.S.
Trust New York advisory fees of $810,101, $1,136,936 and $828,277 with respect
to the Money, Government Money and Treasury Money Funds, respectively. For the
same period, Excelsior Tax-Exempt Fund paid U.S. Trust advisory fees of New York
$1,891,333 with respect to the Tax-Exempt Money Fund. For the fiscal year ended
March 31, 1997, U.S. Trust New York waived advisory fees totaling $215,132,
$183,979, $79,008 and $502,764 with respect to the Money, Government Money,
Treasury Money and Tax-Exempt Money Funds, respectively.

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<PAGE>

The Investment Advisory Agreements provide that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of such agreements, except that
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreements to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.

CGFSC, Federated Administrative Services, an affiliate of the
Distributor, and U.S. Trust Company (collectively, the "Administrators") serve
as the Companies' administrators and provide the Funds with general
administrative and operational assistance. Under the Administration Agreements,
the Administrators have agreed to maintain office facilities for the Funds,
furnish the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income, "exempt-interest dividends," and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing Share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.

Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Money, Government Money, Treasury Money and
Tax-Exempt Money Funds' administrators pursuant to administration agreements
substantially similar to the Administration Agreements currently in effect for
the Funds.

The Administrators also provide administrative services to the other
investment portfolios of the Companies and to all of the investment portfolios
of Excelsior Institutional Trust which are also advised by U.S. Trust and its
affiliates and distributed by the Distributor. For services provided to all of
the investment portfolios of the Companies and Excelsior Institutional Trust
(except for the international portfolios of Excelsior Fund and Excelsior
Institutional Trust), the Administrators are entitled jointly to fees, computed
daily and paid monthly, based on the combined aggregate average daily net assets
of the three companies (excluding the international portfolios of Excelsior Fund
and Excelsior Institutional Trust) as follows:

Combined Aggregate Average Daily Net Assets
of Excelsior Fund, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust (excluding
the international portfolios of Excelsior Fund
and Excelsior Institutional Trust)

Annual Fee
----------
<S> <C>
First $200 million.................................................... 0.200%
Next $200 million..................................................... 0.175%
Over $400 million..................................................... 0.150%

</TABLE>

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<PAGE>

Administration fees payable to the Administrators by each portfolio of
the Companies and Excelsior Institutional Trust are allocated in proportion to
their relative average daily net assets at the time of determination. From time
to time, the Administrators may voluntarily waive all or a portion of the
administration fee payable to them by a Fund, which waivers may be terminated at
any time.

For the fiscal year or period ended March 31, 1999, Excelsior Fund
paid the Administrators $1,122,463, $958,200 and $792,993 in the aggregate with
respect to the Money, Government Money and Treasury Money Funds, respectively.
For the same period, Excelsior Tax-Exempt Fund paid the Administrators
$2,156,742 and $248,317 in the aggregate with respect to the Tax-Exempt Money
and New York Tax-Exempt Money Funds, respectively. For the fiscal year or period
ended March 31, 1999, the Administrators waived fees totaling $11 and $172 with
respect to the Money and Government Money Funds, respectively.

For the fiscal year ended March 31, 1998, Excelsior Fund paid CGFSC,
Federated Administrative Services and U.S. Trust $775,667, $847,526 and $607,458
in the aggregate with respect to the Money, Government Money and Treasury Money
Funds, respectively. For the same period, Excelsior Tax-Exempt Fund paid CGFSC,
Federated Administrative Services and U.S. Trust $1,807,345 in the aggregate
with respect to the Tax-Exempt Money Fund. For the fiscal year ended March 31,
1998, CGFSC, Federated Administrative Services and U.S. Trust waived fees
totaling $3 and $96 with respect to the Money and Government Money Funds,
respectively.

For the fiscal year ended March 31, 1997, Excelsior Fund paid CGFSC,
Federated Administrative Services and U.S. Trust New York $630,623, $811,988 and
$464,931 in the aggregate with respect to the Money, Government Money and
Treasury Money Funds, respectively. For the same period, Excelsior Tax-Exempt
Fund paid CGFSC, Federated Administrative Services and U.S. Trust New York
$1,472,582 in the aggregate with respect to the Tax-Exempt Money Fund. For the
fiscal year ended March 31, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York waived fees totaling $8 and $256 with respect to the Money
and Government Money Funds, respectively.

BANKING LAWS

Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Shares of the Funds, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent, or custodian to
such an investment company, or from purchasing shares of such company for and
upon the order of customers. The Adviser, CGFSC and certain Shareholder
Organizations may be subject to such banking laws and regulations. State
securities laws may differ from the interpretations of federal law

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<PAGE>

discussed in this paragraph and banks and financial institutions may be required
to register as dealers pursuant to state law.

Should legislative, judicial, or administrative action prohibit or
restrict the activities of the Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Adviser and such Shareholder
Organizations might be required to alter materially or discontinue the
investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would
affect their net asset values per Share or result in financial loss to any
shareholder.

SHAREHOLDER ORGANIZATIONS

The Companies have entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to
provide shareholder administrative services to their Customers who
beneficially own Retail Shares or Institutional Shares in consideration for a
Fund's payment of not more than the annual rate of 0.40% or 0.15%,
respectively of the average daily net assets of the Fund's Retail Shares or
Institutional Shares beneficially owned by Customers of the Shareholder
Organization. Such services may include: (a) acting as recordholder of Retail
Shares or Institutional Shares; (b) assisting in processing purchase,
exchange and redemption transactions; (c) transmitting and receiving funds in
connection with Customer orders to purchase, exchange or redeem Retail Shares
or Institutional Shares; (d) providing periodic statements showing a
Customer's account balances and confirmations of transactions by the
Customer; (e) providing tax and dividend information to shareholders as
appropriate; (f) transmitting proxy statements, annual reports, updated
prospectuses and other communications from the Companies to Customers; and
(g) providing or arranging for the provision of other related services. It is
the responsibility of Shareholder Organizations to advise Customers of any
fees that they may charge in connection with a Customer's investment. Until
further notice, the Adviser and Administrators have voluntarily agreed to
waive fees payable by a Fund in an aggregate amount equal to administrative
service fees payable by that Fund.

The Companies' agreements with Shareholder Organizations are governed
by Administrative Services Plans (the "Plans") adopted by the Companies.
Pursuant to the Plans, each Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of each Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").

Any material amendment to a Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Companies'
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Companies' Boards of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Companies will be
committed to the discretion of such Disinterested Directors.

For the fiscal years ended March 31, 1999, 1998 and 1997, payments to
Shareholder Organizations for Retail Shares totaled $358,371, $231,371 and
$215,140;

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<PAGE>

$184,360, $168,833 and $184,235; $151,843, $82,614 and $79,008; and $827,107,
$627,413 and $502,764 with respect to the Money, Government Money, Treasury
Money and Tax-Exempt Money Funds, respectively. Of these respective amounts,
$358,333, $231,347 and $215,090; $183,330, $168,139 and $182,579; $151,843,
$82,614 and $79,008; and $827,104, $627,412 and $502,764 were paid to affiliates
of U.S. Trust with respect to the Money, Government Money, Treasury Money and
Tax-Exempt Money Funds, respectively. For the fiscal period ended March 31,
1999, payments to Shareholder Organizations totaled $7,879 with respect to the
New York Tax-Exempt Money Fund. Of this amount, $7,879 was paid to affiliates
of U.S. Trust with respect to the New York Tax-Exempt Money Fund. As of the date
of this SAI, there were no Institutional Shares issued.

EXPENSES

Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include taxes;
interest; fees (including fees paid to the Companies' directors and officers who
are not affiliated with the Distributor or the Administrators); SEC fees; state
securities qualifications fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to shareholders; advisory,
administration and administrative servicing fees; charges of the custodian,
transfer agent, and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; cost of independent pricing services; costs
of shareholder reports and shareholder meetings; and any extraordinary expenses.
The Funds also pay for brokerage fees and commissions in connection with the
purchase of portfolio securities.

CUSTODIAN AND TRANSFER AGENT

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of the
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under the
Custodian Agreements, Chase has agreed to: (i) maintain a separate account or
accounts in the name of the Funds; (ii) make receipts and disbursements of money
on behalf of the Funds; (iii) collect and receive all income and other payments
and distributions on account of the Funds' portfolio securities; (iv) respond to
correspondence from securities brokers and others relating to its duties; (v)
maintain certain financial accounts and records; and (vi) make periodic reports
to each Company's Board of Directors concerning the Funds' operations. Chase
may, at its own expense, open and maintain custody accounts with respect to the
Funds with other banks or trust companies, provided that Chase shall remain
liable for the performance of all its custodial duties under the Custodian
Agreements, notwithstanding any delegation. Communications to the custodian
should be directed to Chase, Mutual Funds Service Division, 3 Chase MetroTech
Center, 8th Floor, Brooklyn, NY 11245.

U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i) issue
and redeem Shares; (ii) address and mail all communications by the Funds to
their shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for its meetings of shareholders; (iii) respond to
correspondence by shareholders and others relating to its duties; (iv) maintain
shareholder accounts; and (v) make periodic reports to each Company's Board of
Directors concerning the Funds' operations. For its transfer agency, dividend
disbursing, and

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<PAGE>

subaccounting services, U.S. Trust New York is entitled to receive $15.00 per
annum per account and subaccount. In addition, U.S. Trust New York is entitled
to be reimbursed for its out-of-pocket expenses for the cost of forms, postage,
processing purchase and redemption orders, handling of proxies, and other
similar expenses in connection with the above services. U.S. Trust New York is
located at 114 W. 47th Street, New York, New York 10036.

U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreements, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Companies for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.

PORTFOLIO TRANSACTIONS

Subject to the general control of the Companies' Boards of Directors,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of all portfolio securities of each of the
Funds.

The Funds do not intend to seek profits from short-term trading. Their
annual portfolio turnover will be relatively high, but brokerage commissions are
not normally paid on money market instruments, and portfolio turnover is not
expected to have a material effect on the net income of the Funds.

Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere.

The Investment Advisory Agreements between the Companies and the
Adviser provide that, in executing portfolio transactions and selecting brokers
or dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and
whether such broker or dealer is selling shares of the Companies, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.

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<PAGE>

In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Companies'
Boards of Directors from time to time with respect to the extent and
continuation of the policy, to cause the Funds to pay a broker which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker for effecting the same transaction, provided that the
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser to the accounts as to which it exercises
investment discretion. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of stocks and their comparative earnings, or broad overviews of the stock
market and the economy.

Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and does not
reduce the investment advisory fees payable by the Funds. Such information may
be useful to the Adviser in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Funds.

Portfolio securities will not be purchased from or sold to the
Adviser, the Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.

Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of the Funds and
another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to the Funds and such other
investment company or common trust fund. In some instances, this investment
procedure may adversely affect the price paid or received by the Funds or the
size of the position obtained by the Funds. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Funds with
those to be sold or purchased for other investment companies or common trust
funds in order to obtain best execution.

The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 1999, the Excelsior Money Fund held one corporate bond issued by
Merrill Lynch & Co. with a principal amount of $45,000,000.

INDEPENDENT AUDITORS

Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
March 31, 1999 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.

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<PAGE>

COUNSEL

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103, is
counsel to the Companies, and will pass upon the legality of the Shares offered
by the Prospectus.

ADDITIONAL INFORMATION CONCERNING TAXES

GENERALLY

The following supplements the tax information contained in the
Prospectus.

For federal income tax purposes, each Fund is treated as a separate
corporate entity , and has qualified and intends to continue to qualify as a
regulated investment company. Such qualification generally relieves a Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, such Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether or
not derived from interest on Municipal Securities) would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.

A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Fund when required
to do so either that they are not subject to backup withholding or that they are
"exempt recipients."

The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state, local and/or foreign taxes.

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<PAGE>

TAXABLE FUNDS

The Taxable Funds' distributions will generally be taxable to
shareholders. The Taxable Funds expect that all, or substantially all, of their
distributions will consist of ordinary income. You will be subject to income tax
on these distributions regardless whether they are paid in cash or reinvested in
additional shares. The one major exception to these tax principles is that
distributions on shares held in an IRA (or other tax-qualified plan) will not be
currently taxable. You will be notified annually of the tax status of
distributions to you.

TAX-EXEMPT FUNDS

The distributions by the Tax-Exempt Funds will generally constitute
tax-exempt income for shareholders for federal income tax purposes. It is
possible, depending upon the Tax-Exempt Funds' investments, that a portion of
the Funds' distributions could be taxable to shareholders as ordinary income or
capital gains, but the Tax-Exempt Funds do not expect that this will be the
case.

Interest on indebtedness incurred by a shareholder to purchase or
carry shares of the Tax-Exempt Funds generally will not be deductible for
federal income tax purposes.

You should note that a portion of the exempt-interest dividends paid
by the Tax-Exempt Funds may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest dividends
will also be considered along with other adjusted gross income in determining
whether any Social Security or railroad retirement payments received by you are
subject to federal income taxes.

Each Tax-Exempt Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Exempt Funds would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Tax-Exempt Funds' dividends
being tax-exempt, but such dividends would be ultimately taxable to the
beneficiaries when distributed to them. In addition, the Tax-Exempt Funds may
not be appropriate investments for entities which are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under the Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, who occupies more than 5% of the usable area of
such facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S Corporation and its shareholders.

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<PAGE>

In order for the Tax-Exempt Funds to pay exempt-interest dividends
for any taxable year, at least 50% of the aggregate value of a Fund's portfolio
must consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, the Tax-Exempt
Funds will notify their shareholders of the portion of the dividends paid by
such Fund which constitutes an exempt-interest dividend with respect to such
taxable year. However, the aggregate amount of dividends so designated by the
Tax-Exempt Funds cannot exceed the excess of the amount of interest exempt from
tax under Section 103 of the Code received by the Tax-Exempt Funds during the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code. The percentage of total dividends paid by the Tax-Exempt
Funds with respect to any taxable year which qualifies as exempt-interest
dividends will be the same for all shareholders receiving dividends from the
Tax-Exempt Funds for such year.

The Tax-Exempt Funds intend to distribute to their shareholders any
investment company taxable income earned by such Fund for each taxable year. In
general, the Tax-Exempt Funds' investment company taxable income will be its
taxable income (including taxable interest and short-term capital gains) subject
to certain adjustments and excluding the excess of any net long-term capital
gain for the taxable year over the net short-term capital loss, if any, for such
year. Such distributions will be taxable to the shareholders as ordinary income
(whether paid in cash or additional shares).

* * *

The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. You should consult your tax advisor for further information regarding
federal, state, local and/or foreign tax consequences relevant to your specific
situation. Shareholders may also be subject to state and local taxes on
distributions and redemptions. State income taxes may not apply, however, to the
portions of each Funds' distributions, if any, that are attributable to intent
on federal securities or interest on securities of the particular state or
localities within the state. For example, distributions from the New York
Tax-Exempt Money Fund will generally be exempt from federal, New York State and
New York City taxes.

YIELD INFORMATION

Each Fund may advertise its seven-day yield which refers to the income
generated over a particular seven-day period identified in the advertisement by
an investment in the Fund. This income is annualized, i.e., the income during a
particular week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The Funds may also advertise their
"effective yields" which are calculated similarly but, when annualized, income
is assumed to be reinvested, thereby making the effective yields slightly higher
because of the compounding effect of the assumed reinvestment.

Yields will fluctuate and any quotation of yield should not be
considered as representative of a Fund's future performance. Since yields
fluctuate, yield data cannot

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<PAGE>

necessarily be used to compare an investment in the Funds with bank deposits,
savings accounts and similar investment alternatives which often provide an
agreed or guaranteed fixed yield for a stated period of time. Shareholders
should remember that yield is generally a function of the kind and quality of
the instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by Shareholder Organizations with respect to
accounts of Customers that have invested in Shares will not be included in
calculations of yield.

The standardized annualized seven-day yields for the Shares of the
Funds are computed separately by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account in the Fund
involved, having a balance of one Share at the beginning of the period, dividing
the net change in account value by the value of the account at the beginning of
the period to obtain the base period return, and multiplying the base period
return by (365/7). The net change in the value of an account in each of the
Funds includes the value of additional Shares purchased with dividends from the
original Share and dividends declared on both the original Share and any such
additional Shares, net of all fees that are charged to all Shareholder accounts
and to the particular series of Shares in proportion to the length of the base
period, other than nonrecurring account or any sales charges. For any account
fees that vary with the size of the account, the amount of fees charged is
computed with respect to the Fund's mean (or median) account size. The capital
changes to be excluded from the calculation of the net change in account value
are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. In addition, each Fund may use effective compound
yield quotations for its Shares computed by adding 1 to the unannualized base
period return (calculated as described above), raising the sums to a power equal
to 365 divided by 7, and subtracting 1 from the results.

From time to time, in advertisements, sales literature or in reports
to shareholders, the yields of each Money Market Fund's Shares may be quoted and
compared to those of other mutual funds with similar investment objectives and
to stock or other relevant indices. For example, the yield of such a Fund's
Shares may be compared to the Donoghue's Money Fund average, which is an average
compiled by Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely
recognized independent publication that monitors the performance of money market
funds, or to the data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service that monitors the performance of mutual funds.
The yields of the Taxable Funds may also be compared to the average yields
reported by the Bank Rate Monitor for money market deposit accounts offered by
the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas. Advertisements, sales literature or reports to
shareholders may from time to time also include a discussion and analysis of
each Fund's performance, including without limitation, those factors, strategies
and techniques that, together with market conditions and events, materially
affected each Fund's performance.

Yield data as reported in national financial publications including,
but not limited to, MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET JOURNAL
and THE NEW YORK TIMES, or in publications of a local or regional nature, may
also be used in comparing the Funds' yields.

The current yields for the Funds' Shares may be obtained by calling
(800) 446-1012. For the seven-day period ended March 31, 1999, the annualized
yields for Retail Shares of the Money Fund, Government Money Fund, Treasury
Money Fund, Tax- Exempt Money Fund and New York Tax-Exempt Money Fund were
4.47%, 4.53%, 4.31%, 2.47% and 2.36%,

-55-
<PAGE>

respectively, and the effective yields for Retail Shares of such respective
Funds were 4.57%, 4.63%, 4.40%, 2.50% and 2.39%.

The "tax-equivalent" yield of the Tax-Exempt Money Fund is computed
by: (a) dividing the portion of the yield (calculated as above) that is exempt
from federal income tax by one minus a stated federal income tax rate and (b)
adding that figure to that portion, if any of the yield that is not exempt from
federal income tax. Tax-equivalent yields assume the payment of federal income
taxes at a rate of 31%.

The "tax-equivalent" yield of the New York Tax-Exempt Money Fund is
computed by: (a) dividing the portion of the yield (calculated as above) that is
exempt from both federal and New York State income taxes by one minus a stated
combined federal and New York State income tax rate; (b) dividing the portion of
the yield (calculated as above) that is exempt from federal income tax only by
one minus a stated federal income tax rate; and (c) adding the figures resulting
from (a) and (b) above to that portion, if any, of the yield that is not exempt
from federal income tax. Tax-equivalent yields assume a federal income tax rate
of 31%, a New York State and New York City marginal income tax rate of 10.21%
and an overall tax rate taking into account the federal tax deduction for state
and local taxes paid of 38.04%.

Based on the foregoing calculation, the annualized tax-equivalent
yield of the Retail Shares of the Tax-Exempt Money Fund and the New York
Tax-Exempt Money Fund for the seven-day period ended March 31, 1999 were 3.58%
and 3.86%.

MISCELLANEOUS

As used herein, "assets belonging to a Fund" means the consideration
received upon the issuance of Shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company involved not belonging to a particular portfolio of that Company. In
determining the net asset value of a Fund's Shares, assets belonging to the Fund
are charged with the direct liabilities in respect of that Fund and with a share
of the general liabilities of the Company involved which are normally allocated
in proportion to the relative asset values of the Company's portfolios at the
time of allocation. Subject to the provisions of the Companies' Charters,
determinations by the Boards of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to a
particular Fund, are conclusive.

As of July 13, 1999, U.S. Trust and its affiliates held of record
substantially all of the Companies' outstanding Shares as agent or custodian
for their customers, but did not own such shares beneficially because they did
not have voting or investment discretion with respect to such Retail Shares.

-56-
<PAGE>

States Trust Company of New York, 114 West 47th Street, New York, New York
10036, 6.29%; Excelsior Tax-Exempt Funds, Inc.: NEW YORK TAX-EXEMPT MONEY FUND:
Christopher H. Browne, c/o United States Trust Company of New York, 114 West
47th Street, New York, New York 10036, 7.31%.

As of July 13, 1999, the name, address and percentage ownership of
each person, in addition to U.S. Trust and its affiliates, that owned
beneficially or of record 5% or more of the outstanding Institutional Shares of
the Money Fund were as follows: Money Fund: Barnett Executive Benefit Plan, c/o
United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 35.58%; and M. Kemmerer, c/o United States Trust Company of New
York, 114 West 47th Street, New York, New York 10036, 6.05%. As of the date of
this SAI, there were no Instiutional Shares issued.

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, 1999 (the
"1999 Annual Reports") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the 1999 Annual Reports
are incorporated by reference herein. The financial statements included in the
1999 Annual Reports for the Funds have been audited by the Companies'
independent auditors, Ernst & Young LLP, whose reports thereon also appear in
the 1999 Annual Reports and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 1999 Annual Reports may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.

-57-
<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:

"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.

"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.

"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.

"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.

"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.

"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.

Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:

A-1
<PAGE>

"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.

"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

"Not Prime" - Issuers do not fall within any of the Prime rating
categories.

The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:

"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.

"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.

"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.

"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.

"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.

A-2
<PAGE>

"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.

"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.

Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:

"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.

"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.

"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.

"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.

"C" - Securities possess high default risk. This designation indicates
that default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.

"D" - Securities are in actual or imminent payment default.

Thomson Financial BankWatch short-term ratings assess the likelihood
of an untimely payment of principal and interest of debt instruments with
original maturities of one year or less. The following summarizes the ratings
used by Thomson Financial BankWatch:

"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.

"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment

A-3
<PAGE>

of principal and interest is strong, the relative degree of safety is not as
high as for issues rated "TBW-1."

"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.

"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:

"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.

"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.

"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.

A-4
<PAGE>

"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.

"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.

"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.

"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due,
even if the applicable grace period has not expired, unless S & P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.

"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower

A-5
<PAGE>

than the best bonds because margins of protection may not be as large as in
"Aaa" securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risk
appear somewhat larger than the "Aaa" securities.

"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.

Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.

The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.

"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.

"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.

A-6
<PAGE>

"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.

"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.

To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.

The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:

"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.

"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.

"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.

"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.

"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.

A-7
<PAGE>

"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.

"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.

"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations
in this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery , around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "D" the lowest recovery potential, i.e., below 50%.

Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for redemption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.

To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.

Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:

"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.

A-8
<PAGE>

"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.

"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.

"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson Financial BankWatch to non-investment grade long-term debt. Such issues
are regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.

"D" - This designation indicates that the long-term debt is in
default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.

MUNICIPAL NOTE RATINGS

A Standard and Poor's rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:

"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.

"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.

"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.

Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:

A-9
<PAGE>

"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.

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

"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.

"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.

"SG" - This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.

Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.

A-10
<PAGE>

EXCELSIOR FUNDS, INC.

Blended Equity Fund
Value and Restructuring Fund
Small Cap Fund
Large Cap Growth Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1999

This Statement of Additional Information is not a prospectus but should
be read in conjunction with the current prospectus for the Blended Equity, Value
and Restructuring, Small Cap and Large Cap Growth Funds (individually, a "Fund"
and collectively, the "Funds") of Excelsior Funds, Inc. dated August 1, 1999
(the "Prospectus"). A copy of the Prospectus may be obtained by writing
Excelsior Funds, Inc. c/o Chase Global Funds Services Company, 73 Tremont
Street, Boston, MA 02108-3913 or by calling (800) 446-1012. Capitalized terms
not otherwise defined have the same meaning as in the Prospectus.

The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Funds'
shareholders for the fiscal year ended March 31, 1999 are incorporated herein by
reference in the section entitled "Financial Statements." No other parts of the
annual report are incorporated herein by reference. Copies of the annual report
may be obtained upon request and without charge by calling (800) 446-1012.

<PAGE>

TABLE OF CONTENTS

PAGE

<S> <C>
CLASSIFICATION AND HISTORY...................................................1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS..................................1
Investment Philosophy and Strategies................................1
Additional Investment Policies......................................3
Additional Information on Portfolio Instruments.....................3
Investment Limitations.............................................14
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................18
Purchase of Shares.................................................19
Redemption Procedures..............................................21
Other Redemption Information.......................................23
INVESTOR PROGRAMS...........................................................24
Systematic Withdrawal Plan.........................................24
Exchange Privilege.................................................24
Retirement Plans...................................................25
Automatic Investment Program.......................................26
Additional Information.............................................26
DESCRIPTION OF CAPITAL STOCK................................................26
MANAGEMENT OF THE FUNDS.....................................................28
Directors and Officers.............................................28
Investment Advisory and Administration Agreements..................34
Banking Laws.......................................................36
Shareholder Organizations..........................................37
Expenses...........................................................38
Custodian and Transfer Agent.......................................38
PORTFOLIO TRANSACTIONS......................................................39
PORTFOLIO VALUATION.........................................................42
INDEPENDENT AUDITORS........................................................42
COUNSEL.....................................................................43
ADDITIONAL INFORMATION CONCERNING TAXES.....................................43
PERFORMANCE INFORMATION.................................................... 44
MISCELLANEOUS...............................................................47
FINANCIAL STATEMENTS........................................................48
APPENDIX A.................................................................A-1
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CLASSIFICATION AND HISTORY

Excelsior Funds, Inc. (the "Company") is an open-end,
management investment company. Each Fund is a separate series of the Company and
is classified as diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company was organized as a Maryland corporation on
August 2, 1984. Prior to December 28, 1995, the Company was known as "UST Master
Funds, Inc." Prior to August 1, 1997, the Blended Equity Fund, Value and
Restructuring Fund and Small Cap Fund were known as the Equity Fund, Business
and Industrial Restructuring Fund and Early Life Cycle Fund, respectively.

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of each of the Blended Equity, Value and
Restructuring and Small Cap Funds may not be changed without the vote of the
holders of a majority of its outstanding shares (as defined below). The
investment objective of the Large Cap Growth Fund may be changed without
shareholder approval. Except as expressly noted below, each Fund's investment
policies may be changed without shareholder approval.

INVESTMENT PHILOSOPHY AND STRATEGIES

In managing investments for the Funds, the Adviser follows a
long-term investment philosophy which generally does not change with the
short-term variability of financial markets or fundamental conditions. Its
approach begins with the conviction that all worthwhile investments are grounded
in value. The Adviser believes that an investor can identify fundamental values
that eventually should be reflected in market prices, such that over time, a
disciplined search for fundamental value will achieve better results than
attempting to take advantage of short-term price movements.

The Adviser's investment philosophy is to identify investment
values available in the market at attractive prices. Investment value arises
from the ability to generate earnings or from the ownership of assets or
resources. Underlying earnings potential and asset values are frequently
demonstrable but not recognized in the market prices of the securities
representing their ownership. The Adviser employs the following three different
but closely interrelated portfolio strategies to focus and organize its search
for investment values.

1. PROBLEM/OPPORTUNITY COMPANIES. Important investment
opportunities often occur where companies develop solutions to large, complex,
fundamental problems, such as declining industrial productivity; rising costs
and declining sources of energy; the economic imbalances and value erosion
caused by years of high inflation and interest rates; the soaring costs and
competing priorities of providing health care; and the accelerating
interdependence and "shrinking size" of the world.

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Solutions or parts of solutions to large problems may be
generated by established companies or comparatively new companies of all sizes
through the development of new products, technologies or services, or through
new applications of older ones.

Investment in such companies represents a very wide range of
investment potential, current income return rates, and exposure to fundamental
and market risks. Income generated by each Fund's investments in these companies
would be expected to be moderate, characterized by lesser rates than those of a
fund whose sole objective is current income, and somewhat higher rates than
those of a higher-risk growth fund.

2. TRANSACTION VALUE COMPANIES. In the opinion of the Adviser,
the stock market frequently values the aggregate ownership of a company at a
substantially lower figure than its component assets would be worth if they were
sold off separately over time. Such assets may include intangible assets such as
product and market franchises, operating know-how, or distribution systems, as
well as such tangible properties as oil reserves, timber, real estate, or
production facilities. Investment opportunities in these companies are
determined by the magnitude of difference between economic worth and current
market price.

Market undervaluations are very often corrected by purchase
and sale, restructuring of the company, or market appreciation to recognize the
actual worth. The recognition process may well occur over time, however,
incurring a form of time-exposure risk. Success from investing in these
companies is often great, but may well be achieved only after a waiting period
of inactivity.

Income derived from investing in undervalued companies is
expected to be moderately greater than that derived from investments in either
the Problem/Opportunity or Early Life Cycle companies.

3. EARLY LIFE CYCLE COMPANIES. Investments in Early Life Cycle
companies tend to be narrowly focused on an objective of higher rates of capital
appreciation. They correspondingly will involve a significantly greater degree
of risk and the reduction of current income to a negligible level. Such
investments will not be limited to new, small companies engaged only in frontier
technology, but will seek opportunities for maximum appreciation through the
full spectrum of business operations, products, services, and asset values.
Consequently, the Funds' investments in Early Life Cycle companies are primarily
in younger, small- to medium-sized companies in the early stages of their
development. Such companies are usually more flexible in trying new approaches
to problem-solving and in making new or different employment of assets. Because
of the high risk level involved, the ratio of success among such companies is
lower than the average, but for those companies which succeed, the magnitude of
investment reward is potentially higher.

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understanding the instigation, catalysts and effects of these longer-term
trends should help to identify companies that are beneficiaries of these
trends.

ADDITIONAL INVESTMENT POLICIES

Under normal market and economic conditions, each Fund will
invest at least 65% of its total assets in common stock, preferred stock and
securities convertible into common stock. Normally, up to 35% of each Fund's
total assets may be invested in other securities and instruments including,
e.g., other investment-grade debt securities (i.e., debt obligations classified
within the four highest ratings of a nationally recognized statistical rating
organization such as Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Services ("S&P") or, if unrated, determined by the Adviser to be
of comparable quality), warrants, options and futures instruments as described
in more detail below. During temporary defensive periods or when the Adviser
believes that suitable stocks or convertible securities are unavailable, each
Fund may hold cash and/or invest some or all of its assets in U.S. government
securities, high-quality money market instruments and repurchase agreements
collateralized by the foregoing obligations.

Portfolio holdings will include equity securities of companies
having capitalizations of varying amounts, and the Funds may invest in the
securities of high growth, small companies when the Adviser expects earnings and
the price of the securities to grow at an above-average rate. The Small Cap Fund
emphasizes such companies. Certain securities owned by the Funds may be traded
only in the over-the-counter market or on a regional securities exchange, may be
listed only in the quotation service commonly known as the "pink sheets," and
may not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, there may be a greater fluctuation in the
value of a Fund's shares, and a Fund may be required, in order to satisfy
redemption requests or for other reasons, to sell these securities at a discount
from market prices, to sell during periods when such disposition is not
desirable, or to make many small sales over a period of time.

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

OPTIONS

The Value and Restructuring, Small Cap and Large Cap Growth
Funds may purchase put and call options listed on a national securities exchange
and issued by the Options

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Clearing Corporation. Such purchases would be in an amount not exceeding 5% of
each such Fund's net assets. Such options may relate to particular securities or
to various stock and bond indices. Purchase of options is a highly specialized
activity which entails greater than ordinary investment risks, including a
substantial risk of a complete loss of the amounts paid as premiums to the
writer of the options. Regardless of how much the market price of the underlying
security increases or decreases, the option buyer's risk is limited to the
amount of the original investment for the purchase of the option. However,
options may be more volatile than the underlying securities, and therefore, on a
percentage basis, an investment in options may be subject to greater fluctuation
than an investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and the
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by the Value and Restructuring,
Small Cap and Large Cap Growth Funds will be valued at the last sale price or,
in the absence of such a price, at the mean between bid and asked prices.

Each Fund may engage in writing covered call options (options
on securities owned by the particular Fund) and enter into closing purchase
transactions with respect to such options. Such options must be listed on a
national securities exchange and issued by the Options Clearing Corporation. The
aggregate value of the securities subject to options written by each Fund may
not exceed 25% of the value of its net assets. By writing a covered call option,
a Fund forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price except insofar as the premium
represents such a profit, and it will not be able to sell the underlying
security until the option expires or is exercised or the Fund effects a closing
purchase transaction by purchasing an option of the same series.

When a Fund writes a covered call option, it may terminate its
obligation to sell the underlying security prior to the expiration date of the
option by executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the writer will have
incurred a loss on the transaction. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
There is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered option writer, unable to effect a closing
purchase transaction, will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the writer in such circumstances will be subject to the risk of
market decline in the underlying security during such period. A Fund will write
an option on a particular security only if the Adviser believes that a

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liquid secondary market will exist on an exchange for options of the same
series, which will permit the Fund to make a closing purchase transaction in
order to close out its position.

When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by that Fund is included in
the liability section of that Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked
to market to reflect the current value of the option written. The current value
of the traded option is the last sale price or, in the absence of a sale, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date, or if the Fund involved enters into a closing
purchase transaction, the Fund will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold), and the deferred credit related to such option will be eliminated. If an
option is exercised, the Fund involved may deliver the underlying security from
its portfolio or purchase the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received, and the Fund involved will realize a gain or loss. Premiums from
expired call options written by the Funds and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. The use of covered call options is not a primary investment technique of
the Funds and such options will normally be written on underlying securities as
to which the Adviser does not anticipate significant short-term capital
appreciation.

REPURCHASE AGREEMENTS

Each Fund may agree to purchase portfolio securities subject
to the seller's agreement to repurchase them at a mutually agreed upon date and
price ("repurchase agreements"). The Funds will enter into repurchase agreements
only with financial institutions that are deemed to be creditworthy by the
Adviser, pursuant to guidelines established by the Company's Board of Directors.
The Funds will not enter into repurchase agreements with the Adviser or any of
its affiliates. Repurchase agreements with remaining maturities in excess of
seven days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).

Securities subject to repurchase agreements are held by the
Funds' custodian (or sub-custodian) or in the Federal Reserve/Treasury
book-entry system. The seller under a repurchase agreement will be required to
maintain the value of the securities which are subject to the agreement and held
by a Fund at not less than the repurchase price. Default or bankruptcy of the
seller would, however, expose a Fund to possible delay in connection with the
disposition of the underlying securities or loss to the extent that proceeds
from a sale of the underlying securities were less than the repurchase price
under the agreement. Repurchase agreements are considered loans by a Fund under
the 1940 Act.

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FUTURES CONTRACTS AND RELATED OPTIONS

Each Fund may invest in futures contracts and options thereon.
They may enter into interest rate futures contracts and other types of financial
futures contracts, including foreign currency futures contracts, as well as any
index or foreign market futures which are available on recognized exchanges or
in other established financial markets. A futures contract on foreign currency
creates a binding obligation on one party to deliver, and a corresponding
obligation on another party to accept delivery of, a stated quantity of a
foreign currency for an amount fixed in U.S. dollars. Foreign currency futures,
which operate in a manner similar to interest rate futures contracts, may be
used by the Funds to hedge against exposure to fluctuations in exchange rates
between the U.S. dollar and other currencies arising from multinational
transactions.

Futures contracts will not be entered into for speculative
purposes, but to hedge risks associated with a Fund's securities investments.
The Funds will engage in futures transactions only to the extent permitted by
the Commodity Futures Trading Commission ("CFTC") and the Securities and
Exchange Commission ("SEC"). When investing in futures contracts, the Funds must
satisfy certain asset segregation requirements to ensure that the use of futures
is unleveraged. When a Fund takes a long position in a futures contract, it must
maintain a segregated account containing liquid assets equal to the purchase
price of the contract, less any margin or deposit. When a Fund takes a short
position in a futures contract, the Fund must maintain a segregated account
containing liquid assets in an amount equal to the market value of the
securities underlying such contract (less any margin or deposit), which amount
must be at least equal to the market price at which the short position was
established. Asset segregation requirements are not applicable when a Fund
"covers" an options or futures position generally by entering into an offsetting
position. Each Fund will limit its hedging transactions in futures contracts and
related options so that, immediately after any such transaction, the aggregate
initial margin that is required to be posted by the Fund under the rules of the
exchange on which the futures contract (or futures option) is traded, plus any
premiums paid by the Fund on its open futures options positions, does not exceed
5% of the Fund's total assets, after taking into account any unrealized profits
and unrealized losses on the Fund's open contracts (and excluding the amount
that a futures option is "in-the-money" at the time of purchase). An option to
buy a futures contract is "in-the-money" if the then-current purchase price of
the underlying futures contract exceeds the exercise or strike price; an option
to sell a futures contract is "in-the-money" if the exercise or strike price
exceeds the then-current purchase price of the contract that is the subject of
the option. In addition, the use of futures contracts is further restricted to
the extent that no more than 10% of a Fund's total assets may be hedged.

Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Fund would continue
to be required to make daily cash payments to maintain its required margin. In
such situations, if the Fund has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds.

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The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge.

Transactions in futures as a hedging device may subject a Fund
to a number of risks. Successful use of futures by a Fund is subject to the
ability of the Adviser to correctly predict movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts (or options) and movements in the price of the instruments
being hedged. In addition, investments in futures may subject a Fund to losses
due to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract (or option) at any particular time. Consequently, a Fund may realize a
loss on a futures transaction that is not offset by a favorable movement in the
price of securities which it holds or intends to purchase or may be unable to
close a futures position in the event of adverse price movements. In addition,
in some situations, if a Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market.

As noted above, the risk of loss in trading futures contracts
in some strategies can be substantial, due both to the low margin deposits
required, and the extremely high degree of leverage involved in futures pricing.
As a result, a relatively small price movement in a futures contract may result
in immediate and substantial loss (as well as gain) to the investor. For
example, if at the time of purchase, 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit,
before any deduction for the transaction costs, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the contract.

Utilization of futures transactions involves the risk of loss
by a Fund of margin deposits in the event of bankruptcy of a broker with whom
such Fund has an open position in a futures contract or related option.

Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.

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The trading of futures contracts is also subject to the risk
of trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.

OPTIONS ON FUTURES CONTRACTS

Each Fund may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.

Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
instruments being hedged, an option may or may not be less risky than ownership
of the futures contract or such instruments. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). Although
permitted by their fundamental investment policies, the Funds do not currently
intend to write futures options, and will not do so in the future absent any
necessary regulatory approvals.

WHEN-ISSUED AND FORWARD TRANSACTIONS

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equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, its liquidity and ability to manage its
portfolio might be affected in the event its forward commitments or commitments
to purchase "when-issued" securities ever exceed 25% of the value of its assets.

It is expected that "forward commitments" and "when-issued"
purchases will not exceed 25% of the value of a Fund's total assets absent
unusual market conditions, and that the length of such commitments will not
exceed 45 days. The Funds do not intend to engage in "when-issued" purchases and
"forward commitments" for speculative purposes, but only in furtherance of their
investment objectives.

The market value of the securities underlying a "when-issued"
purchase or a "forward commitment" to purchase securities and any subsequent
fluctuations in their market value are taken into account when determining the
market value of a Fund starting on the day the Fund agrees to purchase the
securities. The Fund does not earn interest on the securities it has committed
to purchase until they are paid for and delivered on the settlement date.

FORWARD CURRENCY TRANSACTIONS

Each Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange markets, or by entering into forward currency contracts. A forward
foreign currency contract involves an obligation to purchase or sell a specific
currency for a set price at a future date. In this respect, forward currency
contracts are similar to foreign currency futures contracts; however, unlike
futures contracts which are traded on recognized commodities exchange, forward
currency contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts.

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generally arising in connection with the purchase or sale of its portfolio
securities. The purpose of transaction hedging is to "lock in" the U.S. dollar
equivalent price of such specific securities. Position hedging is the sale of
foreign currency with respect to portfolio security positions denominated or
quoted in that currency. The Funds will not speculate in foreign currency
exchange transactions. Transaction and position hedging will not be limited to
an overall percentage of a Fund's assets, but will be employed as necessary to
correspond to particular transactions or positions. A Fund may not hedge its
currency positions to an extent greater than the aggregate market value (at the
time of entering into the forward contract) of the securities held in its
portfolio denominated, quoted in, or currently convertible into that particular
currency. When the Funds engage in forward currency transactions, certain asset
segregation requirements must be satisfied to ensure that the use of foreign
currency transactions is unleveraged. When a Fund takes a long position in a
forward currency contract, it must maintain a segregated account containing
liquid assets equal to the purchase price of the contract, less any margin or
deposit. When a Fund takes a short position in a forward currency contract, the
Fund must maintain a segregated account containing liquid assets in an amount
equal to the market value of the currency underlying such contract (less any
margin or deposit), which amount must be at least equal to the market price at
which the short position was established. Asset segregation requirements are not
applicable when a Fund "covers" a forward currency position generally by
entering into an offsetting position.

The transaction costs to the Funds of engaging in forward
currency transactions vary with factors such as the currency involved, the
length of the contract period and prevailing currency market conditions. Because
currency transactions are usually conducted on a principal basis, no fees or
commissions are involved. The use of forward currency contracts does not
eliminate fluctuations in the underlying prices of the securities being hedged,
but it does establish a rate of exchange that can be achieved in the future.
Thus, although forward currency contracts used for transaction or position
hedging purposes may limit the risk of loss due to an increase in the value of
the hedged currency, at the same time they limit potential gain that might
result were the contracts not entered into. Further, the Adviser may be
incorrect in its expectations as to currency fluctuations, and a Fund may incur
losses in connection with its currency transactions that it would not otherwise
incur. If a price movement in a particular currency is generally anticipated, a
Fund may not be able to contract to sell or purchase that currency at an
advantageous price.

At or before the maturity of a forward sale contract, a Fund
may sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between a
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to sell is less than the price of the currency it has

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agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.

REAL ESTATE INVESTMENT TRUSTS

Each Fund may invest in equity real estate investment trusts
("REITs"). REITs pool investors' funds for investment primarily in commercial
real estate properties. Investments in REITs may subject a Fund to certain
risks. REITs may be affected by changes in the value of the underlying property
owned by the trust. REITs are dependent upon specialized management skill, may
not be diversified and are subject to the risks of financing projects. REITs are
also subject to heavy cash flow dependency, defaults by borrowers, self
liquidation and the possibility of failing to qualify for the beneficial tax
treatment available to REITs under the Internal Revenue Code of 1986, as amended
(the "Code"), and to maintain exemption from the 1940 Act. As a shareholder in a
REIT, a Fund would bear, along with other shareholders, its pro rata portion of
the REIT's operating expenses. These expenses would be in addition to the
advisory and other expenses a Fund bears directly in connection with its own
operations.

SECURITIES LENDING

To increase return on its portfolio securities, each Fund may
lend its portfolio securities to broker/dealers pursuant to agreements requiring
the loans to be continuously secured by collateral equal at all times in value
to at least the market value of the securities loaned. Collateral for such loans
may include cash, securities of the U.S. government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total assets.
When a Fund lends its securities, it continues to receive interest or dividends
on the securities lent and may simultaneously earn interest on the investment of
the cash loan collateral, which will be invested in readily marketable,
high-quality, short-term obligations. Although voting rights, or rights to
consent, attendant to lent securities pass to the borrower, such loans may be
called at any time and will be called so that the securities may be voted by a
Fund if a material event affecting the investment is to occur.

There may be risks of delay in receiving additional collateral
or in recovering the securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Adviser to be of good standing
and when, in the Adviser's judgment, the income to be earned from the loan
justifies the attendant risks.

MONEY MARKET INSTRUMENTS

All Funds may invest in "money market instruments," which
include, among other things, bank obligations, commercial paper and corporate
bonds with remaining maturities of 13 months or less.

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Bank obligations include bankers' acceptances, negotiable
certificates of deposit, and non-negotiable time deposits earning a specified
return and issued by a U.S. bank which is a member of the Federal Reserve System
or insured by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC"), or by a savings and loan association or savings bank which
is insured by the Savings Association Insurance Fund of the FDIC. Bank
obligations also include U.S. dollar-denominated obligations of foreign branches
of U.S. banks and obligations of domestic branches of foreign banks. Investments
in bank obligations of foreign branches of domestic financial institutions or of
domestic branches of foreign banks are limited so that no more than 5% of the
value of a Fund's total assets may be invested in any one branch, and no more
than 20% of a particular Fund's total assets at the time of purchase may be
invested in the aggregate in such obligations (see investment limitation No. 17
below under "Investment Limitations"). Investments in time deposits are limited
to no more than 5% of the value of a Fund's total assets at the time of
purchase.

Investments by the Funds in commercial paper will consist of
issues that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's.
In addition, each Fund may acquire unrated commercial paper that is determined
by the Adviser at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the particular Fund.

GOVERNMENT OBLIGATIONS

All Funds may invest in U.S. government obligations, including
U.S. Treasury Bills and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, the
Farmers Home Administration, the Export-Import Bank of the United States, the
Small Business Administration, the Government National Mortgage Association, the
Federal National Mortgage Association, the General Services Administration, the
Central Bank for Cooperatives, the Federal Home Loan Mortgage Corporation, the
Federal Intermediate Credit Banks and the Maritime Administration.

INVESTMENT COMPANY SECURITIES

Each Fund may invest in securities issued by other investment
companies which invest in high-quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. In addition to the advisory fees and other expenses a
Fund bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly

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<PAGE>

bear the expenses of the Fund and the other investment company, some or all
of which would be duplicative. Such securities will be acquired by each Fund
within the limits prescribed by the 1940 Act, which include, subject to
certain exceptions, a prohibition against a Fund investing more than 10% of
the value of its total assets in such securities.

BORROWING AND REVERSE REPURCHASE AGREEMENTS

Each Fund may borrow funds, in an amount up to 10% of the
value of its total assets, for temporary or emergency purposes, such as meeting
larger than anticipated redemption requests, and not for leverage. Each Fund may
also agree to sell portfolio securities to financial institutions such as banks
and broker-dealers and to repurchase them at a mutually agreed date and price (a
"reverse repurchase agreement"). The SEC views reverse repurchase agreements as
a form of borrowing. At the time a Fund enters into a reverse repurchase
agreement, it will place in a segregated custodial account liquid assets having
a value equal to the repurchase price, including accrued interest. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by a Fund may decline below the repurchase price of those securities.

ILLIQUID SECURITIES

No Fund will knowingly invest more than 10% (15%, with respect
to the Large Cap Growth Fund) of the value of its net assets in securities that
are illiquid. A security will be considered illiquid if it may not be disposed
of within seven days at approximately the value at which the particular Fund has
valued the security. Each Fund may purchase securities which are not registered
under the Securities Act of 1933, as amended (the "Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the Act.
Any such security will not be considered illiquid so long as it is determined by
the Adviser, acting under guidelines approved and monitored by the Board, that
an adequate trading market exists for that security. This investment practice
could have the effect of increasing the level of illiquidity in a Fund during
any period that qualified institutional buyers are no longer interested in
purchasing these restricted securities.

PORTFOLIO TURNOVER

Each Fund may sell a portfolio investment immediately after
its acquisition if the Adviser believes that such a disposition is consistent
with the investment objective of the particular Fund. Portfolio investments may
be sold for a variety of reasons, such as a more favorable investment
opportunity or other circumstances bearing on the desirability of continuing to
hold such investments. A high rate of portfolio turnover may involve
correspondingly greater brokerage commission expenses and other transaction
costs, which must be borne directly by a Fund and ultimately by its
shareholders. High portfolio turnover may result in the realization of
substantial net capital gains. To the extent net short-term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes. (See "Additional Information Concerning
Taxes.")

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<PAGE>

INVESTMENT LIMITATIONS

The investment limitations enumerated below are matters of
fundamental policy. Fundamental investment limitations may be changed with
respect to a Fund only by a vote of the holders of a majority of such Fund's
outstanding shares. As used herein, a "vote of the holders of a majority of the
outstanding shares" of the Company or a particular Fund means, with respect to
the approval of an investment advisory agreement or a change in a fundamental
investment policy, the affirmative vote of the lesser of (a) more than 50% of
the outstanding shares of the Company or such Fund, or (b) 67% or more of the
shares of the Company or such Fund present at a meeting if more than 50% of the
outstanding shares of the Company or such Fund are represented at the meeting in
person or by proxy. Investment limitations which are "operating policies" with
respect to a Fund may be changed by the Company's Board of Directors without
shareholder approval.

The following investment limitations are fundamental with
respect to each of the Funds. Each Fund may not:

1. Make loans, except that (i) each Fund may purchase or hold
debt securities in accordance with its investment objective and policies, and
may enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, (ii) each
of the Blended Equity, Value and Restructuring and Small Cap Funds may lend
portfolio securities in an amount not exceeding 30% of its total assets, and
(iii) the Large Cap Growth Fund may lend portfolio securities in accordance with
its investment objective and policies; and

2. Purchase any securities which would cause more than 25% of
the value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (i) with respect to the Blended Equity Fund,
there is no limitation with respect to securities issued or guaranteed by the
U.S. government or domestic bank obligations, (ii) with respect to the Value and
Restructuring and Small Cap Funds, there is no limitation with respect to
securities issued or guaranteed by the U.S. government, (iii) with respect to
the Large Cap Growth Fund, there is no limitation with respect to securities
issued or guaranteed by the U.S. government, any state, territory or possession
of the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions, and repurchase agreements
secured by such securities, and (iv) neither all finance companies, as a group,
nor all utility companies, as a group, are considered a single industry for
purposes of this policy.

The following investment limitations are fundamental with
respect to each of the Blended Equity, Value and Restructuring and Small Cap
Funds. Each such Fund may not:

3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;

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<PAGE>

4. Purchase or sell real estate, except that each Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate;

5. Purchase securities of any one issuer, other than U.S.
government obligations, if immediately after such purchase more than 5% of the
value of its total assets would be invested in the securities of such issuer,
except that up to 25% of the value of its total assets may be invested without
regard to this 5% limitation;

6. Borrow money except from banks for temporary purposes, and
then in amounts not in excess of 10% of the value of its total assets at the
time of such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes.) A Fund will not purchase
portfolio securities while borrowings in excess of 5% of its total assets are
outstanding. Optioned stock held in escrow is not deemed to be a pledge; and

7. Issue any senior securities, except insofar as any
borrowing in accordance with a Fund's investment limitation contained in the
Prospectus might be considered to be the issuance of a senior security.

The following investment limitations are fundamental with
respect to the Large Cap Growth Fund. The Fund may not:

8. Borrow money or mortgage, pledge or hypothecate its assets
except to the extent permitted under the 1940 Act. Optioned stock held in escrow
is not deemed to be a pledge;

9. Purchase securities of any one issuer, other than
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities or other investment companies if, immediately after such
purchase, more than 5% of the value of its total assets would be invested in the
securities of such issuer, except that up to 25% of the value of its total
assets may be invested without regard to this 5% limitation;

10. Act as an underwriter of securities within the meaning of
the Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
its investment objective, policies and limitations may be deemed to be
underwriting;

11. Purchase or sell real estate, except that (a) the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by real estate or interests therein, and (b) the
Fund may hold and sell any real estate it acquires as a result of the Fund's
ownership of such securities;

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<PAGE>

12. Issue any senior securities, except insofar as any
borrowing in accordance with the Fund's investment limitations might be
considered to be the issuance of a senior security; and

13. Purchase or sell commodities or commodities futures
contracts or invest in oil, gas, or other mineral exploration or development
programs; provided, however, that the Fund may: (a) purchase publicly traded
securities of companies engaging in whole or in part in such activities or
invest in liquidating trust receipts, certificates of beneficial ownership or
other instruments in accordance with its investment objective and policies, and
(b) purchase and sell options, forward contracts, futures contracts and futures
options.

The following investment limitations are fundamental with
respect to the Blended Equity Fund, but are operating policies with respect to
the Value and Restructuring, Small Cap and Large Cap Growth Funds. No Fund may:

14. Purchase securities on margin, make short sales of
securities, or maintain a short position;

15. Invest in companies for the purpose of exercising
management or control; and

16. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.

The following investment limitations are fundamental with
respect to the Blended Equity Fund. The Fund may not:

17. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks, if immediately after such
purchase (i) more than 5% of the value of its total assets would be invested in
obligations of any one foreign branch of the financial institution or domestic
branch of a foreign bank; or (ii) more than 20% of its total assets would be
invested in foreign branches of financial institutions or in domestic branches
of foreign banks;

18. Knowingly invest more than 10% of the value of its total
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available;

19. Invest in or sell put options, call options, straddles,
spreads, or any combination thereof; provided, however, that the Fund may write
covered call options with respect to its portfolio securities that are traded on
a national securities exchange, and may enter into closing purchase transactions
with respect to such options if, at the time of the writing of such option, the
aggregate value of the securities subject to the options written by the Fund
does not exceed 25% of the value of its total assets;

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<PAGE>

20. Invest more than 5% of its total assets in securities
issued by companies which, together with any predecessor, have been in
continuous operation for fewer than three years; and

21. Purchase or sell commodities futures contracts or invest
in oil, gas, or other mineral exploration or development programs; provided,
however, that this shall not prohibit the Fund from purchasing publicly traded
securities of companies engaging in whole or in part in such activities.

The following investment limitation is fundamental with
respect to the Value and Restructuring and Small Cap Funds. The Value and
Restructuring and Small Cap Funds may not:

22. Purchase or sell commodities or commodities futures
contracts or invest in oil, gas, or other mineral exploration or development
programs; provided, however, that (i) this shall not prohibit either Fund from
purchasing publicly traded securities of companies engaging in whole or in part
in such activities or from investing in liquidating trust receipts, certificates
of beneficial ownership or other instruments in accordance with their investment
objectives and policies, and (ii) each Fund may enter into futures contracts and
futures options.

* * *

In addition to the investment limitations described above, no
Fund may invest in the securities of any single issuer if, as a result, the Fund
holds more than 10% of the outstanding voting securities of such issuer.

The Value and Restructuring, Small Cap and Large Cap Growth
Funds may not invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks if immediately after such
purchase (i) more than 5% of the value of their respective total assets would be
invested in obligations of any one foreign branch of the financial institution
or domestic branch of a foreign bank; or (ii) more than 20% of their respective
total assets would be invested in foreign branches of financial institutions or
in domestic branches of foreign banks. In addition, the Large Cap Growth Fund
will not purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding. These investment policies may be changed by the
Company's Board of Directors without shareholder approval.

The Blended Equity Fund will not invest more than 25% of the
value of its total assets in domestic bank obligations.

Each Fund currently intends to limit its investments in
warrants so that, valued at the lower of cost or market value, they do not
exceed 5% of the Fund's net assets. For the purpose of this limitation, warrants
acquired by a Fund in units or attached to securities will be deemed to be
without value. Each Fund also intends to refrain from entering into arbitrage
transactions.

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<PAGE>

For the purpose of Investment Limitation No. 4, the
prohibition of purchases of real estate includes acquisition of limited
partnership interests in partnerships formed with a view toward investing in
real estate, but does not prohibit purchases of shares in real estate investment
trusts.

The Blended Equity Fund may not purchase or sell commodities
except as provided in Investment Limitation No. 13 above.

If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of a Fund's securities will not constitute a violation of such
limitation.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Shares are continuously offered for sale by Edgewood Services,
Inc. (the "Distributor"), a registered broker-dealer and the Company's sponsor
and distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA
15237-5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.

At various times the Distributor may implement programs under
which a dealer's sales force may be eligible to win nominal awards for certain
sales efforts or under which the Distributor will make payments to any dealer
that sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.

In addition, the Distributor may offer to pay a fee from its
own assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.

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<PAGE>

Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset value per share
for purposes of pricing sales and redemptions is calculated by dividing the
value of all securities and other assets allocable to the Fund, less the
liabilities allocable to the Fund, by the number of its outstanding shares.

As described below, shares may be sold to customers
("Customers") of financial institutions ("Shareholder Organizations"). Shares
are also offered for sale directly to institutional investors and to members of
the general public. Different types of Customer accounts at the Shareholder
Organizations may be used to purchase shares, including eligible agency and
trust accounts. In addition, Shareholder Organizations may automatically "sweep"
a Customer's account not less frequently than weekly and invest amounts in
excess of a minimum balance agreed to by the Shareholder Organization and its
Customer in shares selected by the Customer. Investors purchasing shares may
include officers, directors, or employees of the particular Shareholder
Organization.

The Company has authorized certain brokers to accept on its
behalf purchase, exchange and redemption requests. Such brokers are authorized
to designate other intermediaries to accept purchase, exchange and redemption
requests on behalf of the Company. The Company will be deemed to have received a
purchase, exchange or redemption request when the request is received by an
authorized broker or designated intermediary in good order.

PURCHASE OF SHARES

Shares of the Funds are offered for sale at their net asset
value per share next computed after a purchase request is received in good order
by the Company's sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.

Shares may be purchased directly by individuals ("Direct
Investors") or by institutions ("Institutional Investors" and, collectively with
Direct Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Company. A Shareholder
Organization may elect to hold of record shares for its Customers and to record
beneficial ownership of shares on the account statements provided by it to its
Customers. If it does so, it is the Shareholder Organization's responsibility to
transmit to the Distributor all purchase requests for its Customers and to
transmit, on a timely basis, payment for such requests to Chase Global Funds
Services Company ("CGFSC"), the Funds' sub-transfer agent, in accordance with
the procedures agreed to by the Shareholder Organization and the Distributor.
Confirmations of all such Customer purchases (and redemptions) will be sent by
CGFSC to the particular Shareholder Organization. As an alternative, a
Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization continues
to place its Customers' purchase (and redemption) requests with the Funds, CGFSC
will send confirmations of such transactions and periodic account statements
directly to the shareholders of record. Shares in the Funds bear the

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<PAGE>

expense of fees payable to Shareholder Organizations for such services. See
"Shareholder Organizations."

Customers wishing to purchase shares through their Shareholder
Organization should contact such entity directly for appropriate instructions.
(For a list of Shareholder Organizations in your area, call (800) 446-1012.) An
Investor purchasing shares through a registered investment adviser or certified
financial planner may incur transaction charges in connection with such
purchases. Such Investors should contact their registered investment adviser or
certified financial planner for further information on transaction fees.
Investors may also purchase shares directly from the Distributor in accordance
with procedures described in the Prospectus.

Direct Investors may purchase shares by completing the
Application accompanying the Prospectus and mailing it, together with a check
payable to Excelsior Funds Inc., to:

Excelsior Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

Subsequent investments in an existing account in a Fund may be
made at any time by sending to the above address a check payable to Excelsior
Funds, Inc. along with: (a) the detachable form that regularly accompanies the
confirmation of a prior transaction; (b) a subsequent order form which may be
obtained from CGFSC; or (c) a letter stating the amount of the investment, the
name of the Fund and the account number in which the investment is to be made.
Institutional Investors may purchase shares by transmitting their purchase
orders to CGFSC by telephone at (800) 446-1012 or by terminal access.
Institutional Investors must pay for shares with federal funds or funds
immediately available to CGFSC.

Investors may also purchase shares by wiring federal funds to
CGFSC. Prior to making an initial investment by wire, an Investor must telephone
CGFSC at (800) 446-1012 (from overseas, call (617) 557-8280) for instructions.
Federal funds and registration instructions should be wired through the Federal
Reserve System to:

The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account No. 9102732915
For further credit to:
Excelsior Funds
Wire Control Number
Account Registration
(including account number)

Investors making initial investments by wire must promptly
complete the Application accompanying the Prospectus and forward it to CGFSC.
Redemptions by Investors

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<PAGE>

will not be processed until the completed Application for purchase of shares has
been received by CGFSC and accepted by the Distributor. Investors making
subsequent investments by wire should follow the above instructions.

Except as provided below, the minimum initial investment by an
Investor or initial aggregate investment by a Shareholder Organization investing
on behalf of its Customers is $500 per Fund. The minimum subsequent investment
for both types of investors is $50 per Fund. Customers may agree with a
particular Shareholder Organization to make a minimum purchase with respect to
their accounts. Depending upon the terms of the particular account, Shareholder
Organizations may charge a Customer's account fees for automatic investment and
other cash management services provided. The Company reserves the right to
reject any purchase order, in whole or in part, or to waive any minimum
investment requirements. Third party checks will not be accepted as payment for
Fund shares.

REDEMPTION PROCEDURES

A request for the redemption of shares will receive the net
asset value per share next computed after the request is received in good order
by the Company's sub-transfer agent or an authorized broker or designated
intermediary.

Customers of Shareholder Organizations holding shares of
record may redeem all or part of their investments in a Fund in accordance with
procedures governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Company, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

Shares may be redeemed by a Direct Investor by submitting a
written request for redemption to:

Excelsior Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

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<PAGE>

A written redemption request to CGFSC must (i) state the
number of shares to be redeemed, (ii) identify the shareholder account number
and tax identification number, and (iii) be signed by each registered owner
exactly as the shares are registered. If the shares to be redeemed were issued
in certificate form, the certificates must be endorsed for transfer (or
accompanied by a duly executed stock power) and must be submitted to CGFSC
together with the redemption request. A redemption request for an amount in
excess of $50,000 per account, or for any amount if the proceeds are to be sent
elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.

CGFSC may require additional supporting documents for
redemptions made by corporations, executors, administrators, trustees and
guardians. A redemption request will not be deemed to be properly received until
CGFSC receives all required documents in good order. Payment for shares redeemed
will ordinarily be made by mail within five Business Days after receipt by CGFSC
of the redemption request in good order. Questions with respect to the proper
form for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).

Direct Investors who have so indicated on the Application, or
have subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States. Direct
Investors who are shareholders of record may also redeem shares by instructing
CGFSC by telephone to mail a check for redemption proceeds of $500 or more to
the shareholder of record at his or her address of record. Institutional
Investors may also redeem shares by instructing CGFSC by telephone at (800)
446-1012 or by terminal access. Only redemptions of $500 or more will be wired
to a Direct Investor's account. The redemption proceeds for Direct Investors
must be paid to the same bank and account as designated on the Application or in
written instructions subsequently received by CGFSC.

In order to arrange for redemption by wire or telephone after
an account has been opened or to change the bank or account designated to
receive redemption proceeds, a Direct Investor must send a written request to
the Company c/o CGFSC, at the address listed above. Such requests must be signed
by the Direct Investor, with signatures guaranteed, as discussed above. Further
documentation may be requested.

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<PAGE>

cost or expense for acting upon telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Company will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to account
registration.

If any portion of the shares to be redeemed represents an
investment made by personal check, the Company and CGFSC reserve the right not
to honor the redemption until CGFSC is reasonably satisfied that the check has
been collected in accordance with the applicable banking regulations, which may
take up to 15 days. A Direct Investor who anticipates the need for more
immediate access to his or her investment should purchase shares by federal
funds or bank wire or by certified or cashier's check. Banks normally impose a
charge in connection with the use of bank wires, as well as certified checks,
cashier's checks and federal funds. If a Direct Investor's purchase check is not
collected, the purchase will be cancelled and CGFSC will charge a fee of $25.00
to the Direct Investor's account.

During periods of substantial economic or market change,
telephone redemptions may be difficult to complete. If an Investor is unable to
contact CGFSC by telephone, the Investor may also deliver the redemption request
to CGFSC in writing at the address noted above.

Except as described in "Investor Programs" below, Investors
may be required to redeem shares in a Fund after 60 days' written notice if due
to Investor redemptions the balance in the particular account with respect to
the Fund remains below $500. If a Customer has agreed with a particular
Shareholder Organization to maintain a minimum balance in his or her account at
the institution with respect to shares of a Fund, and the balance in such
account falls below that minimum, the Customer may be obliged by the Shareholder
Organization to redeem all or part of his or her shares to the extent necessary
to maintain the required minimum balance.

OTHER REDEMPTION INFORMATION

The Company may suspend the right of redemption or postpone
the date of payment for shares for more than 7 days during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.

In the event that shares are redeemed in cash at their net
asset value, a shareholder may receive in payment for such shares an amount that
is more or less than his original investment due to changes in the market prices
of that Fund's portfolio securities.

The Company reserves the right to honor any request for
redemption or repurchase of a Fund's shares by making payment in whole or in
part in securities chosen by the Company and valued in the same way as they
would be valued for purposes of computing a Fund's net asset value (a
"redemption in kind"). If payment is made in securities, a shareholder may incur
transaction costs in converting these securities into cash. The Company has
filed a notice of election with the SEC under Rule 18f-1 of the 1940 Act.
Therefore, a Fund is obligated

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to redeem its shares solely in cash up to the lesser of $250,000 or 1% of its
net asset value during any 90-day period for any one shareholder of the Fund.

Under certain circumstances, the Company may, in its
discretion, accept securities as payment for shares. Securities acquired in this
manner will be limited to securities issued in transactions involving a BONA
FIDE reorganization or statutory merger, or other transactions involving
securities that meet the investment objective and policies of any Fund acquiring
such securities.

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

An Investor who owns shares with a value of $10,000 or more
may begin a Systematic Withdrawal Plan. The withdrawal can be on a monthly,
quarterly, semiannual or annual basis. There are four options for such
systematic withdrawals. The Investor may request:

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

(3) A fixed-percentage withdrawal (based on the current
value of the account); or

(4) A declining-balance withdrawal.

Prior to participating in a Systematic Withdrawal Plan, the
Investor must deposit any outstanding certificates for shares with CGFSC. Under
this Plan, dividends and distributions are automatically reinvested in
additional shares of a Fund. Amounts paid to investors under this Plan should
not be considered as income. Withdrawal payments represent proceeds from the
sale of shares, and there will be a reduction of the shareholder's equity in the
Fund involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a program of
systematic investing in a Fund while at the same time participating in the
Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the Systematic
Withdrawal Plan directly from their Shareholder Organizations.

EXCHANGE PRIVILEGE

-24-
<PAGE>

of all or a portion of the shares in a Fund and the investment of the redemption
proceeds in shares of another portfolio. The redemption will be made at the per
share net asset value of the shares being redeemed next determined after the
exchange request is received in good order. The shares of the portfolio to be
acquired will be purchased at the per share net asset value of those shares next
determined after receipt of the exchange request in good order.

Shares may be exchanged by wire, telephone or mail and must be
made to accounts of identical registration. There is no exchange fee imposed by
the Companies or Excelsior Institutional Trust. In order to prevent abuse of
this privilege to the disadvantage of other shareholders, the Companies and
Excelsior Institutional Trust reserve the right to limit the number of exchange
requests of Investors to no more than six per year. The Companies and Excelsior
Institutional Trust may modify or terminate the exchange program at any time
upon 60 days' written notice to shareholders, and may reject any exchange
request. Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, such program directly
from their Shareholder Organizations.

For federal income tax purposes, exchanges are treated as
sales on which the shareholder will realize a gain or loss, depending upon
whether the value of the shares to be given up in exchange is more or less than
the basis in such shares at the time of the exchange. Generally, a shareholder
may include sales loads incurred upon the purchase of shares in his or her tax
basis for such shares for the purpose of determining gain or loss on a
redemption, transfer or exchange of such shares. However, if the shareholder
effects an exchange of shares for shares of another portfolio of the Companies
within 90 days of the purchase and is able to reduce the sales load otherwise
applicable to the new shares (by virtue of the Companies' exchange privilege),
the amount equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.

RETIREMENT PLANS

Shares are available for purchase by Investors in connection
with the following tax-deferred prototype retirement plans offered by United
States Trust Company of New York ("U.S. Trust New York"):

IRAs (including "rollovers" from existing retirement plans)
for individuals and their spouses;

Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit
themselves and their employees; and

Keogh Plans for self-employed individuals.

-25-
<PAGE>

service fees and other matters related to these plans can be obtained by calling
(800) 446-1012 (from overseas, call (617) 557-8280). Customers of Shareholder
Organizations may purchase shares of the Funds pursuant to retirement plans if
such plans are offered by their Shareholder Organizations.

AUTOMATIC INVESTMENT PROGRAM

The Automatic Investment Program permits Investors to purchase
shares (minimum of $50 per Fund per transaction) at regular intervals selected
by the Investor. The minimum initial investment for an Automatic Investment
Program account is $50 per Fund. Provided the Investor's financial institution
allows automatic withdrawals, shares are purchased by transferring funds from an
Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days.

The Automatic Investment Program is one means by which an
Investor may use "Dollar Cost Averaging" in making investments. Instead of
trying to time market performance, a fixed dollar amount is invested in shares
at predetermined intervals. This may help Investors to reduce their average cost
per share because the agreed upon fixed investment amount allows more shares to
be purchased during periods of lower share prices and fewer shares during
periods of higher prices. In order to be effective, Dollar Cost Averaging should
usually be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using Dollar Cost Averaging are purchased without
regard to their price on the day of investment or to market trends. In addition,
while Investors may find Dollar Cost Averaging to be beneficial, it will not
prevent a loss if an Investor ultimately redeems his shares at a price which is
lower than their purchase price. The Company may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently is
contemplated. An Investor may also implement the Dollar Cost Averaging method on
his own initiative or through other entities.

ADDITIONAL INFORMATION

Customers of Shareholder Organizations may obtain information
on the availability of, and the procedures and fees relating to, the above
programs directly from their Shareholder Organizations.

DESCRIPTION OF CAPITAL STOCK

The Company's Charter authorizes its Board of Directors to
issue up to thirty-five billion full and fractional shares of common stock,
$.001 par value per share, and to classify or reclassify any unissued shares of
the Company into one or more classes or series by setting or changing in any one
or more respects their respective preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions

-26-
<PAGE>

of redemption. The Company's authorized common stock is currently classified
into 41 series of shares representing interests in 17 investment portfolios.

Each share in a Fund represents an equal proportionate
interest in the particular Fund with other shares of the same class, and is
entitled to such dividends and distributions out of the income earned on the
assets belonging to such Fund as are declared in the discretion of the Company's
Board of Directors.

Shares have no preemptive rights and only such conversion or
exchange rights as the Board of Directors may grant in its discretion. When
issued for payment as described in the Prospectus, shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of a Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the Company's portfolios, of any general assets of the Company
not belonging to any particular portfolio of the Company which are available for
distribution. In the event of a liquidation or dissolution of the Company, its
shareholders will be entitled to the same distribution process.

Shareholders of the Company are entitled to one vote for each
full share held, and fractional votes for fractional shares held, and will vote
in the aggregate and not by class, except as otherwise required by the 1940 Act
or other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
the Company's shares may elect all of the Company's directors, regardless of
votes of other shareholders.

Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by the matter. A portfolio is
affected by a matter unless it is clear that the interests of each portfolio in
the matter are substantially identical or that the matter does not affect any
interest of the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent public
accountants and the election of directors may be effectively acted upon by
shareholders of the Company voting without regard to class.

-27-
<PAGE>

will not have a material adverse effect on shareholders of any portfolio
participating in such combination, and, in connection therewith, to cause all
outstanding shares of the Fund involved to be redeemed at their net asset value
or converted into shares of another class of the Company's common stock at net
asset value. The exercise of such authority by the Board of Directors will be
subject to the provisions of the 1940 Act, and the Board of Directors will not
take any action described in this paragraph unless the proposed action has been
disclosed in writing to the particular Fund's shareholders at least 30 days
prior thereto.

Notwithstanding any provision of Maryland law requiring a
greater vote of the Company's common stock (or of the shares of a Fund voting
separately as a class) in connection with any corporate action, unless otherwise
provided by law (for example, by Rule 18f-2, discussed above) or by the
Company's Charter, the Company may take or authorize such action upon the
favorable vote of the holders of more than 50% of the outstanding common stock
of the Company voting without regard to class.

Certificates for shares will not be issued unless expressly
requested in writing to CGFSC and will not be issued for fractional shares.

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

The business and affairs of the Funds are managed under the
direction of the Company's Board of Directors. The directors and executive
officers of the Company, their addresses, ages, principal occupations during the
past five years, and other affiliations are as follows:

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<PAGE>

Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------

<S> <C> <C>
Frederick S. Wonham(1) Chairman of the Retired; Director of the Company and
238 June Road Board, President Excelsior Tax-Exempt Fund (since 1995);
Stamford, CT 06903 and Treasurer Trustee of Excelsior Funds and Excelsior
Age: 68 Institutional Trust (since 1995); Vice
Chairman of U.S. Trust Corporation and
U.S. Trust New York (from February 1990
until September 1995); and Chairman,
U.S. Trust Company (from March 1993 to May
1997).

Donald L. Campbell Director Retired; Director of the Company and
333 East 69th Street Excelsior Tax-Exempt Fund (since 1984);
Apt. 10-H Director of UST Master Variable Series,
New York, NY 10021 Inc. (from 1994 to June 1997); Trustee of
Age: 73 Excelsior Institutional Trust (since 1995);
and Director, Royal Life Insurance Co. of
New York (since 1991).

Rodman L. Drake Director Director of the Company and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Fund (since 1996); Trustee of
1251 Avenue of the Americas Excelsior Institutional Trust and Excelsior
9th Floor Funds (since 1994); Director, Parsons
New York, NY 10020 Brinkerhoff, Inc. (engineering firm) (since
Age: 56 1995); President, Continuation Investments
Group, Inc. (since 1997); President,
Mandrake Group (investment and consulting
firm) (1994-1997); Director, Hyperion Total
Return Fund, Inc. and four other funds for
which Hyperion Capital Management, Inc.
serves as investment adviser (since 1991);
Co-Chairman, KMR Power Corporation (power
plants) (from 1993 to 1996); Director, The
Latin America Smaller Companies Fund, Inc.
(1993-1998); Member of Advisory Board,
Argentina Private Equity Fund L.P. (from
1992 to 1996) and Garantia L.P. (Brazil)
(from 1993 to 1996); and Director, Mueller
Industries, Inc. (from 1992 to 1994).

-----------------------
1. This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-29-
<PAGE>

Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------

Joseph H. Dugan Director Retired; Director of the Company and
913 Franklin Lake Road Excelsior Tax-Exempt Fund (since 1984);
Franklin Lakes, NJ 07417 Director of UST Master Variable Series,
Age: 74 Inc. (from 1994 to June 1997); and Trustee
of Excelsior Institutional Trust (since
1995).

Wolfe J. Frankl Director Retired; Director of the Company and
2320 Cumberland Road Excelsior Tax-Exempt Fund (since 1986);
Charlottesville, VA 22901-7726 Director of UST Master Variable Series,
Age: 78 Inc. (from 1994 to June 1997); Trustee of
Excelsior Institutional Trust (since 1995);
Director, Deutsche Bank Financial, Inc.
(since 1989); Director, The Harbus
Corporation (since 1951); and Trustee, HSBC
Funds Trust and HSBC Mutual Funds Trust
(since 1988).

Jonathan Piel Director Director of the Company and Excelsior
558 E. 87th Street Tax-Exempt Fund (since 1996); Trustee of
New York, NY 10128 Excelsior Institutional Trust and Excelsior
Age: 60 Funds (since 1994); Vice President and
Editor, Scientific American, Inc. (from
1986 to 1994); Director, Group for The
South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee,
Knight Journalism Fellowships,
Massachusetts Institute of Technology
(since 1984).

Robert A. Robinson Director Director of the Company and Excelsior
Church Pension Group Tax-Exempt Fund (since 1987); Director of UST
445 Fifth Avenue Master Variable Series, Inc. (from 1994 to
New York, NY 10016 June 1997); Trustee of Excelsior
Age: 73 Institutional Trust (since 1995); President
Emeritus, The Church Pension Fund and its
affiliated companies (since 1966); Trustee,
H.B. and F.H. Bugher Foundation and
Director of its wholly owned subsidiaries
-- Rosiclear Lead and Flourspar Mining Co.
and The Pigmy Corporation (since 1984);
Director, Morehouse Publishing Co.
(1974-1998); Trustee, HSBC Funds Trust and
HSBC Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since 1995).

-30-
<PAGE>

Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------

Alfred C. Tannachion(2) Director Retired; Director of the Company and
6549 Pine Meadows Drive Excelsior Tax-Exempt Fund (since 1985);
Spring Hill, FL 34606 Chairman of the Board of Excelsior Fund and
Age: 73 Excelsior Tax-Exempt Fund (1991-1997) and
Excelsior Institutional Trust (1996-1997);
President and Treasurer of Excelsior Fund
and Excelsior Tax-Exempt Fund (1994-1997)
and Excelsior Institutional Trust
(1996-1997); Chairman of the Board,
President and Treasurer of UST Master
Variable Series, Inc. (1994-1997); and
Trustee of Excelsior Institutional Trust
(since 1995).

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40

Eddie Wang Assistant Manager of Blue Sky Compliance, Chase
Chase Global Funds Secretary Global Funds Services Company (November
Services Company 1996 to present); and Officer and Manager
73 Tremont Street of Financial Reporting, Investors Bank &
Boston, MA 02108-3913 Trust Company (January 1991 to November
Age: 38 1996).

Patricia M. Leyne Assistant Assistant Vice President, Senior Manager
Chase Global Funds Treasurer of Fund Administration, Chase Global Funds
Services Company Services Company (sine July 1998);
73 Tremont Street Assistant Treasurer, Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 32 Company (from November 1996 to July
1998); Supervisor, Chase Global Funds
Services Company (from September 1995 to
November 1996); Fund Administrator, Chase
Global Funds Services Company (from
February 1993 to September 1995).

-----------------------
2. This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
</TABLE>

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<PAGE>

Each director of the Company receives an annual fee of $9,000
plus a meeting fee of $1,500 for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is entitled
to receive an additional $5,000 per annum for services in such capacity. Drinker
Biddle & Reath LLP, of which Messrs. McConnel and Malloy are partners, receives
legal fees as counsel to the Company. The employees of CGFSC do not receive any
compensation from the Company for acting as officers of the Company. No person
who is currently an officer, director or employee of the Adviser serves as an
officer, director or employee of the Company. As of July 13, 1999, the directors
and officers of the Company as a group owned beneficially less than 1% of the
outstanding shares of each fund of the Company, and less than 1% of the
outstanding shares of all funds of the Company in the aggregate.

-32-
<PAGE>

The following chart provides certain information about the
fees received by the Company's directors in the most recently completed fiscal
year.

Pension or Retirement Total Compensation from
Aggregate Benefits Accrued as the Company
Name of Compensation from Part of and Fund Complex*
Person/Position the Company Fund Expenses Paid to Directors
- --------------- ----------- ------------- -----------------

<S> <C> <C> <C>
Donald L. Campbell
Director $15,000 None $33,250(3)**

Rodman L. Drake
Director $16,500 None $41,250(4)**

Joseph H. Dugan
Director $16,500 None $36,500(3)**

Wolfe J. Frankl
Director $16,500 None $36,500(3)**

W. Wallace McDowell, Jr.***
Director $11,250 None $28,000(4)**

Jonathan Piel
Director $16,500 None $41,500(4)**

Robert A. Robinson
Director $16,500 None $36,500(3)**

Alfred C. Tannachion
Director $16,500 None $36,500(3)**

Frederick S. Wonham
Chairman of the Board,
President and Treasurer $21,500 None $51,500(4)**

</TABLE>

- -------------------------
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund,
Excelsior Funds and Excelsior Institutional Trust.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
*** Mr. McDowell resigned from the Company, Excelsior Tax-Exempt Fund,
Excelsior Funds and Excelsior Institutional Trust on May 21, 1999.

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<PAGE>

INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS

U.S. Trust New York and U.S. Trust Company (collectively with
U.S. Trust New York, "U.S. Trust" or the "Adviser") serve as investment advisers
to the Funds. In the Investment Advisory Agreements, the Adviser has agreed to
provide the services described in the Prospectus. The Adviser has also agreed to
pay all expenses incurred by it in connection with its activities under the
respective agreements other than the cost of securities, including brokerage
commissions, purchased for the Funds.

Prior to May 16, 1997, U.S. Trust New York served as
investment adviser to the Blended Equity, Value and Restructuring and Small Cap
Funds pursuant to advisory agreements substantially similar to the Investment
Advisory Agreements currently in effect for such Funds.

For the services provided and expenses assumed pursuant to the
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly, at the annual rate of 0.75% of the average
daily net assets of each of the Blended Equity and Large Cap Growth Funds, and
0.60% of the average daily net assets of each of the Value and Restructuring and
Small Cap Funds.

From time to time, the Adviser may voluntarily waive all or a
portion of the advisory fees payable to it by a Fund, which waiver may be
terminated at any time.

For the fiscal year ended March 31, 1999, the Company paid
U.S. Trust advisory fees of $4,320,430, $2,624,874, $241,815 and $803,946 with
respect to the Blended Equity, Value and Restructuring, Small Cap and Large Cap
Growth Funds, respectively. For the same period, U.S. Trust waived advisory fees
totaling $360,040, $639,405, $51,882 and $44,157 with respect to the Blended
Equity, Value and Restructuring, Small Cap and Large Cap Growth Funds,
respectively.

For the fiscal year or period ended March 31, 1998, the
Company paid U.S. Trust advisory fees of $3,139,705, $1,163,708, $320,547 and
$65,472 with respect to the Blended Equity, Value and Restructuring, Small Cap
and Large Cap Growth Funds, respectively. For the same period, U.S. Trust waived
advisory fees totaling $332,044, $84,739, $41,845 and $16,680 with respect to
the Blended Equity, Value and Restructuring, Small Cap and Large Cap Growth
Funds, respectively.

For the fiscal year or period ended March 31, 1997, the
Company paid U.S. Trust advisory fees of $1,954,607, $552,746 and $408,027 with
respect to the Blended Equity, Value and Restructuring and Small Cap Funds,
respectively. For the same period, U.S. Trust waived advisory fees totaling
$132,737, $41,509 and $61,885 with respect to the Blended Equity, Value and
Restructuring and Small Cap Funds, respectively.

-34-
<PAGE>

duty with respect to the receipt of compensation for advisory services or a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of their duties or from reckless disregard by them of their duties
and obligations thereunder. In addition, the Adviser has undertaken in the
Investment Advisory Agreements to maintain its policy and practice of conducting
its Asset Management Group independently of its Banking Group.

CGFSC, Federated Administrative Services (an affiliate of the
Distributor) and U.S. Trust Company (collectively, the "Administrators") serve
as the Company's administrators and provide the Funds with general
administrative and operational assistance. Under the Administration Agreement,
the Administrators have agreed to maintain office facilities for the Funds,
furnish the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income and realized capital gains or losses, if
any, of the respective Funds. The Administrators prepare semiannual reports to
the SEC, prepare federal and state tax returns, prepare filings with state
securities commissions, arrange for and bear the cost of processing share
purchase and redemption orders, maintain the Funds' financial accounts and
records, and generally assist in the Funds' operations.

Prior to May 16, 1997, CGFSC, Federated Administrative
Services and U.S. Trust New York served as the Company's administrators pursuant
to an administration agreement substantially similar to the Administration
Agreement currently in effect for the Company.

The Administrators also provide administrative services to the
other investment portfolios of the Company and to all of the investment
portfolios of Excelsior Tax-Exempt Fund and Excelsior Institutional Trust which
are also advised by U.S. Trust and its affiliates and distributed by the
Distributor. For services provided to all of the investment portfolios of the
Company, Excelsior Tax-Exempt Fund and Excelsior Institutional Trust (except for
the international portfolios of the Company and Excelsior Institutional Trust),
the Administrators are entitled jointly to fees, computed daily and paid
monthly, based on the combined aggregate average daily net assets of the three
companies (excluding the international portfolios of the Company and Excelsior
Institutional Trust) as follows:

ANNUAL FEE
----------
<S> <C>
First $200 million........................................ 0.200%
Next $200 million......................................... 0.175%
Over $400 million......................................... 0.150%
</TABLE>

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<PAGE>

time, the Administrators may voluntarily waive all or a portion of the
administration fee payable to them by a Fund, which waivers may be terminated at
any time.

For the fiscal year ended March 31, 1999, the Company paid the
Administrators $952,859, $712,300, $74,865 and $171,488 in the aggregate with
respect to the Blended Equity, Value and Restructuring, Small Cap and Large Cap
Growth Funds, respectively. For the same period, the Administrators waived
administration fees totaling $1,957, $120,091, $28 and $1,525 with respect to
the Blended Equity, Value and Restructuring, Small Cap and Large Cap Growth
Funds, respectively.

For the fiscal year or period ended March 31, 1998, the
Company paid CGFSC, Federated Administrative Services and U.S. Trust $707,403,
$315,023, $92,358 and $16,759 in the aggregate with respect to the Blended
Equity, Value and Restructuring, Small Cap and Large Cap Growth Funds,
respectively. For the same period, CGFSC, Federated Administrative Services and
U.S. Trust waived administration fees totaling $834, $3,331 and $52 with respect
to the Blended Equity, Value and Restructuring and Small Cap Funds,
respectively.

For the fiscal year ended March 31, 1997, the Company paid
CGFSC, Federated Administrative Services and U.S. Trust New York $422,505,
$152,248 and $120,363 in the aggregate with respect to the Blended Equity, Value
and Restructuring and Small Cap Funds, respectively. For the same period, CGFSC,
Federated Administrative Services and U.S. Trust New York waived administration
fees totaling $5,344, $108 and $87 with respect to the Blended Equity, Value and
Restructuring and Small Cap Funds, respectively.

BANKING LAWS

Banking laws and regulations currently prohibit a bank holding
company registered under the Federal Bank Holding Company Act of 1956 or any
bank or non-bank affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as shares of the Funds, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent, or custodian to
such an investment company, or from purchasing shares of such company for and
upon the order of customers. The Adviser, CGFSC and certain Shareholder
Organizations may be subject to such banking laws and regulations. State
securities laws may differ from the interpretations of federal law discussed in
this paragraph and banks and financial institutions may be required to register
as dealers pursuant to state law.

Should legislative, judicial, or administrative action
prohibit or restrict the activities of the Adviser or other Shareholder
Organizations in connection with purchases of Fund shares, the Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would
affect their net asset values per share or result in financial loss to any
shareholder.

-36-
<PAGE>

SHAREHOLDER ORGANIZATIONS

The Company has entered into agreements with certain
Shareholder Organizations. Such agreements require the Shareholder Organizations
to provide shareholder administrative services to their Customers who
beneficially own shares in consideration for a Fund's payment of not more than
the annual rate of 0.40% of the average daily net assets of the Fund's shares
beneficially owned by Customers of the Shareholder Organization. Such services
may include: (a) acting as recordholder of shares; (b) assisting in processing
purchase, exchange and redemption transactions; (c) transmitting and receiving
funds in connection with Customer orders to purchase, exchange or redeem shares;
(d) providing periodic statements showing a Customer's account balances and
confirmations of transactions by the Customer; (e) providing tax and dividend
information to shareholders as appropriate; (f) transmitting proxy statements,
annual reports, updated prospectuses and other communications from the Company
to Customers; and (g) providing or arranging for the provision of other related
services. It is the responsibility of Shareholder Organizations to advise
Customers of any fees that they may charge in connection with a Customer's
investment. Until further notice, the Adviser and Administrators have
voluntarily agreed to waive fees payable by a Fund in an aggregate amount equal
to administrative service fees payable by that Fund.

The Company's agreements with Shareholder Organizations are
governed by an Administrative Services Plan (the "Plan") adopted by the Company.
Pursuant to the Plan, the Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of the Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").

Any material amendment to the Company's arrangements with
Shareholder Organizations must be approved by a majority of the Company's Board
of Directors (including a majority of the Disinterested Directors). So long as
the Company's arrangements with Shareholder Organizations are in effect, the
selection and nomination of the members of the Company's Board of Directors who
are not "interested persons" (as defined in the 1940 Act) of the Company will be
committed to the discretion of such Disinterested Directors.

For the fiscal years or periods ended March 31, 1999, 1998 and
1997, payments to Shareholder Organizations totaled $234,639, $182,660 and
$132,737; $759,496, $88,070 and $41,617; $51,910, $41,897 and $61,972; and
$45,682, $1,501 and $0 with respect to the Blended Equity, Value and
Restructuring, Small Cap and Large Cap Growth Funds, respectively. Of these
amounts, $223,499, $175,989 and $118,778; $215,581, $55,667 and $41,514;
$51,808, $41,636 and $61,952; and $36,963, $1,501 and $0 was paid to affiliates
of U.S. Trust with respect to the Blended Equity, Value and Restructuring, Small
Cap and Large Cap Growth Funds, respectively.

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<PAGE>

EXPENSES

Except as otherwise noted, the Adviser and the Administrators
bear all expenses in connection with the performance of their services. The
Funds bear the expenses incurred in their operations. Expenses of the Funds
include: taxes; interest; fees (including fees paid to the Company's directors
and officers who are not affiliated with the Distributor or the Administrators);
SEC fees; state securities qualifications fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders;
advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent, and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses; costs of independent pricing
services; costs of shareholder reports and shareholder meetings; and any
extraordinary expenses. The Funds also pay for brokerage fees and commissions in
connection with the purchase of portfolio securities.

CUSTODIAN AND TRANSFER AGENT

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary
of The Chase Manhattan Corporation, serves as custodian of the Funds' assets.
Under the Custodian Agreement, Chase has agreed to: (i) maintain a separate
account or accounts in the name of the Funds; (ii) make receipts and
disbursements of money on behalf of the Funds; (iii) collect and receive all
income and other payments and distributions on account of the Funds' portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to the Company's Board of Directors concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreement, notwithstanding any delegation. Communications to
the custodian should be directed to Chase, Mutual Funds Service Division, 3
Chase MetroTech Center, 8th Floor, Brooklyn, NY 11245.

U.S. Trust New York serves as the Funds' transfer agent and
dividend disbursing agent. In such capacity, U.S. Trust New York has agreed to:
(i) issue and redeem shares; (ii) address and mail all communications by the
Funds to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for its meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. For its transfer
agency, dividend disbursing, and subaccounting services, U.S. Trust New York is
entitled to receive $15.00 per annum per account and subaccount. In addition,
U.S. Trust New York is entitled to be reimbursed for its out-of-pocket expenses
for the cost of forms, postage, processing purchase and redemption orders,
handling of proxies, and other similar expenses in connection with the above
services. U.S. Trust New York is located at 114 W. 47th Street, New York, New
York 10036.

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<PAGE>

under the Transfer Agency Agreement, notwithstanding any delegation. Pursuant to
this provision in the agreement, U.S. Trust New York has entered into a
sub-transfer agency arrangement with CGFSC, an affiliate of Chase, with respect
to accounts of shareholders who are not Customers of U.S. Trust New York. CGFSC
is located at 73 Tremont Street, Boston, Massachusetts 02108-3913. For the
services provided by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00
per annum per account or subaccount plus out-of-pocket expenses. CGFSC receives
no fee directly from the Company for any of its sub-transfer agency services.
U.S. Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.

PORTFOLIO TRANSACTIONS

Subject to the general control of the Company's Board of
Directors, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of all portfolio securities of the
Funds.

The Funds may engage in short-term trading to achieve their
investment objectives. Portfolio turnover may vary greatly from year to year as
well as within a particular year. The Funds' portfolio turnover rates may also
be affected by cash requirements for redemptions of shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectus for the Funds' portfolio
turnover rates.

Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. In
executing portfolio transactions for the Funds, the Adviser may use affiliated
brokers in accordance with the requirements of the 1940 Act. The Adviser may
also take into account the sale of Fund shares in allocating brokerage
transactions.

For the fiscal years ended March 31, 1999, 1998 and 1997, the
Blended Equity Fund paid brokerage commissions aggregating $228,573, $288,470
and $271,411, respectively, $0, $0 and $0 of which was paid to affiliates of
U.S. Trust.

For the fiscal years ended March 31, 1999, 1998 and 1997, the
Value and Restructuring Fund paid brokerage commissions aggregating $278,966,
$412,406 and $271,334, respectively, of which $525, $26,847 and $13,069,
respectively, was paid to UST Securities Corp., an affiliate of U.S. Trust. For
the same periods, the percentages of total commissions paid by the Fund to UST
Securities Corp. were 0.19%, 6.51% and 4.82%, respectively, and the percentages
of the total amount of the Fund's brokerage transactions involving the payment
of commissions that was effected through UST Securities Corp. were 0.24%, 7.74%
and 5.76%, respectively. For the same periods, the average commissions per

-39-
<PAGE>

share paid by the Fund to UST Securities Corp. and other unaffiliated brokers
were $0.07 and $0.06, $0.09 and $0.06, and $0.09 and $0.08, respectively.

For the fiscal years ended March 31, 1999, 1998 and 1997, the
Small Cap Fund paid brokerage commissions aggregating $248,422, $131,936 and
$122,184, of which $0, $0 and $7,047, respectively, was paid to UST Securities
Corp. For the fiscal years ended March 31, 1999 and March 31, 1997, the
percentages of total commissions paid by the Fund to UST Securities Corp. was 0%
and 5.77%, respectively, and the percentages of the total amount of the Fund's
brokerage transactions involving the payment of commissions that was effected
through UST Securities Corp. was 0% and 1.83%, respectively. For the same
periods, the average commissions per share paid by the Fund to UST Securities
Corp. and other unaffiliated brokers were $0 and $0.06, and $0.03 and $0.04,
respectively.

For the fiscal years or periods ended March 31, 1999 and 1998,
the Large Cap Growth Fund paid brokerage commissions aggregating $89,509 and
$25,680, respectively, of which $0 and $0 was paid to affiliates of U.S. Trust.
For the year ended March 31, 1999, the percentage of total commissions paid by
the Fund to UST Securities Corp. was 0%, and the percentage of the total amount
of the Fund's brokerage transactions involving the payment of commissions that
was effected through UST Securities Corp. was 0%. For the same period, the
average commissions per share paid by the Fund to UST Securities Corp. and other
unaffiliated brokers were $0 and $0.07, respectively.

Transactions in domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere.

The Investment Advisory Agreements between the Company and the
Adviser provide that, in executing portfolio transactions and selecting brokers
or dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and
whether such broker or dealer is selling shares of the Company, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.

-40-
<PAGE>

and statistics on specific companies or industries, general summaries of
groups of stocks and their comparative earnings, or broad overviews of the stock
market and the economy.

Supplementary research information so received is in addition
to and not in lieu of services required to be performed by the Adviser and does
not reduce the investment advisory fees payable by the Funds. Such information
may be useful to the Adviser in serving the Funds and other clients and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to the Adviser in carrying out its obligations to
the Funds.

During the fiscal year ended March 31, 1999, the Adviser
directed Fund brokerage transactions to brokers because of research services
provided. The amounts of such transactions and their related commissions were as
follows:
<TABLE>
<CAPTION>

Fund Amount of Transactions Related Commission
---- ---------------------- ------------------

<S> <C> <C>
Blended Equity Fund $136,842,126 $88,500
Value and Restructuring Fund $149,252,350 $217,450
Small Cap Fund $24,708,873 $82,496
Large Cap Growth Fund $46,627,415 $49,375
</TABLE>

Portfolio securities will not be purchased from or sold to the
Adviser, Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.

Investment decisions for the Funds are made independently from
those for other investment companies, common trust funds and other types of
funds managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund and another
investment company or common trust fund, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to the Fund and such other investment company
or common trust fund. In some instances, this investment procedure may adversely
affect the price paid or received by the Funds or the size of the position
obtained by the Funds. To the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for the Funds with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.

The Company is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
their parents held by the Funds as of the close of the most recent fiscal year.
As of March 31, 1999, the following Funds held the following securities of the
Company's regular brokers or dealers or their parents: the Blended Equity Fund
held 202,694 shares of common stock of Morgan Stanley Dean Witter & Co.; the
Value and Restructuring Fund held 115,000 shares of common stock of Morgan
Stanley Dean Witter & Co., 275,000 shares of common stock of Donaldson, Lufkin
and Jenrette Securites Corp. and 200,000 shares of common stock of Bear Stearns
& Co., Inc.; and the Large Cap Growth Fund held 125,000 shares of common stock
of Merrill Lynch & Co .

-41-
<PAGE>

PORTFOLIO VALUATION

Assets in the Funds which are traded on a recognized domestic
stock exchange are valued at the last sale price on the securities exchange on
which such securities are primarily traded or at the last sale price on the
national securities market. Securities traded only on over-the-counter markets
are valued on the basis of closing over-the-counter bid prices. Securities for
which there were no transactions are valued at the average of the most recent
bid and asked prices. An option or futures contract is valued at the last sales
price quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, the mean between the last bid
and asked prices. Restricted securities and securities or other assets for which
market quotations are not readily available are valued at fair value, pursuant
to guidelines adopted by the Company's Board of Directors.

Portfolio securities which are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except that when an event
subsequent to the time where value was so established is likely to have changed
such value, then the fair value of those securities will be determined by
consideration of other factors under the direction of the Board of Directors. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security.
Investments in debt securities having a maturity of 60 days or less are valued
based upon the amortized cost method. All other foreign securities are valued at
the last current bid quotation if market quotations are available, or at fair
value as determined in accordance with guidelines adopted by the Board of
Directors. For valuation purposes, quotations of foreign securities in foreign
currency are converted to U.S. dollars equivalent at the prevailing market rate
on the day of conversion. Some of the securities acquired by a Fund may be
traded on foreign exchanges or over-the-counter markets on days which are not
Business Days. In such cases, the net asset value of the shares may be
significantly affected on days when investors can neither purchase nor redeem
the Fund's shares. The Company's administrators have undertaken to price the
securities in the Funds' portfolio, and may use one or more independent pricing
services in connection with this service.

INDEPENDENT AUDITORS

Ernst & Young LLP, independent auditors, 200 Clarendon
Street, Boston, MA 02116, serve as auditors of the Company. The Funds' Financial
Highlights included in the Prospectus and the financial statements for the
period ended March 31, 1999 are incorporated by reference in this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
included in their reports thereon which appear therein.

-42-
<PAGE>

COUNSEL

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary
of the Company, and Mr. Malloy, Assistant Secretary of the Company, are
partners), One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania
19103, is counsel to the Company and will pass upon the legality of the shares
offered by the Prospectus.

ADDITIONAL INFORMATION CONCERNING TAXES

The following supplements the tax information contained in the
Prospectus.

For federal income tax purposes, each Fund is treated as a
separate corporate entity and has qualified and intends to continue to qualify
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification generally relieves a Fund of liability
for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, such Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions would be
taxable as ordinary income to shareholders to the extent of the Fund's current
and accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.

A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Funds intend to make
sufficient distributions or deemed distributions of their ordinary taxable
income and any capital gain net income prior to the end of each calendar year to
avoid liability for this excise tax.

Each Fund will distribute substantially all of its taxable
income including its net capital gain (the excess of long-term capital over
short-term capital loss), if any. As noted in the Funds' Prospectus, the
dividends and distributions you receive may be subject to federal, state and
local taxation, depending upon your tax situation. Distributions you receive
from a Fund will generally be taxable regardless of whether they are paid in
cash or reinvested in additional shares. Distributions attributable to the net
capital gain of a fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares. Other Fund distributions will
generally be taxable as ordinary income.

You should note that if you purchase shares just before a
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxed on the entire amount of the distribution
received, even though, as an economic matter, the

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<PAGE>

distribution simply constitutes a return of capital. This is known as "buying
into a dividend."

You will recognize taxable gain or loss on a sale, exchange or
redemption of your shares, including an exchange for shares of another Fund,
based on the difference between your tax basis in the shares and the amount you
receive for them. To aid in computing your tax basis, you generally should
retain your account statements for the periods during which you held shares.

Any loss realized on shares held for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividends that were received on the shares.

The one major exception to these tax principles is that
distributions on, and sales, exchanges and redemptions of share held in an IRA
(or other tax-qualified plan) will not be currently taxable.

Dividends declared in October, November or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by a Fund on December
31 of such year if such dividends are actually paid during January of the
following year.

Each Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure properly to include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so either that they are not subject to backup
withholding or that they are "exempt recipients."

The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisers
concerning their specific situations and the application of state, local and
foreign taxes.

PERFORMANCE INFORMATION

The Funds may advertise the "average annual total return" for
their shares. Such total return figure reflects the average percentage change in
the value of an investment in a Fund from the beginning date of the measuring
period to the end of the measuring period. Average total return figures will be
given for the most recent one-year period, and may be given for other periods as
well (such as from the commencement of a Fund's operations, or on a year-by-year
basis). The average annual total return is computed by determining the average
annual

-44-
<PAGE>

compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:

1/n
ERV
T = [(-----) - 1]
P

Where: T = average annual total return.

ERV = ending redeemable value
of a hypothetical $1,000
payment made at the
beginning of the 1, 5 or 10
year (or other) periods at
the end of the applicable
period (or a fractional
portion thereof).

P = hypothetical initial payment of $1,000.

n = period covered by the computation, expressed in years.

Each Fund may also advertise the "aggregate total return" for
its shares for various periods, representing the cumulative change in the value
of an investment in the Fund for the specific period. The aggregate total return
is computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:

ERV
Aggregate Total Return = [(------)] - 1
P

The above calculations are made assuming that (1) all
dividends and capital gain distributions are reinvested on the reinvestment
dates at the price per share existing on the reinvestment date, (2) all
recurring fees charged to all shareholder accounts are included, and (3) for any
account fees that vary with the size of the account, a mean (or median) account
size in a Fund during the periods is reflected. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.

Based on the foregoing calculations, the average annual total
returns for the shares of the Blended Equity, Value and Restructuring, Small Cap
and Large Cap Growth Funds for the one year period ended March 31, 1999 were
19.65%, 1.48%, -21.41% and 68.04%, respectively. The average annual total
returns for the shares of the Blended Equity, Value and Restructuring and Small
Cap Funds for the five year period ended March 31, 1999 were 23.75%, 22.61% and
4.41%, respectively. The average annual total returns for the shares of the
Blended Equity Fund for the ten year period ended March 31, 1999 was 17.63%. The
average annual total returns for the shares of the Value and Restructuring and
Small Cap Funds for the period from December 31, 1992 (commencement of
operations) to March 31, 1999 were

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<PAGE>

24.12% and 7.28%, respectively. The average annual total return for the shares
of the Large Cap Growth Fund for the period from October 1, 1997 (commencement
of operations) to March 31, 1999 was 60.93%.

The Funds may also from time to time include in
advertisements, sales literature and communications to shareholders a total
return figure that is not calculated according to the formulas set forth above
in order to compare more accurately a Fund's performance with other measures of
investment return. For example, in comparing a Fund's total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Weisenberger Investment Company Service, or with the performance of an index,
a Fund may calculate its aggregate total return for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value.

The total return of shares of a Fund may be compared to that
of other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the total return of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. The total return of the Funds also may be compared to the
Standard & Poor's 500 Stock Index ("S&P 500"), an unmanaged index of common
stocks of 500 companies, most of which are listed on the Exchange, the Consumer
Price Index, or the Dow Jones Industrial Average, a recognized unmanaged index
of common stocks of 30 industrial companies listed on the Exchange. Total return
and yield data as reported in national financial publications such as MONEY
MAGAZINE, FORBES, BARRON'S, THE WALL STREET JOURNAL and THE NEW YORK TIMES, or
in publications of a local or regional nature, may also be used in comparing the
performance of a Fund. Advertisements, sales literature or reports to
shareholders may from time to time also include a discussion and analysis of
each Fund's performance, including, without limitation, those factors,
strategies and techniques that, together with market conditions and events,
materially affected each Fund's performance.

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<PAGE>

current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisements, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.

Performance will fluctuate and any quotation of performance
should not be considered as representative of a Fund's future performance.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, operating expenses, and
market conditions. Any fees charged by Shareholder Organizations with respect to
accounts of Customers that have invested in shares will not be included in
calculations of performance.

MISCELLANEOUS

As used herein, "assets allocable to the Fund" means the
consideration received upon the issuance of shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company not belonging to a particular portfolio of the Company. In
determining a Fund's net asset value, assets allocable to the Fund are charged
with the direct liabilities in respect of the Fund and with a share of the
general liabilities of the Company which are normally allocated in proportion to
the relative asset values of the Company's portfolios at the time of allocation.
Subject to the provisions of the Company's Charter, determinations by the Board
of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets with respect to a particular Fund, are conclusive.

As of July 13, 1999, U.S. Trust and its affiliates held of
record substantially all of the Funds' outstanding shares as agent or custodian
for their customers, but did not own such shares beneficially because they did
not have voting or investment discretion with respect to such shares.

As of July 13, 1999, the name, address and percentage
ownership of each person that owned beneficially or of record 5% or more of the
outstanding shares of a Fund were as follows: BLENDED EQUITY FUND: U.S. Trust
Retirement Fund, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 9.96%; and United States Trust Company of New
York Trustee FBO U.S. Trust Plan, U.S. Trust Company of the Pacific Northwest,
Attn: Sandra Woolcock, 4380 S.W. Macadam Avenue, Suite 450, Portland, Oregon
97201, 5.86%; VALUE AND RESTRUCTURING FUND: Charles Schwab & Co., Inc. Special
Custody A/C for Benefit of Customers, Attn: Mutual Funds, 101 Montgomery Street,
San Francisco, California 94104, 20.36%; and SMALL CAP FUND:

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<PAGE>

U.S. Trust Retirement Fund, c/o United States Trust Company of New York, 114
West 47th Street, New York, New York 10036, 17.95%.

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the
Company's Annual Report to Shareholders for the fiscal year ended March 31, 1999
(the "1999 Annual Report") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the 1999 Annual Report
are incorporated by reference herein. The financial statements included in the
1999 Annual Report for the Funds have been audited by the Company's independent
auditors, Ernst & Young LLP, whose reports thereon also appear in the 1999
Annual Report and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 1999 Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.

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<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:

A-1
<PAGE>

on debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.

"Not Prime" - Issuers do not fall within any of the Prime rating
categories.

"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.

"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.

"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.

A-2
<PAGE>

"D" - Securities are in actual or imminent payment default.

Thomson Financial BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:

"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.

"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."

A-3
<PAGE>

"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:

"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.

Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

A-4
<PAGE>

"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.

"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.

A-5
<PAGE>

Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.

The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.

"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.

"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable in periods of greater economic stress.

A-6
<PAGE>

The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:

"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations
in this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serves as general guidelines. "DDD" obligations have
the highest potential for recovery , around 90% - 100% of outstanding amounts
and accrued interest. "DD" indicates potential recoveries in the range of 50% -
90%, and "D" the lowest recovery potential , i.e., below 50%.

A-7
<PAGE>

"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.

"BB," "B," "CCC," and "CC" - These designations are assigned by Thomson
Financial BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.

"D" - This designation indicates that the long-term debt is in default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.

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<PAGE>

MUNICIPAL NOTE RATINGS

"SP-1" - The issuers of these municipal notes exhibit a strong capacity
to pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.

"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.

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

"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.

"SG" - This designation denotes speculative quality . Debt instruments
in this category lack of margins of protection.

Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.

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<PAGE>

EXCELSIOR FUNDS, INC.

Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund

EXCELSIOR TAX-EXEMPT FUNDS, INC.

Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1999

This Statement of Additional Information is not a prospectus but should
be read in conjunction with the current prospectuses for the Short-Term
Government Securities, Intermediate-Term Managed Income and Managed Income Funds
of Excelsior Funds, Inc. and the Short-Term Tax-Exempt Securities,
Intermediate-Term Tax-Exempt and Long-Term Tax-Exempt Funds of Excelsior
Tax-Exempt Funds, Inc. (individually, a "Fund" and collectively, the "Funds")
dated August 1, 1999 (the "Prospectuses"). Copies of the Prospectuses may be
obtained by writing Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc.
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston, MA
02108-3913 or by calling (800) 446-1012. Capitalized terms not otherwise defined
have the same meaning as in the Prospectus.

The audited financial statements and related reports of Ernst &
Young LLP, independent auditors, contained in the annual reports to the
Funds' shareholders for the fiscal year ended March 31, 1999 are incorporated
herein by reference in the section entitled "Financial Statements." No other
parts of the annual reports are incorporated herein by reference. Copies of
the annual reports may be obtained upon request and without charge by calling
(800) 446-1012.

<PAGE>

TABLE OF CONTENTS

Page
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<S> <C>
CLASSIFICATION AND HISTORY.......................................................................................1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS......................................................................1
Additional Investment Policies..........................................................................1
Additional Information on Portfolio Instruments.........................................................3
Investment Limitations.................................................................................15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................................20
Purchase of Shares.....................................................................................21
Redemption Procedures..................................................................................23
Other Redemption Information...........................................................................25
INVESTOR PROGRAMS...............................................................................................26
Systematic Withdrawal Plan.............................................................................26
Exchange Privilege.....................................................................................27
Retirement Plans.......................................................................................28
Automatic Investment Program...........................................................................28
Additional Information.................................................................................29
DESCRIPTION OF CAPITAL STOCK....................................................................................29
MANAGEMENT OF THE FUNDS.........................................................................................31
Directors and Officers.................................................................................31
Investment Advisory and Administration Agreements......................................................35
Banking Laws...........................................................................................38
Shareholder Organizations..............................................................................39
Expenses ..............................................................................................40
Custodian and Transfer Agent...........................................................................40
PORTFOLIO TRANSACTIONS..........................................................................................41
PORTFOLIO VALUATION.............................................................................................43
INDEPENDENT AUDITORS............................................................................................44
COUNSEL ........................................................................................................44
ADDITIONAL INFORMATION CONCERNING TAXES.........................................................................44
Generally..............................................................................................44
Fixed Income Funds.....................................................................................45
Tax-Exempt Funds.......................................................................................45
PERFORMANCE AND YIELD INFORMATION...............................................................................48
Yields and Performance.................................................................................48
MISCELLANEOUS...................................................................................................51
FINANCIAL STATEMENTS............................................................................................52
APPENDIX A.....................................................................................................A-1

</TABLE>

<PAGE>

CLASSIFICATION AND HISTORY

Excelsior Funds, Inc. ("Excelsior Fund") and Excelsior Tax-Exempt
Funds, Inc. ("Excelsior Tax-Exempt Fund" and collectively with Excelsior Fund,
the "Companies") are open-end, management investment companies. The Short-Term
Government Securities, Intermediate-Term Managed Income and Managed Income Funds
(collectively, the "Fixed-Income Funds") are separate series of Excelsior Fund.
The Short-Term Tax-Exempt Securities, Intermediate-Term Tax-Exempt and Long-Term
Tax-Exempt Funds (collectively, the "Tax-Exempt Funds") are separate series of
Excelsior Tax-Exempt Fund. Each Fund is classified as diversified under the
Investment Company Act of 1940, as amended (the "1940 Act"). Excelsior Fund and
Excelsior Tax-Exempt Fund were organized as Maryland corporations on August 2,
1984 and August 8, 1984, respectively. Prior to December 28, 1995, Excelsior
Fund and Excelsior Tax-Exempt Fund were known as "UST Master Funds, Inc." and
"UST Master Tax-Exempt Funds, Inc.," respectively.

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

The following information supplements the description of the investment
objectives, strategies and risks of the Funds as set forth in the Prospectuses.
The investment objective of each of the Funds may not be changed without the
vote of the holders of a majority of its outstanding shares (as defined below).
Except as expressly noted below, each Fund's investment policies may be changed
without shareholder approval.

For ease of reference, the various Funds are referred to as follows:
Short-Term Tax-Exempt Securities Fund as "ST Tax-Exempt Fund"; Intermediate-Term
Tax-Exempt Fund as "IT Tax-Exempt Fund"; Long-Term Tax-Exempt Fund as "LT
Tax-Exempt Fund"; Short-Term Government Securities Fund as "ST Government Fund";
and Intermediate-Term Managed Income Fund as "IT Managed Income Fund."

ADDITIONAL INVESTMENT POLICIES

SHORT-TERM GOVERNMENT SECURITIES FUND

Under normal circumstances, at least 65% of the ST Government Fund's
total assets will be invested in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements
collateralized by such obligations. As a result, the interest income on such
investments generally should be exempt from state and local personal income
taxes in most states. In all states this tax exemption is passed through to the
Fund's shareholders.

INTERMEDIATE-TERM MANAGED INCOME AND MANAGED INCOME FUNDS

The IT Managed Income and Managed Income Funds may invest in the
following types of securities: corporate debt obligations such as bonds,
debentures, obligations convertible into common stocks and money market
instruments; preferred stocks; and obligations issued or

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<PAGE>

guaranteed by the U.S. government and its agencies or instrumentalities. The
Funds are also permitted to enter into repurchase agreements. The Funds may,
from time to time, invest in debt obligations issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their respective authorities, agencies, instrumentalities and political
subdivisions, the interest from which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax ("Municipal Obligations"). The purchase
of Municipal Obligations may be advantageous when, as a result of prevailing
economic, regulatory or other circumstances, the performance of such securities,
on a pre-tax basis, is comparable to that of corporate or U.S. government debt
obligations.

Under normal market conditions, at least 75% of the IT Managed Income
and Managed Income Funds' total assets will be invested in investment-grade debt
obligations rated within the three highest ratings of Standard & Poor's Ratings
Services ("S&P") or Moody's Investors Service, Inc. ("Moody's") (or in unrated
obligations considered to be of comparable credit quality by the Adviser) and in
U.S. government obligations and money market instruments of the types listed
below under "Additional Information on Portfolio Instruments - Money Market
Instruments." When, in the opinion of the Adviser, a defensive investment
posture is warranted, the Funds may invest temporarily and without limitation in
high quality, short-term money market instruments.

Unrated securities will be considered of investment grade if deemed by
the Adviser to be comparable in quality to instruments so rated, or if other
outstanding obligations of the issuers of such securities are rated "Baa/BBB" or
better. It should be noted that obligations rated in the lowest of the top four
ratings ("Baa" by Moody's or "BBB" by S&P) are considered to have some
speculative characteristics and are more sensitive to economic change than
higher rated bonds.

The IT Managed Income and Managed Income Funds may invest up to 25% of
their respective total assets in: preferred stocks; dollar-denominated debt
obligations of foreign issuers, including foreign corporations and foreign
governments; and dollar-denominated debt obligations of U.S. companies issued
outside the United States. The Funds may also enter into foreign currency
exchange transactions for hedging purposes. The Funds may invest up to 10% and
25% of their respective total assets in obligations rated below the four highest
ratings of S&P or Moody's ("junk bonds") with no minimum rating required. The
Funds will not invest in common stocks, and any common stocks received through
conversion of convertible debt obligations will be sold in an orderly manner as
soon as possible.

SHORT-TERM TAX-EXEMPT SECURITIES, INTERMEDIATE-TERM TAX-EXEMPT AND LONG-TERM
TAX-EXEMPT FUNDS

The Tax-Exempt Funds will invest substantially all of their assets in
Municipal Obligations which are determined by the Adviser to present minimal
credit risks. As a matter of fundamental policy, except during temporary
defensive periods, each Fund will maintain at least 80% of its net assets in
Municipal Obligations. (This policy may not be changed with respect to a Fund
without the vote of the holders of a majority of its outstanding shares.)
However, from

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<PAGE>

time to time on a temporary defensive basis due to market conditions, each Fund
may hold uninvested cash reserves or invest in taxable obligations in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income. Should a
Fund invest in taxable obligations, it would purchase: (i) obligations of the
U.S. Treasury; (ii) obligations of agencies and instrumentalities of the U.S.
government; (iii) money market instruments such as certificates of deposit,
commercial paper, and bankers' acceptances; (iv) repurchase agreements
collateralized by U.S. government obligations or other money market instruments;
(v) municipal bond index and interest rate futures contracts; or (vi) securities
issued by other investment companies that invest in high quality, short-term
securities.

In seeking to achieve its investment objective, each Tax-Exempt Fund
may invest in "private activity bonds" (see "Additional Information on Portfolio
Instruments -- Municipal Obligations" below), the interest on which is treated
as a specific tax preference item under the federal alternative minimum tax.
Investments in such securities, however, will not exceed under normal market
conditions 20% of a Fund's total assets when added together with any taxable
investments held by that Fund.

The Municipal Obligations purchased by the Funds will consist of: (1)
bonds rated "BBB" or higher by S&P or by Fitch IBCA ("Fitch"), or "Baa" or
higher by Moody's, or, in certain instances, bonds with lower ratings if they
are determined by the Adviser to be comparable to BBB/Baa-rated issues; (2)
notes rated "MIG-3" or higher ("VMIG-3" or higher in the case of variable rate
notes) by Moody's, or "SP-3" or higher by S&P, or "F3" or higher by Fitch; and
(3) commercial paper rated "Prime-3" or higher by Moody's, or "A-3" or higher by
S&P, or "F3" or higher by Fitch. Securities rated "BBB" by S&P and Fitch or
"Baa" by Moody's are generally considered to be investment grade, although they
have speculative characteristics and are more sensitive to economic change than
higher rated securities. If not rated, securities purchased by the Funds will be
of comparable quality to the above ratings as determined by the Adviser under
the supervision of the Board of Directors. A discussion of Moody's, Fitch's and
S&P's rating categories is contained in Appendix A.

Although the Funds do not presently intend to do so on a regular basis,
they may invest more than 25% of their assets in Municipal Obligations the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by the Adviser. To the extent that
a Fund's assets are concentrated in Municipal Obligations payable from revenues
on similar projects, the Fund will be subject to the peculiar risks presented by
such projects to a greater extent than it would be if the Fund's assets were not
so concentrated.

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

MUNICIPAL OBLIGATIONS

Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses,

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<PAGE>

and the extension of loans to public institutions and facilities. Private
activity bonds that are issued by or on behalf of public authorities to finance
various privately operated facilities are included within the term "Municipal
Obligations" only if the interest paid thereon is exempt from regular federal
income tax and not treated as a specific tax preference item under the federal
alternative minimum tax.

The two principal classifications of Municipal Obligations which may be
held by the Tax-Exempt Funds are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as user fees of
the facility being financed.

The Tax-Exempt Funds' portfolios may also include "moral obligation"
securities, which are usually issued by public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund--the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by the Funds.

The Tax-Exempt Funds may also purchase custodial receipts evidencing
the right to receive either the principal amount or the periodic interest
payments or both with respect to specific underlying Municipal Obligations. In
general, such "stripped" Municipal Obligations are offered at a substantial
discount in relation to the principal and/or interest payments which the holders
of the receipt will receive. To the extent that such discount does not produce a
yield to maturity for the investor that exceeds the original tax-exempt yield on
the underlying Municipal Obligation, such yield will be exempt from federal
income tax for such investor to the same extent as interest on the underlying
Municipal Obligation. The Funds intend to purchase "stripped" Municipal
Obligations only when the yield thereon will be, as described above, exempt from
federal income tax to the same extent as interest on the underlying Municipal
Obligations. "Stripped" Municipal Obligations are considered illiquid securities
subject to the limit described below under "Illiquid Securities." The Tax-Exempt
Funds will limit their investments in interest-only and principal-only Municipal
Obligations to 5% of their total assets.

There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of nationally recognized statistical rating organizations
("NRSROs") such as Moody's and S&P described in Appendix A hereto represent
their opinion as to the quality of Municipal Obligations. It should be
emphasized that these ratings are general and are not absolute standards of
quality, and Municipal Obligations with the same maturity, interest rate, and
rating may have different yields while Municipal Obligations of the same
maturity and interest rate

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<PAGE>

with different ratings may have the same yield. Subsequent to its purchase by a
Fund, an issue of Municipal Obligations may cease to be rated, or its rating may
be reduced below the minimum rating required for purchase by that Fund. The
Adviser will consider such an event in determining whether a Fund should
continue to hold the obligation.

The payment of principal and interest on most securities purchased by
the Tax-Exempt Funds will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each multistate
agency of which a state is a member, is a separate "issuer" as that term is used
in this Statement of Additional Information. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer." An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.

Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the Funds are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.

Among other instruments, the Tax-Exempt Funds may purchase short-term
general obligation notes, tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax-exempt commercial paper, construction loan notes
and other forms of short-term loans. Such instruments are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues. In addition, each Fund may invest in
long-term tax-exempt instruments, such as municipal bonds and private activity
bonds, to the extent consistent with the maturity restrictions applicable to it.

Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the
Tax-Exempt Funds nor the Adviser will review the proceedings relating to the
issuance of Municipal Obligations or the bases for such opinions.

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<PAGE>

The IT Managed Income and Managed Income Funds may, when deemed
appropriate by the Adviser in light of the Funds' investment objectives, also
invest in Municipal Obligations. Although yields on Municipal Obligations can
generally be expected under normal market conditions to be lower than yields on
corporate and U.S. government obligations, from time to time municipal
securities have outperformed, on a total return basis, comparable corporate and
federal debt obligations as a result of prevailing economic, regulatory or other
circumstances. Dividends paid by the IT Managed Income and Managed Income Funds
that are derived from interest on municipal securities would be taxable to the
Funds' shareholders for federal income tax purposes.

INSURED MUNICIPAL OBLIGATIONS

The Tax-Exempt Funds may purchase Municipal Obligations which are
insured as to timely payment of principal and interest at the time of purchase.
The insurance policies will usually be obtained by the issuer of the bond at the
time of its original issuance. Bonds of this type will be acquired only if at
the time of purchase they satisfy quality requirements generally applicable to
Municipal Obligations. Although insurance coverage for the Municipal Obligations
held by the Tax-Exempt Funds reduces credit risk by insuring that the Funds will
receive timely payment of principal and interest, it does not protect against
market fluctuations caused by changes in interest rates and other factors. Each
Tax-Exempt Fund may invest more than 25% of its net assets in Municipal
Obligations covered by insurance policies.

REPURCHASE AGREEMENTS

Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). Each Fund will enter into repurchase agreements only
with financial institutions such as banks or broker/dealers which are deemed to
be creditworthy by the Adviser, pursuant to guidelines approved by the
Companies' Boards of Directors. The Funds will not enter into repurchase
agreements with the Adviser or its affiliates. Repurchase agreements with
remaining maturities in excess of seven days will be considered illiquid
securities subject to the 10% limit described below under "Illiquid Securities."

The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose a
Fund to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Income on
the repurchase agreements will be taxable.

The repurchase price under a repurchase agreement generally equals the
price paid by a Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the securities underlying the
repurchase agreement). Securities subject to repurchase agreements are held by
the Funds' custodian (or sub-custodian) or in the

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<PAGE>

Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
loans by a Fund under the 1940 Act.

INVESTMENT COMPANY SECURITIES

The Funds may also invest in securities issued by other investment
companies which invest in high-quality, short-term securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. In addition to the advisory fees and other expenses a
Fund bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by the Funds within the limits prescribed by the 1940 Act,
which include, subject to certain exceptions, a prohibition against a Fund
investing more than 10% of the value of its total assets in such securities.

SECURITIES LENDING

To increase return on their portfolio securities, the Fixed Income
Funds may lend their portfolio securities to broker/dealers pursuant to
agreements requiring the loans to be continuously secured by collateral equal at
all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. government,
its agencies or instrumentalities, or an irrevocable letter of credit issued by
a bank which meets the investment standards of a Fund, or any combination
thereof. Such loans will not be made if, as a result, the aggregate of all
outstanding loans of a Fund exceeds 30% of the value of its total assets. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. However, loans are made only to borrowers
deemed by the Adviser to be of good standing and when, in the Adviser's
judgment, the income to be earned from the loan justifies the attendant risks.

When the Fixed Income Funds lend their portfolio securities, they
continue to receive interest or dividends on the securities lent and may
simultaneously earn interest on the investment of the cash loan collateral,
which will be invested in readily marketable, high-quality, short-term
obligations. Although voting rights, or rights to consent, attendant to
securities lent pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by the pertinent Fund if a
material event affecting the investment is to occur.

BORROWING AND REVERSE REPURCHASE AGREEMENTS

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<PAGE>

and price (a "reverse repurchase agreement"). The Securities and Exchange
Commission (the "SEC") views reverse repurchase agreements as a form of
borrowing. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the repurchase price of those securities.

ILLIQUID SECURITIES

No Fund will knowingly invest more than 10% of the value of its net
assets in securities that are illiquid. A security will be considered illiquid
if it may not be disposed of within seven days at approximately the value at
which the particular Fund has valued the security. Each Fund may purchase
securities which are not registered under the Securities Act of 1933, as amended
(the "1933 Act"), but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Boards, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.

GOVERNMENT OBLIGATIONS

The Funds may purchase government obligations which include obligations
issued or guaranteed by the U.S. government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations; still others are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. government would
provide financial support to U.S. government-sponsored instrumentalities if it
is not obligated to do so by law. Obligations of such instrumentalities will be
purchased only when the Adviser believes that the credit risk with respect to
the instrumentality is minimal.

Examples of the types of U.S. government obligations that may be held
by the Funds include, in addition to U.S. Treasury Bills, the obligations of
Federal Home Loan Banks, the Farm Credit System Financial Assistance
Corporation, Federal Land Banks, the Federal Financing Bank, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, the Tennessee Valley Authority and Maritime
Administration.

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<PAGE>

WHEN-ISSUED AND FORWARD TRANSACTIONS

Each Fund may purchase eligible securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceeded
25% of the value of its assets.

It is expected that forward commitments and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.

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STAND-BY COMMITMENTS

The Managed Income and IT Managed Income Funds and the Tax-Exempt Funds
may acquire "stand-by commitments" with respect to Municipal Obligations held by
them. Under a "stand-by commitment," a dealer or bank agrees to purchase from a
Fund, at the Fund's option, specified Municipal Obligations at a specified
price. The amount payable to a Fund upon its exercise of a "stand-by commitment"
is normally (i) the Fund's acquisition cost of the Municipal Obligations
(excluding any accrued interest which the Fund paid on their acquisition), less
any amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period. "Stand-by commitments" are exercisable by a Fund at any time before the
maturity of the underlying Municipal Obligations, and may be sold, transferred
or assigned by the Fund only with the underlying instruments.

The Managed Income and IT Managed Income Funds and the Tax-Exempt Funds
expect that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for a "stand-by commitment" either separately in cash
or by paying a higher price for securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities). Where a Fund has paid any consideration directly or indirectly for
a "stand-by commitment," its cost will be reflected as unrealized depreciation
for the period during which the commitment was held by the Fund.

The Managed Income and IT Managed Income Funds and the Tax-Exempt Funds
intend to enter into "stand-by commitments" only with banks and broker/dealers
which, in the Adviser's opinion, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a "stand-by commitment," the Adviser will
review periodically the issuer's assets, liabilities, contingent claims and
other relevant financial information. The Funds will acquire "stand-by
commitments" solely to facilitate portfolio liquidity and do not intend to
exercise their rights thereunder for trading purposes. "Stand-by commitments"
acquired by a Fund will be valued at zero in determining the Fund's net asset
value.

FUTURES CONTRACTS

The Funds may invest in interest rate futures contracts and municipal
bond index futures contracts as a hedge against changes in market conditions. A
municipal bond index assigns values daily to the municipal bonds included in the
index based on the independent assessment of dealer-to-dealer municipal bond
brokers. A municipal bond index futures contract represents a firm commitment by
which two parties agree to take or make delivery of an amount equal to a
specified dollar amount multiplied by the difference between the municipal bond
index value on the last trading date of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities in the index is made. Any income from investments in futures
contracts will be taxable income of the Funds.

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<PAGE>

The Fund may enter into contracts for the future delivery of
fixed-income securities commonly known as interest rate futures contracts.
Interest rate futures contracts are similar to municipal bond index futures
contracts except that, instead of a municipal bond index, the "underlying
commodity" is represented by various types of fixed-income securities.

The Funds will not engage in transactions in futures contracts for
speculation, but only as a hedge against changes in market values of securities
which they hold or intend to purchase where the transactions are intended to
reduce risks inherent in the management of the Funds. Each Fund may engage in
futures contracts only to the extent permitted by the Commodity Futures Trading
Commission ("CFTC") and the SEC. Each Fund currently intends to limit its
hedging transactions in futures contracts so that, immediately after any such
transaction, the aggregate initial margin that is required to be posted by the
Fund under the rules of the exchange on which the futures contract is traded
does not exceed 5% of the Fund's total assets, after taking into account any
unrealized profits and unrealized losses on the Fund's open contracts.

When investing in futures contracts, the Funds must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When a Fund takes a long position in a futures contract, it must maintain a
segregated account containing liquid assets equal to the purchase price of the
contract, less any margin or deposit. When a Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing liquid
assets in an amount equal to the market value of the securities underlying such
contract (less any margin or deposit), which amount must be at least equal to
the market price at which the short position was established. Asset segregation
requirements are not applicable when a Fund "covers" a futures position
generally by entering into an offsetting position. Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event of
adverse price movements, a Fund would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if a Fund has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. In addition, a Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on a Fund's
ability to effectively hedge.

Transactions by a Fund in futures contracts may subject the Fund to a
number of risks. Successful use of futures by a Fund is subject to the ability
of the Adviser to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts and movements in the price of the instruments

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<PAGE>

being hedged. In addition, investments in futures may subject a Fund to losses
due to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract at any particular time. Consequently, a Fund may realize a loss on a
futures transaction that is not offset by a favorable movement in the price of
securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements. In addition, in some
situations, if a Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements.

As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.

Utilization of futures transactions by a Fund involves the risk of loss
by a Fund of margin deposits in the event of bankruptcy of a broker with whom
the Fund has an open position in a futures contract or related option.

Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.

The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.

FORWARD CURRENCY TRANSACTIONS

The Managed Income and IT Managed Income Funds will conduct their
currency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency

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<PAGE>

exchange markets, or by entering into forward currency contracts. A forward
foreign currency contract involves an obligation to purchase or sell a specific
currency for a set price at a future date. In this respect, forward currency
contracts are similar to foreign currency futures contracts; however, unlike
futures contracts which are traded on recognized commodities exchange, forward
currency contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts.

A Fund's participation in forward currency contracts will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose of
transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in that currency.
The Funds will not speculate in foreign currency exchange transactions.
Transaction and position hedging will not be limited to an overall percentage of
a Fund's assets, but will be employed as necessary to correspond to particular
transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation requirements are not applicable when
a Fund "covers" a forward currency position generally by entering into an
offsetting position.

The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Adviser may be incorrect in
its expectations as to currency fluctuations, and a Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.

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<PAGE>

At or before the maturity of a forward sale contract, a Fund may sell a
portfolio security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency which it is obligated to deliver. If the Fund
retains the portfolio security and engages in an offsetting transaction, the
Fund, at the time of execution of the offsetting transaction, will incur a gain
or a loss to the extent that movement has occurred in forward contract prices.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of a currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Fund will suffer a loss to the extent the price of the currency it has
agreed to sell is less than the price of the currency it has agreed to purchase
in the offsetting contract. The foregoing principles generally apply also to
forward purchase contracts.

MONEY MARKET INSTRUMENTS

"Money market instruments" that may be purchased by the Tax-Exempt
Funds and the IT Managed Income and Managed Income Funds in accordance with
their investment objectives and policies include, among other things, bank
obligations, commercial paper and corporate bonds with remaining maturities of
13 months or less.

Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations acquired
by the IT Managed Income and Managed Income Funds may also include U.S.
dollar-denominated obligations of foreign branches of U.S. banks and obligations
of domestic branches of foreign banks. Investments in bank obligations of
foreign branches of domestic financial institutions or of domestic branches of
foreign banks are limited so that no more than 5% of the value of the Managed
Income Fund's total assets will be invested in obligations of any one foreign or
domestic branch and no more than 20% of the Fund's total assets at the time of
purchase will be invested in the aggregate in such obligations. Investments in
time deposits are limited to no more than 5% of the value of a Fund's total
assets at time of purchase.

Investments by the Fixed-Income Funds in commercial paper will consist
of issues that are rated "A-2" or better by S&P, "Prime-2" or better by Moody's,
or "F2" or better by Fitch. Investments by the Tax-Exempt Funds in commercial
paper will consist of issues that are rated "A-3" or better by S&P, "Prime-3" or
better by Moody's, or "F3" or better by Fitch. In addition, each Fund may
acquire unrated commercial paper that is determined by the Adviser at the time
of purchase to be of comparable quality to rated instruments that may be
acquired by the particular Fund.

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<PAGE>

VARIABLE AND FLOATING RATE INSTRUMENTS

Securities purchased by the Tax-Exempt Funds may include variable and
floating rate instruments. The interest rates on such instruments are not fixed
and vary with changes in the particular interest rate benchmarks or indexes.
Unrated variable and floating rate instruments will be purchased by the Funds
based upon the Adviser's determination that their quality at the time of
purchase is comparable to at least the minimum ratings set forth on page 3. In
some cases a Fund may require that the issuer's obligation to pay the principal
be backed by an unconditional and irrevocable bank letter or line of credit,
guarantee or commitment to lend. Although there may be no active secondary
market with respect to a particular variable or floating rate instrument
purchased by a Fund, the Fund may (at any time or during specified intervals
within a prescribed period, depending upon the instrument involved) demand
payment in full of the principal and may resell the instrument to a third party.
The absence of an active secondary market, however, could make it difficult for
a Fund to dispose of a variable or floating rate instrument in the event the
issuer defaulted on its payment obligation or during periods when the Fund is
not entitled to exercise its demand rights. In such cases, the Fund could suffer
a loss with respect to the instrument.

PORTFOLIO TURNOVER

Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with a
Fund's investment objective. Portfolio investments may be sold for a variety of
reasons, such as a more favorable investment opportunity or other circumstances
bearing on the desirability of continuing to hold the investments. A high rate
of portfolio turnover may involve correspondingly greater transaction costs,
which must be borne directly by a Fund and ultimately by its shareholders.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
High portfolio turnover may result in the realization of substantial net capital
gains. To the extent that net short-term gains are realized, any distributions
resulting from such gains are considered ordinary income for federal income tax
purposes. (See "Additional Information Concerning Taxes.")

INVESTMENT LIMITATIONS

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<PAGE>

The following investment limitations are fundamental with respect to
each Fund. No Fund may:

1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that the purchase of Municipal
Obligations or other securities directly from the issuer thereof in accordance
with the Tax-Exempt Funds' investment objectives, policies, and limitations may
be deemed to be underwriting; and except insofar as the Managed Income Fund
might be deemed to be an underwriter upon disposition of certain portfolio
securities acquired within the limitation on purchases of restricted securities;

2. Purchase or sell real estate, except that each Tax-Exempt Fund may
invest in Municipal Obligations secured by real estate or interests therein, and
the Managed Income and IT Managed Income Funds may purchase securities of
issuers which deal in real estate and may purchase securities which are secured
by interests in real estate;

3. Issue any senior securities, except insofar as any borrowing by each
Fund in accordance with its investment limitations might be considered to be the
issuance of a senior security; provided that each Fund may enter into futures
contracts and futures options;

4. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing, provided that each Fund may enter into futures contracts and
futures options. (This borrowing provision is included solely to facilitate the
orderly sale of portfolio securities to accommodate abnormally heavy redemption
requests and is not for leverage purposes.) A Fund will not purchase portfolio
securities while borrowings in excess of 5% of its total assets are outstanding;

5. Purchase any securities which would cause more than 25% of the value
of its total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the same
industry, provided that (a) with respect to the IT Tax-Exempt and LT Tax-Exempt
Funds, there is no limitation with respect to domestic bank obligations or
securities issued or guaranteed by the United States; any state or territory;
any possession of the U.S. government; the District of Columbia; or any of their
authorities, agencies, instrumentalities, or political subdivisions, (b) with
respect to the Managed Income Fund, there is no limitation with respect to
securities issued or guaranteed by the U.S. government or domestic bank
obligations, (c) with respect to the ST Tax-Exempt Fund, there is no limitation
with respect to securities issued or guaranteed by the United States; any state
or territory; any possession of the U.S. government; the District of Columbia;
or any of their authorities, agencies, instrumentalities, or political
subdivisions, (d) with respect to the ST Government and IT Managed Income Funds,
there is no limitation with respect to securities issued or guaranteed by the
U.S. government and (e) with respect to the Fixed Income Funds, neither all
finance companies, as a group, nor all utility companies, as a group, are
considered a single industry for purposes of this policy; and

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<PAGE>

6. Purchase securities of any one issuer, other than U.S. government
obligations, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that up
to 25% of the value of its total assets may be invested without regard to this
5% limitation.

The following investment limitation is fundamental with respect to the
Fixed-Income Funds. Each Fixed-Income Fund may not:

7. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, and (ii)
each Fund may lend portfolio securities in an amount not exceeding 30% of its
total assets.

The following investment limitation is fundamental with respect to the
IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds, but is an operating
policy with respect to the ST Tax-Exempt, ST Government and IT Managed Income
Funds. The Funds may not:

8. Purchase securities on margin, make short sales of securities, or
maintain a short position; provided that each Fund may enter into futures
contracts and futures options.

The following investment limitation is fundamental with respect to each
Tax-Exempt Fund. A Tax-Exempt Fund may not:

9. Make loans, except that each Tax-Exempt Fund may purchase or hold
debt obligations in accordance with its investment objective, policies, and
limitations.

The following investment limitation is fundamental with respect to the
IT Tax-Exempt and LT Tax-Exempt Funds, but is an operating policy with respect
to the ST Tax-Exempt Fund. A Tax-Exempt Fund may not:

10. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that a Fund may purchase shares of any
registered, open-end investment company, if immediately after any such purchase,
the Fund does not (a) own more than 3% of the outstanding voting stock of any
one investment company, (b) invest more than 5% of the value of its total assets
in the securities of any one investment company, or (c) invest more than 10% of
the value of its total assets in the aggregate in securities of investment
companies.

The following investment limitations are fundamental with respect to
the Managed Income Fund, but are operating policies with respect to the IT
Managed Income and ST Government Funds. A Fixed-Income Fund may not:

11. Invest in companies for the purpose of exercising management or
control;

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<PAGE>

12. Purchase foreign securities; provided that subject to the limit
described below, the IT Managed Income and Managed Income Funds may purchase (a)
dollar-denominated debt obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the United States in
an amount not to exceed 25% of its total assets at time of purchase; and (b)
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks, or foreign branches of U.S. banks,
in an amount not to exceed 20% of its total net assets; and

13. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.

The following investment limitations are fundamental with respect to
the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds. The IT Tax-Exempt, LT
Tax-Exempt and Managed Income Funds may not:

14. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that each Fund may enter into futures contracts and futures
options; and

15. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Funds may
enter into futures contracts and futures options.

The following investment limitation is fundamental with respect to the
ST Tax-Exempt, ST Government and IT Managed Income Funds. The ST Tax-Exempt, ST
Government and IT Managed Income Funds may not:

16. Purchase or sell commodities or commodity futures contracts, or
invest in oil, gas, or mineral exploration or development programs; provided
that the Funds may enter into futures contracts and futures options.

The following investment limitations are fundamental with respect to
the IT Tax-Exempt and LT Tax-Exempt Funds. Each of the IT Tax-Exempt and LT
Tax-Exempt Funds may not:

17. Knowingly invest more than 10% of the value of its total assets in
securities which may be illiquid in light of legal or contractual restrictions
on resale or the absence of readily available market quotations; and

18. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation.

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<PAGE>

The following investment limitations are fundamental with respect to
the Managed Income Fund. The Managed Income Fund may not:

19. Knowingly invest more than 10% of the value of its total assets in
illiquid securities, including repurchase agreements with remaining maturities
in excess of seven days, restricted securities, and other securities for which
market quotations are not readily available;

20. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years; and

21. Invest in obligations of foreign branches of financial institutions
or in domestic branches of foreign banks if immediately after such purchase (i)
more than 5% of the value of its total assets would be invested in obligations
of any one foreign branch of the financial institution or domestic branch of a
foreign bank, or (ii) more than 20% of its total assets would be invested in
foreign branches of financial institutions or in domestic branches of foreign
banks.

* * *

In addition to the investment limitations described above, as
a matter of fundamental policy for each Fund, which may not be changed without
the vote of the holders of a majority of the Fund's outstanding shares, a Fund
may not invest in the securities of any single issuer if, as a result, the Fund
holds more than 10% of the outstanding voting securities of such issuer.

The Managed Income, IT Tax-Exempt and LT Tax-Exempt Funds will not
invest more than 25% of the value of their respective total assets in domestic
bank obligations.

In Investment Limitation No. 6 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed by the United States government, its agencies or
instrumentalities (including securities backed by the full faith and credit of
the United States) are deemed to be U.S. government obligations.

In addition to the above investment limitations, Excelsior Fund
currently intends to limit the IT Managed Income and Managed Income Funds'
investments in warrants so that,

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<PAGE>

valued at the lower of cost or market value, they do not exceed 5% of a Fund's
net assets. For the purpose of this limitation, warrants acquired by the IT
Managed Income or Managed Income Fund in units or attached to securities will be
deemed to be without value.

The IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds may not
purchase or sell commodities.

The Funds' transactions in futures contracts and futures options
(including the margin posted by the Funds in connection with such transactions)
are excluded from the Funds' prohibitions: against the purchase of securities on
margin, short sales of securities and the maintenance of a short position; the
issuance of senior securities; writing or selling puts, calls, straddles,
spreads, or combinations thereof; and the mortgage, pledge or hypothecation of
the Funds' assets.

If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's securities will not constitute a violation of such limitation.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.

In addition, the Distributor may offer to pay a fee from its own assets
to financial institutions for the continuing investment of customers' assets in
the Funds or for providing substantial marketing, sales and operational support.
The support may include initiating customer accounts, participating in sales,
educational and training seminars, providing sales literature, and engineering
computer software programs that emphasize the attributes of the Funds. Such
assistance will be predicated upon the amount of shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution.

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<PAGE>

The net asset value of each Fund is determined and the shares of each
Fund are priced at the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), currently 4:00 p.m. (Eastern time). Net asset value
and pricing for each Fund are determined on each day the Exchange and the
Adviser are open for trading (a "Business Day"). Currently, the holidays which
the Funds observe are New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset value per share
for purposes of pricing sales and redemptions is calculated by dividing the
value of all securities and other assets allocable to the Fund, less the
liabilities allocable to the Fund, by the number of its outstanding shares.

As described below, shares may be sold to customers ("Customers") of
financial institutions ("Shareholder Organizations"). Shares are also offered
for sale directly to institutional investors and to members of the general
public. Different types of Customer accounts at the Shareholder Organizations
may be used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.

The Companies have authorized certain brokers to accept on their behalf
purchase, exchange and redemption requests. Such brokers are authorized to
designate other intermediaries to accept purchase, exchange and redemption
requests on behalf of the Companies. A Company will be deemed to have received a
purchase, exchange or redemption request when the request is received by an
authorized broker or designated intermediary in good order.

PURCHASE OF SHARES

Shares of the Funds are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Companies' sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.

-21-
<PAGE>

agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
(and redemptions) will be sent by CGFSC to the particular Shareholder
Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with CGFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase (and
redemption) requests with the Funds, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Funds bear the expense of fees payable to Shareholder
Organizations for such services. See "Shareholder Organizations."

Direct Investors may purchase shares by completing the Application
accompanying the Prospectus and mailing it, together with a check payable to
Excelsior Funds Inc. (or Excelsior Tax-Exempt Funds, Inc., with respect to the
Tax-Exempt Funds), to:

Excelsior Funds, Inc. (or Excelsior Tax-Exempt Funds, Inc.)
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

Subsequent investments in an existing account in a Fund may be made at
any time by sending to the above address a check payable to Excelsior Funds,
Inc. (or Excelsior Tax-Exempt Funds, Inc.) along with: (a) the detachable form
that regularly accompanies the confirmation of a prior transaction; (b) a
subsequent order form which may be obtained from CGFSC; or (c) a letter stating
the amount of the investment, the name of the Fund and the account number in
which the investment is to be made. Institutional Investors may purchase shares
by transmitting their purchase orders to CGFSC by telephone at (800) 446-1012 or
by terminal access. Institutional Investors must pay for shares with federal
funds or funds immediately available to CGFSC.

Investors may also purchase shares by wiring federal funds to CGFSC.
Prior to making an initial investment by wire, an Investor must telephone CGFSC
at (800) 446-1012 (from overseas, call (617) 557-8280) for instructions. Federal
funds and registration instructions should be wired through the Federal Reserve
System to:

-22-
<PAGE>

The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account No. 9102732915
For further credit to:
Excelsior Funds
Wire Control Number
Account Registration
(including account number)

Investors making initial investments by wire must promptly complete the
Application accompanying the Prospectus and forward it to CGFSC. Redemptions by
Investors will not be processed until the completed Application for purchase of
shares has been received by CGFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.

Except as provided below, the minimum initial investment by an Investor
or initial aggregate investment by a Shareholder Organization investing on
behalf of its Customers is $500 per Fund. The minimum subsequent investment for
both types of investors is $50 per Fund. Customers may agree with a particular
Shareholder Organization to make a minimum purchase with respect to their
accounts. Depending upon the terms of the particular account, Shareholder
Organizations may charge a Customer's account fees for automatic investment and
other cash management services provided. The Companies reserve the right to
reject any purchase order, in whole or in part, or to waive any minimum
investment requirements. Third party checks will not be accepted as payment for
Fund shares.

REDEMPTION PROCEDURES

A request for the redemption of shares will receive the net asset value
per share next computed after the request is received in good order by the
Company's sub-transfer agent or an authorized broker or designated intermediary.

Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Companies, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their shares in accordance with any of the procedures described below

-23-
<PAGE>

(these procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

Shares may be redeemed by a Direct Investor by submitting a written
request for redemption to:

Excelsior Funds, Inc. (or Excelsior Tax-Exempt Funds, Inc.)
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

A written redemption request to CGFSC must (i) state the number of
shares to be redeemed, (ii) identify the shareholder account number and tax
identification number, and (iii) be signed by each registered owner exactly as
the shares are registered. If the shares to be redeemed were issued in
certificate form, the certificates must be endorsed for transfer (or accompanied
by a duly executed stock power) and must be submitted to CGFSC together with the
redemption request. A redemption request for an amount in excess of $50,000 per
account, or for any amount if the proceeds are to be sent elsewhere than the
address of record, must be accompanied by signature guarantees from any eligible
guarantor institution approved by CGFSC in accordance with its Standards,
Procedures and Guidelines for the Acceptance of Signature Guarantees ("Signature
Guarantee Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. All
eligible guarantor institutions must participate in the Securities Transfer
Agents Medallion Program ("STAMP") in order to be approved by CGFSC pursuant to
the Signature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines
and information on STAMP can be obtained from CGFSC at (800) 446-1012 or at the
address given above.

CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until CGFSC receives all
required documents in good order. Payment for shares redeemed will ordinarily be
made by mail within five Business Days after receipt by CGFSC of the redemption
request in good order. Questions with respect to the proper form for redemption
requests should be directed to CGFSC at (800) 446-1012 (from overseas, call
(617) 557-8280).

Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States. Direct
Investors who are shareholders of record may also redeem shares by instructing
CGFSC by telephone to mail a check for redemption proceeds of $500 or more to
the shareholder of record at his or her address of record. Institutional
Investors may also redeem shares by instructing CGFSC by telephone at (800)
446-1012 or by terminal access. Only redemptions of $500 or more will be wired
to a Direct Investor's account. The redemption

-24-
<PAGE>

proceeds for Direct Investors must be paid to the same bank and account as
designated on the Application or in written instructions subsequently received
by CGFSC.

In order to arrange for redemption by wire or telephone after an
account has been opened or to change the bank or account designated to receive
redemption proceeds, a Direct Investor must send a written request to a Company
c/o CGFSC, at the address listed above. Such requests must be signed by the
Direct Investor, with signatures guaranteed, as discussed above. Further
documentation may be requested.

CGFSC and the Distributor reserve the right to refuse a wire or
telephone redemption if it is believed advisable to do so. Procedures for
redeeming shares by wire or telephone may be modified or terminated at any time
by the Company, CGFSC or the Distributor. The Company, CGFSC, and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions that are reasonably believed to be genuine.
In attempting to confirm that telephone instructions are genuine, the Companies
will use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration.

If any portion of the shares to be redeemed represents an investment
made by personal check, the Companies and CGFSC reserve the right not to honor
the redemption until CGFSC is reasonably satisfied that the check has been
collected in accordance with the applicable banking regulations, which may take
up to 15 days. A Direct Investor who anticipates the need for more immediate
access to his or her investment should purchase shares by federal funds or bank
wire or by certified or cashier's check. Banks normally impose a charge in
connection with the use of bank wires, as well as certified checks, cashier's
checks and federal funds. If a Direct Investor's purchase check is not
collected, the purchase will be cancelled and CGFSC will charge a fee of $25.00
to the Direct Investor's account.

Except as described in "Investor Programs" below, Investors may be
required to redeem shares in a Fund after 60 days' written notice if due to
Investor redemptions the balance in the particular account with respect to the
Fund remains below $500. If a Customer has agreed with a particular Shareholder
Organization to maintain a minimum balance in his or her account at the
institution with respect to shares of a Fund, and the balance in such account
falls below that minimum, the Customer may be obliged by the Shareholder
Organization to redeem all or part of his or her shares to the extent necessary
to maintain the required minimum balance.

OTHER REDEMPTION INFORMATION

The Companies may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is

-25-
<PAGE>

restricted by applicable rules and regulations of the SEC; (b) the Exchange is
closed for other than customary weekend and holiday closings; (c) the SEC has by
order permitted such suspension; or (d) an emergency exists as determined by the
SEC.

In the event that shares are redeemed in cash at their net asset value,
a shareholder may receive in payment for such shares an amount that is more or
less than his original investment due to changes in the market prices of that
Fund's portfolio securities.

Each Company reserves the right to honor any request for redemption or
repurchase of a Fund's shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. Each Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.

Under certain circumstances, the Companies may, at their discretion,
accept securities as payment for shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a BONA FIDE
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

An Investor who owns shares with a value of $10,000 or more may begin a
Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

(3) A fixed-percentage withdrawal (based on the current
value of the account); or

(4) A declining-balance withdrawal.

-26-
<PAGE>

of shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a program of
systematic investing in a Fund while at the same time participating in the
Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and procedures and fees relating to, the Systematic Withdrawal
Plan directly from their Shareholder Organizations.

EXCHANGE PRIVILEGE

Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Companies or for shares of Excelsior Institutional Trust. An exchange involves a
redemption of all or a portion of the shares of Excelsior Institutional Trust.
An exchange involves a redemption of all or a portion of the shares in a Fund
and the investment of the redemption proceeds in shares of another portfolio.
The redemption will be made at the per share net asset value of the shares being
redeemed next determined after the exchange request is received in good order.
The shares of the portfolio to be acquired will be purchased at the per share
net asset value of those shares next determined after receipt of the exchange
request in good order.

For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.

-27-
<PAGE>

RETIREMENT PLANS

Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):

IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;

Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit themselves and
their employees; and

Keogh Plans for self-employed individuals.

Investors investing in the Funds pursuant to Profit Sharing and
Money-Purchase Plans and Keogh Plans are not subject to the minimum investment
and forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase shares
of the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.

AUTOMATIC INVESTMENT PROGRAM

The Automatic Investment Program permits Investors to purchase shares
(minimum of $50 per Fund per transaction) at regular intervals selected by the
Investor. The minimum initial investment for an Automatic Investment Program
account is $50 per Fund. Provided the Investor's financial institution allows
automatic withdrawals, shares are purchased by transferring funds from an
Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days.

The Automatic Investment Program is one means by which an Investor may
use "Dollar Cost Averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, Dollar Cost Averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using Dollar Cost Averaging are purchased without
regard to their price on the day of investment or to market trends. In addition,
while Investors may find Dollar Cost Averaging to be beneficial, it will not
prevent a loss if an Investor ultimately redeems his shares at a price which is
lower than their purchase price. The Companies may modify or terminate this
privilege

-28-
<PAGE>

at any time or charge a service fee, although no such fee currently is
contemplated. An Investor may also implement the Dollar Cost Averaging method on
his own initiative or through other entities.

ADDITIONAL INFORMATION

Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.

DESCRIPTION OF CAPITAL STOCK

Excelsior Fund's Charter authorizes its Board of Directors to issue up
to thirty-five billion full and fractional shares of common stock, $.001 par
value per share; and Excelsior Tax-Exempt Fund's Charter authorizes its Board of
Directors to issue up to fourteen billion full and fractional shares of common
stock, $.001 par value per share. Both Charters authorize the respective Boards
of Directors to classify or reclassify any unissued shares of the respective
Companies into one or more additional classes or series by setting or changing
in any one or more respects their respective preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.

Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued for
payment as described in the Prospectuses, shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of a Fund,
shareholders of that Fund are entitled to receive the assets available for
distribution belonging to that Fund and a proportionate distribution, based upon
the relative asset values of the portfolios of the Company involved, of any
general assets of that Company not belonging to any particular portfolio of that
Company which are available for distribution. In the event of a liquidation or
dissolution of either Company, shareholders of such Company will be entitled to
the same distribution process.

Shareholders of the Companies are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of a
Company's outstanding shares may elect all of that Company's directors,
regardless of the votes of other shareholders.

-29-
<PAGE>

The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The exercise
of such authority by the Boards of Directors will be subject to the provisions
of the 1940 Act, and the Boards of Directors will not take any action described
in this paragraph unless the proposed action has been disclosed in writing to
the particular Fund's shareholders at least 30 days prior thereto.

Notwithstanding any provision of Maryland law requiring a greater vote
of the Companies' Common Stock (or of the shares of a Fund voting separately as
a class) in connection with any corporate action, unless otherwise provided by
law (for example, by Rule 18f-2, discussed above) or by the Companies' Charters,
the Companies may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding common stock of the particular
Company voting without regard to class.

Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued in fractional shares.

-30-
<PAGE>

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Frederick S. Wonham(1) Chairman of the Board, Retired; Director of the Companies (since
238 June Road President and Treasurer 1995); Trustee of Excelsior Funds and
Stamford, CT 06903 Excelsior Institutional Trust (since 1995);
Age: 68 Vice Chairman of U.S. Trust Corporation and
U.S. Trust New York (from February 1990 until
September 1995); and Chairman, U.S. Trust
Company (from March 1993 to May 1997).

Donald L. Campbell Director Retired; Director of the Companies (since
333 East 69th Street 1984); Director of UST Master Variable Series,
Apt. 10-H Inc. (from 1994 to June 1997); Trustee of
New York, NY 10021 Excelsior Institutional Trust (since 1995);
Age: 73 and Director, Royal Life Insurance Co. of New
York (since 1991).

Rodman L. Drake Director Director of the Companies (since 1996);
Continuation Investments Group, Inc. Trustee of Excelsior Institutional Trust and
1251 Avenue of the Americas, Excelsior Funds (since 1994); Director,
9th Floor Parsons Brinkerhoff, Inc. (engineering firm)
New York, NY 10020 (since 1995); President, Continuation
Age: 56 Investments Group, Inc. (since 1997);
President, Mandrake Group (investment and
consulting firm) (1994-1997); Director,
Hyperion Total Return Fund, Inc. and four
other funds for which Hyperion Capital
Management, Inc. serves as investment adviser
(since 1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993 to
1996); Director, The Latin America Smaller
Companies Fund, Inc. (1993-1998); Member of
Advisory Board, Argentina Private Equity Fund
L.P. (from 1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996); and Director,
Mueller Industries, Inc. (from 1992 to 1994).

Joseph H. Dugan Director Retired; Director of the Companies (since
913 Franklin Lake Road 1984); Director of UST Master Variable Series,
Franklin Lakes, NJ 07417 Inc. (from 1994 to June 1997); and Trustee of
Age: 74 Excelsior Institutional Trust (since 1995).

</TABLE>

(1) This director is considered to be an "interested person" of the
Companies as defined in the 1940 Act.

-31-
<PAGE>

Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the Companies (since
2320 Cumberland Road 1986); Director of UST Master Variable Series,
Charlottesville, VA 22901-7726 Inc. (from 1994 to June 1997); Trustee of
Age: 78 Excelsior Institutional Trust (since 1995);
Director, Deutsche Bank Financial, Inc. (since
1989); Director, The Harbus Corporation (since
1951); and Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).

Jonathan Piel Director Director of the Companies (since 1996);
558 E. 87th Street Trustee of Excelsior Institutional Trust and
New York, NY 10128 Excelsior Funds (since 1994); Vice President
Age: 60 and Editor, Scientific American, Inc. (from
1986 to 1994); Director, Group for The South Fork,
Bridgehampton, New York (since 1993); and Member,
Advisory Committee, Knight Journalism Fellowships,
Massachusetts Institute of Technology (since 1984).

Robert A. Robinson Director Director of the Companies (since 1987);
Church Pension Group Director of UST Master Variable Series, Inc.
445 Fifth Avenue (from 1994 to June 1997); Trustee of Excelsior
New York, NY 10016 Institutional Trust (since 1995); President
Age: 73 Emeritus, The Church Pension Fund and its
affiliated companies (since 1966); Trustee,
H.B. and F.H. Bugher Foundation and Director
of its wholly owned subsidiaries -- Rosiclear
Lead and Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director, Morehouse
Publishing Co. (1974-1998); Trustee, HSBC
Funds Trust and HSBC Mutual Funds Trust (since
1982); and Director, Infinity Funds, Inc.
(since 1995).

</TABLE>

-32-
<PAGE>

Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Alfred C. Tannachion(2) Director Retired; Director of the Companies (since
26549 Pine Meadows Drive 1985); Chairman of the Board of the Companies
Spring Hill, FL 34606 (1991-1997) and Excelsior Institutional Trust
Age: 73 (1996-1997); President and Treasurer of the
Companies (1994-1997) and Excelsior Institutional
Trust (1996-1997); Chairman of the Board, President
and Treasurer of UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior Institutional
Trust (since 1995).

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40
Assistant Manager of Blue Sky Compliance, Chase Global
Eddie Wang Secretary Funds Services Company (November 1996 to
Chase Global Funds present); and Officer and Manager of Financial
Services Company Reporting, Investors Bank & Trust Company
73 Tremont Street (January 1991 to November 1996).
Boston, MA 02108-3913
Age: 38

Patricia M. Leyne Assistant Assistant Vice President, Senior Manager of
Chase Global Funds Treasurer Fund Administration, Chase Global Funds
Services Company Services Company (Since July 1998);
73 Tremont Street Assistant Treasurer, Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 32 Company (from November 1996 to July 1998);
Supervisor, Chase Global Funds Services Company (from
September 1995 to November 1996); Fund Administrator,
Chase Global Funds Services Company (from February
1993 to September 1995).

</TABLE>

- ----------------------------
(2) This director is considered to be an "interested person" of the
Companies as defined in the 1940 Act.

-33-
<PAGE>

Each director receives an annual fee of $9,000 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to the Companies. The employees of
CGFSC do not receive any compensation from the Companies for acting as officers
of the Companies. No person who is currently an officer, director or employee of
the Adviser serves as an officer, director or employee of the Companies. As of
July 13, 1999, the directors and officers of each Company as a group owned
beneficially less than 1% of the outstanding shares of each fund of each
Company, and less than 1% of the outstanding shares of all funds of each Company
in the aggregate.

The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal year.

-34-
<PAGE>

Pension or
Retirement Total
Benefits Compensation
Accrued as from the Companies
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position the Companies Expenses to Directors
--------------- ------------- -------- ------------
<S> <C> <C> <C>
Donald L. Campbell $28,500 None $33,250(3)**
Director

Rodman L. Drake $31,500 None $41,250(4)**
Director

Joseph H. Dugan $31,500 None $36,500(3)**
Director

Wolfe J. Frankl $36,500 None $36,500(3)**
Director

W. Wallace McDowell, Jr.*** $21,000 None $28,000(4)**
Director

Jonathan Piel $31,500 None $41,500(4)**
Director

Robert A. Robinson $31,500 None $36,500(3)**
Director

Alfred C. Tannachion $31,500 None $36,500(3)**
Director

Frederick S. Wonham $41,500 None $51,500(4)**
Chairman of the Board,
President and Treasurer

</TABLE>

- -----------------------------
* The "Fund Complex" consists of Excelsior Fund, Excelsior Tax-Exempt
Fund, Excelsior Funds and Excelsior Institutional Trust.

** Number of investment companies in the Fund Complex for which director
served as director or trustee.

*** Mr. McDowell resigned from Excelsior Fund, Excelsior Tax-exempt Fund,
Excelsior Funds and Excelsior Institutional Trust on May 21, 1999.

INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS

-35-
<PAGE>

Prospectuses. The Adviser has also agreed to pay all expenses incurred by it in
connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, if any, purchased for the
Funds.

Prior to May 16, 1997, U.S. Trust New York served as investment adviser
to the Funds pursuant to an advisory agreement substantially similar to the
Investment Advisory Agreement currently in effect for the Funds.

For the services provided and expenses assumed pursuant to its
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly at the annual rate of .30% of the average daily
net assets of the ST Government and ST Tax-Exempt Funds; .35% of the average
daily net assets of the IT Managed Income and IT Tax-Exempt Funds; .50% of the
average daily net assets of the LT Tax-Exempt Fund; and .75% of the average
daily net assets of the Managed Income Fund.

From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to them by a Fund, which waiver may be terminated
at any time.

For the fiscal year ended March 31, 1999, the particular Company paid
U.S. Trust advisory fees of $98,059, $317,118, $1,287,808, $92,164, $844,392 and
$690,785 with respect to the ST Government, IT Income, Managed Income, ST
Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively. For the same
period, U.S. Trust waived advisory fees totaling $40,855, $74,201, $272,533,
$28,715, $186,350 and $150,919 with respect to the ST Government, IT Managed
Income, Managed Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.

For the fiscal year ended March 31, 1998, the particular Company paid
U.S. Trust advisory fees of $72,860, $260,708, $1,203,851, $99,010, $746,025 and
$545,298 with respect to the ST Government, IT Managed Income, Managed Income,
ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively. For the same
period, U.S. Trust waived advisory fees totaling $21,549, $42,260, $243,873,
$24,358, $133,635 and $89,459 with respect to the ST Government, IT Income,
Managed Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.

For the fiscal year ended March 31, 1997, the particular Company paid
U.S. Trust New York advisory fees of $63,713, $217,254, $1,185,427, $95,564,
$741,452 and $457,137 with respect to the ST Government, IT Managed Income,
Managed Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively. For the same period, U.S. Trust New York waived advisory fees
totaling $21,478, $35,586, $77,751, $28,208, $140,769 and $69,305 with respect
to the ST Government, IT Managed Income, Managed Income, ST Tax-Exempt, IT
Tax-Exempt and LT Tax-Exempt Funds, respectively.

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<PAGE>

Company shall be jointly, but not severally, liable for a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
advisory services or a loss resulting from willful misfeasance, bad faith or
gross negligence in the performance of their duties or from reckless disregard
by them of their duties and obligations thereunder. In addition, the Adviser has
undertaken in the Investment Advisory Agreement to maintain its policy and
practice of conducting its Asset Management Group independently of its Banking
Group.

CGFSC, Federated Administrative Services, an affiliate of the
Distributor, and U.S. Trust Company (collectively, the "Administrators") serve
as the Companies' administrators and provide the Funds with general
administrative and operational assistance. Under the Administration Agreements,
the Administrators have agreed to maintain office facilities for the Funds,
furnish the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income, "exempt interest dividends" and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.

Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Funds' administrators pursuant to an
administrative agreement substantially similar to the Administration Agreement
currently in effect for the Funds.

The Administrators also provide administrative services to the other
investment portfolios of the Companies and to all of the investment portfolios
of Excelsior Institutional Trust which are also advised by U.S. Trust and its
affiliates and distributed by the Distributor. For services provided to all
portfolios of the Companies and Excelsior Institutional Trust (except for the
international portfolios of Excelsior Fund and Excelsior Institutional Trust),
the Administrators are entitled jointly to fees, computed daily and paid
monthly, based on the combined aggregate average daily net assets of the three
companies (excluding the international portfolios of Excelsior Fund and
Excelsior Institutional Trust) as follows:

Combined Aggregate Average Daily
Net Assets of Excelsior Tax-Exempt Fund,
Excelsior Fund and Excelsior Institutional Trust
(excluding the international portfolios of
Excelsior Fund and Excelsior Institutional Trust)
-------------------------------------------------
<TABLE>
<CAPTION>

Annual Fee
----------
<S> <C>
First $200 million................................... 0.200%
Next $200 million.................................... 0.175%
Over $400 million.................................... 0.150%

</TABLE>

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<PAGE>

For the fiscal year ended March 31, 1999, Excelsior Tax-Exempt Fund
paid the Administrators $61,646, $449,336 and $243,351 in the aggregate with
respect to the ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively. For the same period, Excelsior Fund paid the Administrators
$70,684, $170,673 and $316,445 in the aggregate with respect to the ST
Government, IT Managed Income and Managed Income Funds, respectively. For the
same period, the Administrators waived fees totaling $162, $389, $1,864, $3,
$1,245 and $14,210 with respect to the ST Government, IT Managed Income, Managed
Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively.

For the fiscal year ended March 31, 1998, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services and U.S. Trust $62,813, $383,863
and $189,687 in the aggregate with respect to the ST Tax-Exempt, IT Tax-Exempt
and LT Tax-Exempt Funds, respectively. For the same period, Excelsior Fund paid
CGFSC, Federated Administrative Services and U.S. Trust $48,138, $132,050 and
$294,955 in the aggregate with respect to the ST Government, IT Managed Income
and Managed Income Funds, respectively. For the same period, CGFSC, Federated
Administrative Services and U.S. Trust waived fees totaling $11, $390, $381,
$104, $674 and $4,549 with respect to the ST Government, IT Managed Income,
Managed Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.

For the fiscal year ended March 31, 1997, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services and U.S. Trust New York $63,343,
$387,111 and $160,259 in the aggregate with respect to the ST Tax-Exempt, IT
Tax-Exempt and LT Tax-Exempt Funds, respectively. For the same period, Excelsior
Fund paid CGFSC, Federated Administrative Services and U.S. Trust New York
$43,657, $110,146 and $258,438 in the aggregate with respect to the ST
Government, IT Income and Managed Income Funds, respectively. For the same
period, CGFSC, Federated Administrative Services and U.S. Trust New York waived
fees totaling $1, $909, $468, $96, $489 and $1,651 with respect to the ST
Government, IT Managed Income, Managed Income, ST Tax-Exempt, IT Tax-Exempt and
LT Tax-Exempt Funds, respectively.

BANKING LAWS

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<PAGE>

company, or from purchasing shares of such company for and upon the order of
customers. The Adviser, CGFSC and certain Shareholder Organizations may be
subject to such banking laws and regulations. State securities laws may differ
from the interpretations of federal law discussed in this paragraph and banks
and financial institutions may be required to register as dealers pursuant to
state law.

Should legislative, judicial, or administrative action prohibit or
restrict the activities of the Adviser or other Shareholder Organizations in
connection with purchases of Fund shares, the Adviser and such Shareholder
Organizations might be required to alter materially or discontinue the
investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would
affect their net asset values per share or result in financial loss to any
shareholder.

SHAREHOLDER ORGANIZATIONS

The Companies have entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for a Fund's payment of not more than the annual rate of
0.40% of the average daily net assets of the Fund's shares beneficially owned by
Customers of the Shareholder Organization. Such services may include: (a) acting
as recordholder of shares; (b) assisting in processing purchase, exchange and
redemption transactions; (c) transmitting and receiving funds in connection with
Customer orders to purchase, exchange or redeem shares; (d) providing periodic
statements showing a Customer's account balances and confirmations of
transactions by the Customer; (e) providing tax and dividend information to
shareholders as appropriate; (f) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Companies to Customers;
and (g) providing or arranging for the provision of other related services. It
is the responsibility of Shareholder Organizations to advise Customers of any
fees that they may charge in connection with a Customer's investment. Until
further notice, the Adviser and Administrators have agreed to waive fees payable
by a Fund in an aggregate amount equal to administrative service fees payable by
that Fund.

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<PAGE>

Shareholder Organizations are in effect, the selection and nomination of the
members of the Companies' Boards of Directors who are not "interested persons"
(as defined in the 1940 Act) of the Companies will be committed to the
discretion of such Disinterested Directors.

For the fiscal years ended March 31, 1999, 1998 and 1997, payments to
Shareholder Organizations under the Plans totaled $28,718, $24,462 and $28,304;
$187,595, $134,309 and $141,258; $165,129, $94,008 and $70,956; $41,017, $19,835
and $21,479; $74,590, $42,650 and $36,495; and $66,277, $51,215 and $78,219 with
respect to the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT
Managed Income and Managed Income Funds, respectively. Of these respective
amounts, $28,709, $24,157 and $28,304; $182,945, $131,684 and $139,275;
$114,441, $78,373 and $68,722; $40,538, $19,800 and $21,479; $73,338, $41,041
and $36,495; and $64,528, $48,468 and $77,550 were paid to affiliates of U.S.
Trust with respect to the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST
Government, IT Managed Income and Managed Income Funds, respectively.

EXPENSES

Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include: taxes;
interest; fees (including fees paid to the Companies' directors and officers who
are not affiliated with the Distributor or the Administrators); SEC fees; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to shareholders; advisory,
administration and administrative servicing fees; charges of the custodian,
transfer agent and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; cost of independent pricing service; costs
of shareholder reports and meetings; and any extraordinary expenses. The Funds
also pay for any brokerage fees and commissions in connection with the purchase
of portfolio securities.

CUSTODIAN AND TRANSFER AGENT

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under the
Custodian Agreements, Chase has agreed to: (i) maintain a separate account or
accounts in the name of the Funds; (ii) make receipts and disbursements of money
on behalf of the Funds; (iii) collect and receive income and other payments and
distributions on account of the Funds' portfolio securities; (iv) respond to
correspondence from securities brokers and others relating to its duties; (v)
maintain certain financial accounts and records; and (vi) make periodic reports
to each Company's Board of Directors concerning the Funds' operations. Chase
may, at its own expense, open and maintain custody accounts with respect to the
Funds with other banks or trust companies, provided that Chase shall remain
liable for the performance of all its custodial duties under the Custodian
Agreements, notwithstanding any delegation. Communications to the custodian
should be directed to Chase, Mutual Funds Service Division, 3 Chase MetroTech
Center, 8th Floor, Brooklyn, NY 11245.

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<PAGE>

U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i) issue
and redeem shares; (ii) address and mail all communications by the Funds to
their shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for their meetings of shareholders; (iii) respond
to correspondence by shareholders and others relating to its duties; (iv)
maintain shareholder accounts; and (v) make periodic reports to each Company's
Board of Directors concerning the Funds' operations. For its transfer agency,
dividend disbursing, and subaccounting services, U.S. Trust New York is entitled
to receive $15.00 per annum per account and subaccount. In addition, U.S. Trust
New York is entitled to be reimbursed for its out-of-pocket expenses for the
cost of forms, postage, processing purchase and redemption orders, handling of
proxies, and other similar expenses in connection with the above services. U.S.
Trust New York is located at 114 W. 47th Street, New York, New York 10036.

U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreements, notwithstanding any delegation. Pursuant to this provision in the
agreements, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Companies for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.

PORTFOLIO TRANSACTIONS

Subject to the general control of the Companies' Boards of Directors,
the Adviser is responsible for, makes decisions with respect to and places
orders for all purchases and sales of all portfolio securities of each of the
Funds. Purchases and sales of portfolio securities will usually be principal
transactions without brokerage commissions.

The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Funds' turnover rates may
remain higher than those of many other investment companies with similar
investment objectives and policies. However, since brokerage commissions are not
normally paid on instruments purchased by the Funds, portfolio turnover is not
expected to have a material effect on the net income of any of the Funds. The
Funds' portfolio turnover rates may also be affected by cash requirements for
redemptions of shares and by regulatory provisions which enable the Funds to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. See "Financial Highlights" in the
Prospectuses for the Funds' portfolio turnover rates.

-41-
<PAGE>

Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with dealers who make a market in the securities involved, except in
those situations where better prices and execution are available elsewhere.

Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and does not
reduce the investment advisory fee payable by the Funds. Such information may be
useful to the Adviser in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Funds.

Portfolio securities will not be purchased from or sold to the Adviser,
the Distributor, or any of their affiliated persons (as such term is defined in
the 1940 Act) acting as principal, except to the extent permitted by the SEC.

-42-
<PAGE>

Adviser believes to be equitable to the Funds and such other investment company
or common trust fund. In some instances, this investment procedure may adversely
affect the price paid or received by the Funds or the size of the position
obtained by the Funds. To the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for the Funds with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.

The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 1999, the Managed Income Fund held one corporate bond issued by Morgan
Stanley Dean Witter & Co. with a principal amount Of $5,000,000.

PORTFOLIO VALUATION

Assets in the Funds which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities traded on only over-the-counter markets are valued
on the basis of closing over-the-counter bid prices. Securities for which there
were no transactions are valued at the average of the most recent bid and asked
prices. A futures contract is valued at the last sales price quoted on the
principal exchange or board of trade on which such contract is traded, or in the
absence of a sale, the mean between the last bid and asked prices. Restricted
securities and securities or other assets for which market quotations are not
readily available are valued at fair value pursuant to guidelines adopted by the
Companies' Boards of Directors. Absent unusual circumstances, portfolio
securities maturing in 60 days or less are normally valued at amortized cost.
The net asset value of shares in the Funds will fluctuate as the market value of
their portfolio securities changes in response to changing market rates of
interest and other factors.

Portfolio securities held by the IT Managed Income and Managed Income
Funds which are primarily traded on foreign securities exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an event subsequent to the time when value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors under the
direction of the Boards of Directors. A security which is listed or traded on
more than one exchange is valued at the quotation on the exchange determined to
be the primary market for such security. Investments in foreign debt securities
having a maturity of 60 days or less are valued based upon the amortized cost
method. All other foreign securities are valued at the last current bid
quotation if market quotations are available, or at fair value as determined in
accordance with guidelines adopted by the Boards of Directors. For valuation
purposes, quotations of foreign securities in foreign currency are converted to
U.S. dollars equivalent at the prevailing market rate on the day of conversion.
Some of the securities acquired by the Funds may be traded on foreign exchanges
or over-the-counter markets on days which are not Business Days. In such cases,
the net asset value of the shares may be significantly affected on days when
investors can neither purchase nor redeem a Fund's shares.

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<PAGE>

The Administrators have undertaken to price the securities in the
Funds' portfolios and may use one or more pricing services to value certain
portfolio securities in the Funds where the prices provided are believed to
reflect the fair market value of such securities. The methods used by the
pricing services and the valuations so established will be reviewed by the
Administrators under the general supervision of the Boards of Directors.

INDEPENDENT AUDITORS

Ernst & Young LLP, independent auditors, 200 CLarendon Street, Boston,
MA 02116, serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectuses and the financial statements for the fiscal year
ended March 31, 1999 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.

COUNSEL

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103, is
counsel to the Companies and will pass upon the legality of the shares offered
by the Prospectuses.

ADDITIONAL INFORMATION CONCERNING TAXES

GENERALLY

For federal income tax purposes, each Fund is treated as a separate
corporate entity and has qualified and intends to qualify as a regulated
investment company. Such qualification generally relieves a Fund of liability
for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, the Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions would be
taxable as ordinary income to shareholders to the extent of such Fund's current
and accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.

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<PAGE>

FIXED INCOME FUNDS

Each Fixed-Income Fund contemplates declaring as dividends each year
all or substantially all of its taxable income, including its net capital gain
(the excess of long-term capital gain over short-term capital loss).
Distributions attributable to the net capital gain of a Fixed-Income Fund will
be taxable to you as long-term capital gain, regardless of how long you have
held your shares. Other Fixed-Income Fund distributions will generally be
taxable as ordinary income. You will be subject to income tax on a fixed-income
fund distributions regardless whether they are paid in cash or reinvested in
additional shares. You will be notified annually of the tax status of
distributions to you.

You should note that if you purchase shares just before a distribution,
the purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."

You will recognize taxable gain or loss on a sale, exchange or
redemption of your shares, including an exchange for shares of another
Fixed-Income Fund, based on the difference between your tax basis in the shares
and the amount you receive for them. To aid in computing your tax basis, you
generally should retain your account statements for the periods during which you
held shares.

Any loss realized on shares held for six months or less will be treated
as a long-term capital loss to the extent of any capital gain dividends that
were received on the shares. The one major exception to these tax principles is
that distributions on, and sales, exchanges and redemptions of share held in an
IRA (or other tax-qualified plan) will not be currently taxable.

TAX-EXEMPT FUNDS

It is expected that each Tax-Exempt Fund will distribute dividends
derived from interest earned on securities exempt from taxation and these
"exempt-interest dividends" will be exempt income for shareholders for federal
income tax purposes. However, distributions, if any, derived from net capital
gains (the excess of any long-term capital gains over short-term capital gains)
will generally be taxable to you as long-term capital gains. it is expected that
each Tax-Exempt Fund may pay such capital gains

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<PAGE>

distributions from time to time. Dividends, if any, derived from taxable
interest income or short-term capital gains will be taxable to you as ordinary
income. You will be notified annually of the tax status of distributions to you.

You will recognize taxable gain or loss on a sale, exchange or
redemption of your shares, including an exchange for shares of another
Tax-Exempt Fund, Based on the difference between your tax basis in the shares
and the amount you receive for them. To aid in computing your tax basis, you
generally should retain your account statement for the periods during which you
held shares.

If you receive an exempt-interest dividend with respect to any share
and the share is held by you for six months or less, any loss on the sale or
exchange of the share will be disallowed to the extent of such dividend amount.
Also, any loss realized on shares held for six months or less will be treated as
a long-term capital loss to the extent of any capital gain dividends that were
received on the shares.

Interest on indebtedness incurred by a shareholder to purchase or carry
shares of each tax-exempt fund generally will not be deductible for federal
income tax purposes.

You should note that a portion of the exempt-interest dividends paid by
each Tax-Exempt Fund may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest dividends
will also be considered along with other adjusted gross income in determining
whether any social security or railroad retirement payments received by you are
subject to federal income taxes.

The Tax-Exempt Funds are not intended to constitute a balanced
investment program and are not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Exempt Funds would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Tax-Exempt Funds' dividends
being tax-exempt, but such dividends would be ultimately taxable to the
beneficiaries when distributed to them. In addition, the Tax-Exempt Funds may
not be an appropriate investment for entities which are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under the Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, who occupies more than 5% of the usable area of
such facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S corporation and its shareholders.

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<PAGE>

In order for a Tax-Exempt Fund to pay exempt-interest dividends for any
taxable year, at least 50% of the aggregate value of such Fund's portfolio must
consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, each of the
Tax-Exempt Funds will notify its shareholders of the portion of the dividends
paid by that Fund which constitutes an exempt-interest dividend with respect to
such taxable year. However, the aggregate amount of dividends so designated by
that Fund cannot exceed the excess of the amount of interest exempt from tax
under Section 103 of the Code received by that Fund during the taxable year over
any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the
Code. The percentage of total dividends paid by each of the Tax-Exempt Funds
with respect to any taxable year which qualifies as exempt-interest dividends
will be the same for all shareholders receiving dividends from that Tax-Exempt
Fund for such year.

Generally, if a shareholder holds Tax-Exempt Fund shares for six months
or less, any loss on the sale or exchange of those shares will be disallowed to
the extent of the amount of exempt-interest dividends received with respect to
the shares. The Treasury Department, however, is authorized to issue regulations
reducing the six-month holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.

* * * * *

The foregoing is only a summary of certain tax considerations under
current law, which may be subject to change in the future. You should consult
your tax adviser for further information regarding federal, state, local and/or
foreign tax consequences relevant to your specific situation. Share owners may
also be subject to state and local taxes on distributions and redemptions. State
income taxes may not apply however to the portions of each Fund's distributions,
if any, that are attributable to interest on federal securities or interest on
securities of the particular state. For example, interest earned on the New York
Intermediate-Term Tax-Exempt Fund will generally be exempt from federal, New
York State and New York City taxes; and interest earned on the California
Tax-Exempt Income Fund will generally be exempt from federal and California
taxes. Shareowners should consult their tax advisers regarding the tax status of
distributions in their state and locality.

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<PAGE>

PERFORMANCE AND YIELD INFORMATION

YIELDS AND PERFORMANCE

The Funds may advertise the standardized effective 30-day (or
one month) yields calculated in accordance with the method prescribed by the SEC
for mutual funds. Such yield will be calculated separately for each Fund
according to the following formula:

a-b TO THE POWER OF 6
Yield = 2 [(-------- + 1) - 1]
cd

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of
reimbursements).
c = average daily number of shares outstanding that
were entitled to receive dividends.

d = maximum offering price per share on the last day
of the period.

For the purpose of determining interest earned during the period
(variable "a" in the formula), each of the Funds computes the yield to maturity
of any debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that each
month contains 30 days. Also, the maturity of a debt obligation with a call
provision is deemed to be the next call date on which the obligation reasonably
may be expected to be called or, if none, the maturity date. Each of the Funds
calculates interest gained on tax-exempt obligations issued without original
issue discount and having a current market discount by using the coupon rate of
interest instead of the yield to maturity. In the case of tax-exempt obligations
with original issue discount, where the discount based on the current market
value exceeds the then-remaining portion of original issue discount, the yield
to maturity is the imputed rate based on the original issue discount
calculation. Conversely, where the discount based on the current market value is
less than the remaining portion of the original issue discount, the yield to
maturity is based on the market value.

Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by each of the Funds to all shareholder accounts and
to the particular series of shares in proportion to the length of the base
period and that Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the maximum offering price per share (variable "d" in
the formula).

-48-
<PAGE>

Based on the foregoing calculations, the effective yields for shares of
the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed
Income and Managed Income Funds for the 30-day period ended March 31, 1999 were
2.95%, 3.52%, 4.08%, 4.84%, 5.33% and 5.04%, respectively.

The "tax-equivalent" yield of the ST Tax-Exempt, IT Tax-Exempt and LT
Tax-Exempt Funds is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from federal income tax by one minus a
stated federal income tax rate and (b) adding that figure to that portion, if
any, of the yield that is not exempt from federal income tax. Tax-equivalent
yields assume the payment of federal income taxes at a rate of 31%. Based on the
foregoing calculations, the tax-equivalent yields of the ST Tax-Exempt, IT
Tax-Exempt and LT Tax-Exempt Funds for the 30-day period ended March 31, 1999
were 4.28%, 5.10% and 5.91%, respectively.

Each Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:

1/n
ERV
T = [(-----) - 1]
P

Where: T = average annual total return.

ERV = ending redeemable value
of a hypothetical $1,000
payment made at the
beginning of the 1, 5 or 10
year (or other) periods at
the end of the applicable
period (or a fractional
portion thereof).

P = hypothetical initial payment of $1,000.

n = period covered by the computation, expressed
in years.

Each Fund may also advertise the "aggregate total return" for its
shares, which is computed by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:

ERV
Aggregate Total Return = [(------)] - 1
P

-49-
<PAGE>

The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.

Based on the foregoing calculations, the total returns for shares of
the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed
Income and Managed Income Funds for the one year period ended March 31, 1999
were 4.51%, 5.53%, 5.42%, 5.54%, 6.02% and 5.95%, respectively. The average
annual total returns for the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST
Government, IT Managed Income and Managed Income Funds for the five year
period ended March 31, 1999 were 4.38%, 6.69%, 8.64%, 5.66%, 7.29% and 7.48%,
respectively. The average annual total returns for shares of the ST
Tax-Exempt Securities, ST Government and IT Managed Income Funds for the
period from December 31, 1992 (commencement of operations) to March 31, 1999
were 4.18%, 5.14% and 6.51%, respectively. The average annual total returns
for the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds for the ten
year period ended March 31, 1999 were 7.15%, 9.14% and 9.00%, respectively.

The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.

The total return and yield of a Fund may be compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return and/or yield of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Total return and yield data as reported in national
financial publications such as MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET
JOURNAL AND THE NEW YORK TIMES, or in publications of a local or regional
nature, may also be used in comparing the performance of a Fund. Advertisements,
sales literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including without
limitation, those factors, strategies and technologies that together with market
conditions and events, materially affected each Fund's performance.

-50-
<PAGE>

The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation's of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Adviser as to
current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisement, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communicators may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.

Performance and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of a Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Funds with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that the
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by the Shareholder Organizations with
respect to accounts of Customers that have invested in shares will not be
included in calculations of yield and performance.

MISCELLANEOUS

As used herein, "assets allocable to a Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company involved not belonging to a particular portfolio of that Company. In
determining the net asset value of a Fund's shares, assets belonging to the Fund
are charged with the direct liabilities in respect of that Fund and with a share
of the general liabilities of the Company involved which are normally allocated
in proportion to the relative asset values of the Company's portfolios at the
time of allocation. Subject to the provisions of the Companies'

-51-
<PAGE>

Charters, determinations by the Boards of Directors as to the direct and
allocable liabilities and the allocable portion of any general assets with
respect to a particular Fund are conclusive.

As of July 13, 1999, U.S. Trust and its affiliates held of record
substantially all of the Companies' outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.

As of July 13, 1999, the name, address and percentage ownership of each
person, in addition to U.S. Trust and its affiliates, that owned beneficially or
of record 5% or more of the outstanding shares of a Fund were as follows:
SHORT-TERM GOVERNMENT SECURITIES FUND: International Planned Parenthood, c/o
United States Trust Company of New York, 114 West 47th Street, New York, New
York, 10036, 6.45%; United States Trust Company of New York FBO U.S. Trust Plan,
114 West 47th Street, New York, New York 10036, 7.16%; and Manhattan School of
Music Building Fund, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 11.45%; Managed Income Fund: U.S. Trust
Retirement Fund, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 39.26%; and United States Trust Company of New
York Trustee FBO U.S. Trust Plan, U. S. Trust Company of the Pacific Northwest,
Attention: Sandra Woolcock, 4380 S.W. Macadam Avenue, Suite 2700, Portland,
Oregon 97201, 6.20%; SHORT-TERM TAX-EXEMPT SECURITIES FUND: Donald C. Opantry,
Jr., c/o United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036, 7.30%; and LONG-TERM TAX-EXEMPT FUND: Charles Schwab &
Co., Inc., Special Custody A/C for Benefit of Customers, Attention: Mutual
Funds, 101 Montgomery Street, San Francisco, California 94104, 7.97%.

FINANCIAL STATEMENTS

-52-
<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

A Standard & Poor's ("S&P") commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:

"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.

"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.

"C" - Obligations are currently vulnerable to nonpayment and
are dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.

"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating will also be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:

A-1
<PAGE>

"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.

"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.

"Not Prime" - Issuers do not fall within any of the Prime
rating categories.

The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:

"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.

"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.

"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.

"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.

A-2
<PAGE>

"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as TO investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.

"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.

Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:

"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.

"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.

"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

"B" - Securities possess speculative credit quality. this
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.

"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.

"D" - Securities are in actual or imminent payment default.

Thomson Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:

"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.

A-3
<PAGE>

"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."

"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.

"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:

"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.

"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.

"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.

Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.

"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse

A-4
<PAGE>

business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.

"B" - An obligation rated "B" Debt is more vulnerable to
nonpayment than obligations rated "BB", but the obligor currently has the
capacity to meet its financial commitment on the obligation. Adverse business,
financial or economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.

"CC" - An obligation rated "CC" is currently highly vulnerable
to nonpayment.

"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.

"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due, even if the applicable grace period has not expired, unless S & P believes
that such payments will be made during such grace period. The "D" rating is also
used upon the filing of a bankruptcy petition or the taking of A similar action
if payments on an obligation are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.

"r" - This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies or commodities;
obligations exposed to severe prepayment risk- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest rate terms, such as inverse floaters.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

A-5
<PAGE>

"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in THE "Aaa"
securities.

"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.

Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.

Note: Moody's applies numerical modifiers 1, 2 and 3 in each
generic rating classification from "Aa", through "Caa." The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.

The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.

"AA" - Debt is considered to be of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.

A-6
<PAGE>

"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.

"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.

"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.

To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.

The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:

"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is HIGHLY unlikely to be
adversely affected by foreseeable events.

"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.

"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to adverse changes in
circumstances or in economic conditions than is the case for higher ratings.

"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse change in circumstances and in economic
conditions are more likely to impair this capacity.

"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic change over

A-7
<PAGE>

time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.

"CCC," "CC" and "C" - Bonds have high default risk.
Default is a real possibility and capacity for meeting financial commitments
is reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.

"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery , around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "D" the lowest recovery potential , i.e., below 50%.

Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
redemption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.

To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.

Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:

"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.

A-8
<PAGE>

"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.

"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.

"BB," "B," "CCC," and "CC" - These designations are assigned
by Thomson Financial BankWatch to non-investment grade long-term debt. Such
issues are regarded as having speculative characteristics regarding the
likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.

"D" - This designation indicates that the long-term debt is in
default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.

MUNICIPAL NOTE RATINGS

A Standard and Poor's rating reflects the liquidity factors
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's for municipal notes:

"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.

"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.

Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:

A-9
<PAGE>

"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.

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

"MIG-3"/"VMIG-3" - This designation denotes favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.

"SG" - This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.

Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.

A-10

<PAGE>

EXCELSIOR FUNDS, INC.

Energy and Natural Resources Fund
Real Estate Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1999

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the Energy and Natural
Resources Fund and Real Estate Fund (individually, a "Fund" and collectively,
the "Funds") of Excelsior Funds, Inc. dated August 1, 1999 (the "Prospectus").
A copy of the Prospectus may be obtained by writing Excelsior Funds, Inc. c/o
Chase Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or
by calling (800) 446-1012. Capitalized terms not otherwise defined have the
same meaning as in the Prospectus.

The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 1999 are incorporated herein by reference in
the section entitled "Financial Statements." No other parts of the annual
report are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
CLASSIFICATION AND HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . .1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS. . . . . . . . . . . . . . . . . .1
Investment Philosophy and Strategies. . . . . . . . . . . . . . . . . . .1
Additional Investment Policies -- Energy and Natural Resources Fund . . .3
Additional Investment Policies -- Real Estate Fund. . . . . . . . . . . .4
Additional Information on Portfolio Instruments . . . . . . . . . . . . .7
Investment Limitations. . . . . . . . . . . . . . . . . . . . . . . . . 16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . 20
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Redemption Procedures . . . . . . . . . . . . . . . . . . . . . . . . . 23
Other Redemption Information. . . . . . . . . . . . . . . . . . . . . . 25
INVESTOR PROGRAMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Systematic Withdrawal Plan. . . . . . . . . . . . . . . . . . . . . . . 26
Exchange Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Retirement Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Automatic Investment Program. . . . . . . . . . . . . . . . . . . . . . 28
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . 28
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . 28
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . . 30
Investment Advisory and Administration Agreements . . . . . . . . . . . 37
Banking Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Shareholder Organizations . . . . . . . . . . . . . . . . . . . . . . . 38
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . . 40
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
PORTFOLIO VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . . 44
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
</TABLE>

<PAGE>

CLASSIFICATION AND HISTORY

Excelsior Funds, Inc. (the "Company") is an open-end, management
investment company. Each Fund is a separate series of the Company and is
classified as non-diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company was organized as a Maryland corporation
on August 2, 1984. Prior to December 28, 1995, the Company was known as "UST
Master Funds, Inc." Prior to August 18, 1997, the Energy and Natural Resources
Fund was known as the Long-Term Supply of Energy Fund.

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of the Energy and Natural Resources Fund
may not be changed without the vote of the holders of a majority of its
outstanding shares (as defined below). The investment objective of the Real
Estate Fund may be changed without shareholder approval. Except as expressly
noted below, each Fund's investment policies may be changed without shareholder
approval.

INVESTMENT PHILOSOPHY AND STRATEGIES

In managing investments for the Funds, the Adviser follows a long-term
investment philosophy which generally does not change with the short-term
variability of financial markets or fundamental conditions. Its approach begins
with the conviction that all worthwhile investments are grounded in value. The
Adviser believes that an investor can identify fundamental values that
eventually should be reflected in market prices, such that over time, a
disciplined search for fundamental value will achieve better results than
attempting to take advantage of short-term price movements.

The Adviser's investment philosophy is to identify investment values
available in the market at attractive prices. Investment value arises from the
ability to generate earnings or from the ownership of assets or resources.
Underlying earnings potential and asset values are frequently demonstrable but
not recognized in the market prices of the securities representing their
ownership. The Adviser employs the following three different but closely
interrelated portfolio strategies to focus and organize its search for
investment values.

Solutions or parts of solutions to large problems may be generated by
established companies or comparatively new companies of all sizes through the
development of new

-1-

<PAGE>

products, technologies or services, or through new applications of older ones.

Investment in such companies represents a very wide range of
investment potential, current income return rates, and exposure to fundamental
and market risks. Income generated by each Fund's investments in these
companies would be expected to be moderate, characterized by lesser rates than
those of a fund whose sole objective is current income, and somewhat higher
rates than those of a higher-risk growth fund.

2. TRANSACTION VALUE COMPANIES. In the opinion of the Adviser, the
stock market frequently values the aggregate ownership of a company at a
substantially lower figure than its component assets would be worth if they were
sold off separately over time. Such assets may include intangible assets such
as product and market franchises, operating know-how, or distribution systems,
as well as such tangible properties as oil reserves, timber, real estate, or
production facilities. Investment opportunities in these companies are
determined by the magnitude of difference between economic worth and current
market price.

Market undervaluations are very often corrected by purchase and sale,
restructuring of the company, or market appreciation to recognize the actual
worth. The recognition process may well occur over time, however, incurring a
form of time-exposure risk. Success from investing in these companies is often
great, but may well be achieved only after a waiting period of inactivity.

Income derived from investing in undervalued companies is expected to
be moderately greater than that derived from investments in either the
Problem/Opportunity or Early Life Cycle companies.

3. EARLY LIFE CYCLE COMPANIES. Investments in Early Life Cycle
companies tend to be narrowly focused on an objective of higher rates of capital
appreciation. They correspondingly will involve a significantly greater degree
of risk and the reduction of current income to a negligible level. Such
investments will not be limited to new, small companies engaged only in frontier
technology, but will seek opportunities for maximum appreciation through the
full spectrum of business operations, products, services, and asset values.
Consequently, the Funds' investments in Early Life Cycle companies are primarily
in younger, small- to medium- sized companies in the early stages of their
development. Such companies are usually more flexible in trying new approaches
to problem-solving and in making new or different employment of assets. Because
of the high risk level involved, the ratio of success among such companies is
lower than the average, but for those companies which succeed, the magnitude of
investment reward is potentially higher.

To complete the Adviser's investment philosophy in managing the Funds,
the three portfolio strategies discussed above are applied in concert with other
longer-term investment "themes" to identify investment opportunities. The
Adviser believes these longer-term themes represent strong and inexorable
trends. The Adviser also believes that understanding the instigation, catalysts
and effects of these longer-term trends should help to identify companies that
are beneficiaries of these trends.

-2-
<PAGE>

ADDITIONAL INVESTMENT POLICIES -- ENERGY AND NATURAL RESOURCES FUND

Under normal market conditions, at least 65% of the Energy and Natural
Resources Fund's total assets will be invested in the securities of companies
that are in the energy and other natural resources groups of industries. Energy
and natural resources encompass a number of traditional industry
classifications, including among others: mining of metals, coal and other
minerals; oil and gas extraction; production of petroleum, coal and newer
resources such as geothermal and solar energy; pipeline companies; and
agricultural industries including crops, livestock, and forestry and timberland.
Normally, investments in energy companies will constitute a substantial portion
of these investments, and at least 25% of the Fund's total assets will be
invested in crude oil, petroleum and natural gas companies. This policy
reflects the Adviser's belief that these hydrocarbon resources represent the
primary component of world energy needs. However, the amount may be reduced if
there are changes in governmental regulations, world economic and political
events, exploration or production spending, supply, demand or prices of crude
oil, petroleum, natural gas or other energy sources, and in the Adviser's
opinion, such changes would have an adverse affect on the securities of such
companies.

The Fund's concentration in companies that are in the energy and other
natural resources groups of industries subjects it to certain risks. The value
of equity securities of such companies will fluctuate pursuant to market
conditions, generally, as well as the market for the particular natural resource
in which the issuer is involved. Furthermore, the values of natural resources
are affected by numerous factors including events occurring in nature and
international politics. For instance, events in nature (such as earthquakes or
fires in prime natural resources areas) and political events (such as coups or
military confrontations) can affect the overall supply of a natural resource and
thereby the value of companies involved in such natural resource. In addition,
inflationary pressures and rising interest rates may affect the demand for
certain natural resources such as timber. Accordingly, the Fund may shift its
emphasis from one natural resources industry to another depending on prevailing
trends or developments.

As noted above, the Fund expects to invest a substantial portion of its
assets in energy companies. Energy-related investments are affected generally
by supply, demand, and other competitive factors for the companies' specific
products and services. They are also affected by unpredictable factors such as
the supply and demand for oil, gas, electricity and other energy sources, prices
of such energy sources, exploration and production spending, governmental
regulation, and world economic and political events. In addition, utilities
firms in the energy field are subject to a variety of factors affecting the
public utilities industries, including: difficulty obtaining adequate returns
on invested capital which are typically subject to the control and scrutiny of
public service commissions; restrictions on operations and increased costs and
delays as a result of environmental considerations; costs of and ability to
secure financing for large construction and development projects; difficulties
in obtaining secure energy resources; the uncertain effects of conservation
efforts; and a variety of issues concerning financing, governmental approval and
environmental aspects of nuclear power facilities.

The Fund may invest up to 35% of its total assets in gold and other
precious metal bullion and coins ("precious metals"). Precious metals will only
be bought from and sold to

-3-
<PAGE>

banks (both U.S. and foreign), and dealers who are members of, or affiliated
with members of, a regulated U.S. commodities exchange, in accordance with
applicable investment laws. Precious metal bullion will not be purchased in any
form that is not readily marketable. Coins will not be purchased for their
numismatic value and will not be considered for the Fund it they cannot be
bought or sold in an active market. Any bullion or coins purchased by the Fund
will be delivered to and stored with a qualified custodian bank in the United
States. Investors should be aware that precious metals do not generate income,
offering only the potential for capital appreciation and depreciation, and may
subject the Fund to higher custody and transaction costs than those normally
associated with the ownership of securities. Investments relating to precious
metals are considered speculative.

In addition to its authority to purchase precious metals, the Fund may
invest to a significant degree in companies in the precious metals industry.
Investments related to precious metals are considered speculative and are
affected by a variety of worldwide economic, financial and political factors.
Prices of precious metals may fluctuate sharply over short periods due to
several factors, including: changes in inflation or expectations regarding
inflation in various countries; currency fluctuations; metal sales by
governments, central banks or international agencies; investment speculation;
changes in industrial and commercial demand; and governmental prohibitions or
restrictions on the private ownership of certain precious metals. Under current
federal tax law, the Fund would fail to qualify as a regulated investment
company if its gains from the sale or other disposition of precious metals were
to exceed 10% of the Fund's annual gross income. Therefore, this limitation may
cause the Fund to hold or sell precious metals or securities when it would not
otherwise be advantageous to do so.

At present, South Africa, the United States, Australia, Canada and the
Commonwealth of Independent States (which includes Russia and certain other
countries that were part of the former Soviet Union) are the five major
producers of gold bullion. Therefore, political and economic conditions in
these and other gold-producing countries may pose certain risks to the Fund's
investments in gold and gold-related companies. These include the effect of
social and political unrest on mining production and gold prices, as well as the
threat of nationalization or expropriation by the various governments involved.

ADDITIONAL INVESTMENT POLICIES -- REAL ESTATE FUND

Under normal market conditions, at least 65% of the Real Estate Fund's
total assets will be invested in companies principally engaged in the real
estate business, such as real estate investment trusts ("REITs"), real estate
developers, mortgage lenders and servicers, construction companies and building
material suppliers. A company is "principally engaged" in the real estate
business if, at the time of investment, the company derives at least 50% of its
revenues from the ownership, construction, financing, management or sale of
commercial, industrial or residential real estate, or that such company has at
least 50% of its assets in such real estate.

It is expected that the Fund will invest a majority of its assets in
shares of REITs during normal market and economic conditions. REITs pool
investors' funds for investment primarily in income-producing real estate or
real estate related loans or interests. Unlike

-4-
<PAGE>

corporations, REITs do not have to pay income taxes if they meet certain
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). To
qualify, a REIT must distribute at least 95% of its taxable income to its
shareholders and receive at least 75% of that income from rents, mortgages and
sales of property.

REITs can generally be classified as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rental and lease payments.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Mortgage REITs make loans to commercial real estate
developers and derive their income primarily from interest payments on such
loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs.

Although the Fund will not invest in real estate directly, it is
subject to the same risks that are associated with the direct ownership of real
estate. In general, real estate values are affected by a variety of factors,
including: supply and demand for properties; the economic health of the
country, different regions and local markets; and the strength of specific
industries renting properties. An equity REIT's performance ultimately depends
on the types and locations of the properties it owns and on how well it manages
its properties. For instance, rental income could decline because of extended
vacancies, increased competition from nearby properties, tenants' failure to pay
rent, or incompetent management. Property values could decrease because of
overbuilding, environmental liabilities, uninsured damages caused by natural
disasters, a general decline in the neighborhood, rent controls, losses due to
casualty or condemnation, increases in property taxes and/or operating expenses,
or changes in zoning laws or other factors.

Changes in interest rates could affect the performance of REITs. In
general, during periods of rising interest rates, REITs may lose some of their
appeal to investors who may be able to obtain higher yields from other
income-producing investments, such as long-term bonds. Higher interest rates
may also mean that it is more expensive to finance property purchases,
renovations and improvements, which could hinder a REIT's performance. During
periods of declining interest rates, certain mortgage REITs may hold mortgages
that the mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by such mortgage REITs.

While equity REITs are affected by changes in the value of the
underlying properties they own, mortgage REITs are affected by changes in the
value of the properties to which they have extended credit. REITs may not be
diversified and are subject to the risks involved with financing projects.
REITs may also be subject to substantial cash flow dependency and
self-liquidation. In addition, REITs could possibly fail to qualify for
tax-free pass-through of income under the Code or to maintain their exemptions
from registration under the 1940 Act.

Such factors may also adversely affect a borrower's or a lessee's
ability to meet its obligations to a REIT. In the event of a default by a
borrower or lessee, a REIT may experience delays in enforcing its rights as a
mortgagee or lessor and may incur substantial costs associated with protecting
its investments.

-5-
<PAGE>

Under certain circumstances the Fund could own real estate directly as a
result of a default on debt securities it owns. If the Fund has rental income
or income from the direct disposition of real property, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company.

* * *

Under normal market and economic conditions, the Energy and Natural
Resources and Real Estate Funds will invest at least 65% of their total assets
in common stock, preferred stock and securities convertible into common stock.
Normally, up to 35% of each Fund's total assets may be invested in other
securities and instruments including, e.g., other investment-grade debt
securities (i.e., debt obligations classified within the four highest ratings of
a nationally recognized statistical rating organization such as Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Services
("S&P") or, if unrated, determined by the Adviser to be of comparable quality),
warrants, options and futures instruments as described in more detail below.
During temporary defensive periods or when the Adviser believes that suitable
stocks or convertible securities are unavailable, each Fund may hold cash and/or
invest some or all of its assets in U.S. government securities, high-quality
money market instruments and repurchase agreements collateralized by the
foregoing obligations.

Portfolio holdings will include equity securities of companies having
capitalizations of varying amounts, and the Funds may invest in the securities
of high growth, small companies when the Adviser expects earnings and the price
of the securities to grow at an above-average rate. Certain securities owned by
the Funds may be traded only in the over-the-counter market or on a regional
securities exchange, may be listed only in the quotation service commonly known
as the "pink sheets," and may not be traded every day or in the volume typical
of trading on a national securities exchange. As a result, there may be a
greater fluctuation in the value of a Fund's shares, and a Fund may be required,
in order to satisfy redemption requests or for other reasons, to sell these
securities at a discount from market prices, to sell during periods when such
disposition is not desirable, or to make many small sales over a period of time.

The Funds may invest in the securities of foreign issuers directly or
indirectly through sponsored and unsponsored American Depository Receipts
("ADRs"). ADRs represent receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities of foreign issuers.
The Energy and Natural Resources Fund may also invest in sponsored and
unsponsored European Depository Receipts ("EDRs") and Global Depository Receipts
("GDRs"). EDRs are receipts issued in Europe typically by non-U.S. banks or
trust companies and foreign branches of U.S. banks which evidence ownership of
foreign or U.S. securities. GDRs are receipts structured similarly to EDRs and
are marketed globally. ADRs may be listed on a national securities exchange or
may be traded in the over-the-counter market. EDRs are designed for use in
European exchange and over-the-counter markets. GDRs are designed for trading
in non-U.S. securities markets. ADRs, EDRs and GDRs traded in the
over-the-counter market which do not have an active or substantial secondary
market will be considered illiquid and therefore will be subject to a Fund's
limitation with respect to such securities. ADR prices are denominated in U.S.
dollars although the underlying securities are

-6-
<PAGE>

denominated in a foreign currency. Investments in ADRs, EDRs and GDRs involve
risks similar to those accompanying direct investments in foreign securities.

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

OPTIONS

The Funds may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation. Such
purchases would be in an amount not exceeding 5% of each such Fund's net assets.
Such options may relate to particular securities or to various stock and bond
indices. Purchase of options is a highly specialized activity which entails
greater than ordinary investment risks, including a substantial risk of a
complete loss of the amounts paid as premiums to the writer of the options.
Regardless of how much the market price of the underlying security increases or
decreases, the option buyer's risk is limited to the amount of the original
investment for the purchase of the option. However, options may be more
volatile than the underlying securities, and therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and the
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by the Funds will be valued at
the last sale price or, in the absence of such a price, at the mean between bid
and asked prices.

Each Fund may engage in writing covered call options (options on
securities owned by the particular Fund) and enter into closing purchase
transactions with respect to such options. Such options must be listed on a
national securities exchange and issued by the Options Clearing Corporation.
The aggregate value of the securities subject to options written by each Fund
may not exceed 25% of the value of its net assets. By writing a covered call
option, a Fund forgoes the opportunity to profit from an increase in the market
price of the underlying security above the exercise price except insofar as the
premium represents such a profit, and it will not be able to sell the underlying
security until the option expires or is exercised or the Fund effects a closing
purchase transaction by purchasing an option of the same series.

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<PAGE>

upon the original option, in which event the writer will have incurred a loss on
the transaction. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. A covered option writer, unable to effect a closing purchase
transaction, will not be able to sell the underlying security until the option
expires or the underlying security is delivered upon exercise, with the result
that the writer in such circumstances will be subject to the risk of market
decline in the underlying security during such period. A Fund will write an
option on a particular security only if the Adviser believes that a liquid
secondary market will exist on an exchange for options of the same series, which
will permit the Fund to make a closing purchase transaction in order to close
out its position.

When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of that Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to market to
reflect the current value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date, or if the Fund involved enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold),
and the deferred credit related to such option will be eliminated. If an option
is exercised, the Fund involved may deliver the underlying security from its
portfolio or purchase the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received, and the Fund involved will realize a gain or loss. Premiums from
expired call options written by the Funds and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. The use of covered call options is not a primary investment technique
of the Funds and such options will normally be written on underlying securities
as to which the Adviser does not anticipate significant short-term capital
appreciation.

REPURCHASE AGREEMENTS

Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser,
pursuant to guidelines established by the Company's Board of Directors. The
Funds will not enter into repurchase agreements with the Adviser or any of its
affiliates. Repurchase agreements with remaining maturities in excess of seven
days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).

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<PAGE>

the agreement and held by a Fund at not less than the repurchase price. Default
or bankruptcy of the seller would, however, expose a Fund to possible delay in
connection with the disposition of the underlying securities or loss to the
extent that proceeds from a sale of the underlying securities were less than the
repurchase price under the agreement. Repurchase agreements are considered
loans by a Fund under the 1940 Act.

FUTURES CONTRACTS AND RELATED OPTIONS

Each Fund may invest in futures contracts and options thereon. They
may enter into interest rate futures contracts and other types of financial
futures contracts, including foreign currency futures contracts, as well as any
index or foreign market futures which are available on recognized exchanges or
in other established financial markets. A futures contract on foreign currency
creates a binding obligation on one party to deliver, and a corresponding
obligation on another party to accept delivery of, a stated quantity of a
foreign currency for an amount fixed in U.S. dollars. Foreign currency futures,
which operate in a manner similar to interest rate futures contracts, may be
used by the Funds to hedge against exposure to fluctuations in exchange rates
between the U.S. dollar and other currencies arising from multinational
transactions.

Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with a Fund's securities investments. The Funds
will engage in futures transactions only to the extent permitted by the
Commodity Futures Trading Commission ("CFTC") and the Securities and Exchange
Commission ("SEC"). When investing in futures contracts, the Funds must satisfy
certain asset segregation requirements to ensure that the use of futures is
unleveraged. When a Fund takes a long position in a futures contract, it must
maintain a segregated account containing liquid assets equal to the purchase
price of the contract, less any margin or deposit. When a Fund takes a short
position in a futures contract, the Fund must maintain a segregated account
containing liquid assets in an amount equal to the market value of the
securities underlying such contract (less any margin or deposit), which amount
must be at least equal to the market price at which the short position was
established. Asset segregation requirements are not applicable when a Fund
"covers" an options or futures position generally by entering into an offsetting
position. Each Fund will limit its hedging transactions in futures contracts
and related options so that, immediately after any such transaction, the
aggregate initial margin that is required to be posted by the Fund under the
rules of the exchange on which the futures contract (or futures option) is
traded, plus any premiums paid by the Fund on its open futures options
positions, does not exceed 5% of the Fund's total assets, after taking into
account any unrealized profits and unrealized losses on the Fund's open
contracts (and excluding the amount that a futures option is "in-the-money" at
the time of purchase). An option to buy a futures contract is "in-the-money" if
the then-current purchase price of the underlying futures contract exceeds the
exercise or strike price; an option to sell a futures contract is "in-the-money"
if the exercise or strike price exceeds the then-current purchase price of the
contract that is the subject of the option. In addition, the use of futures
contracts is further restricted to the extent that no more than 10% of a Fund's
total assets may be hedged.

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<PAGE>

not be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge.

Transactions in futures as a hedging device may subject a Fund to a
number of risks. Successful use of futures by a Fund is subject to the ability
of the Adviser to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts (or options) and movements in the price of the instruments
being hedged. In addition, investments in futures may subject a Fund to losses
due to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract (or option) at any particular time. Consequently, a Fund may realize a
loss on a futures transaction that is not offset by a favorable movement in the
price of securities which it holds or intends to purchase or may be unable to
close a futures position in the event of adverse price movements. In addition,
in some situations, if a Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market.

As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.

Utilization of futures transactions involves the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom such
Fund has an open position in a futures contract or related option.

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<PAGE>

only price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.

The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.

OPTIONS ON FUTURES CONTRACTS

Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.

Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the instruments
being hedged, an option may or may not be less risky than ownership of the
futures contract or such instruments. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). Although permitted by
their fundamental investment policies, the Funds do not currently intend to
write futures options, and will not do so in the future absent any necessary
regulatory approvals.

WHEN-ISSUED AND FORWARD TRANSACTIONS

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<PAGE>

Fund agrees to purchase securities on a "when-issued" or "forward commitment"
basis, the custodian will set aside cash or liquid portfolio securities equal to
the amount of the commitment in a separate account. Normally, the custodian
will set aside portfolio securities to satisfy a purchase commitment and, in
such case, the Fund may be required subsequently to place additional assets in
the separate account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, its liquidity and ability to manage its
portfolio might be affected in the event its forward commitments or commitments
to purchase "when-issued" securities ever exceed 25% of the value of its assets.

It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days.
The Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.

FORWARD CURRENCY TRANSACTIONS

Each Fund will conduct its currency exchange transactions either on a
spot (i.e., cash) basis at the rate prevailing in the currency exchange markets,
or by entering into forward currency contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency for a
set price at a future date. In this respect, forward currency contracts are
similar to foreign currency futures contracts; however, unlike futures contracts
which are traded on recognized commodities exchange, forward currency contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. Also, forward currency
contracts usually involve delivery of the currency

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<PAGE>

involved instead of cash payment as in the case of futures contracts.

A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose
of transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in that currency.
The Funds will not speculate in foreign currency exchange transactions.
Transaction and position hedging will not be limited to an overall percentage of
the Fund's assets, but will be employed as necessary to correspond to particular
transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation requirements are not applicable
when the Fund "covers" a forward currency position generally by entering into an
offsetting position.

The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Adviser may be incorrect in
its expectations as to currency fluctuations, and a Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.

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<PAGE>

during the period between the Fund's entering into a forward contract for the
sale of a currency and the date it enters into an offsetting contract for the
purchase of the currency, the Fund will realize a gain to the extent the price
of the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Fund will suffer a loss
to the extent the price of the currency it has agreed to sell is less than the
price of the currency it has agreed to purchase in the offsetting contract. The
foregoing principles generally apply also to forward purchase contracts.

SECURITIES LENDING

To increase return on its portfolio securities, each Fund may lend its
portfolio securities to broker/dealers pursuant to agreements requiring the
loans to be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. Collateral for such loans may
include cash, securities of the U.S. government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total assets.
When a Fund lends its securities, it continues to receive interest or dividends
on the securities lent and may simultaneously earn interest on the investment of
the cash loan collateral, which will be invested in readily marketable,
high-quality, short-term obligations. Although voting rights, or rights to
consent, attendant to lent securities pass to the borrower, such loans may be
called at any time and will be called so that the securities may be voted by a
Fund if a material event affecting the investment is to occur.

MONEY MARKET INSTRUMENTS

The Funds may invest in "money market instruments," which include,
among other things, bank obligations, commercial paper and corporate bonds with
remaining maturities of 13 months or less.

Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations also
include U.S. dollar-denominated obligations of foreign branches of U.S. banks
and obligations of domestic branches of foreign banks. Investments in bank
obligations of foreign branches of domestic financial institutions or of
domestic branches of foreign banks are limited so that no more than 5% of the
value of a Fund's total assets may be invested in any one branch, and no more
than 20% of a particular Fund's total assets at the time of purchase may be
invested in the aggregate in such obligations (see investment limitation No. 17
below under "Investment

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<PAGE>

Limitations"). Investments in time deposits are limited to no more than 5% of
the value of a Fund's total assets at the time of purchase.

Investments by the Funds in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire unrated commercial paper that is determined by
the Adviser at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the particular Fund.

GOVERNMENT OBLIGATIONS

Each Fund may invest in U.S. government obligations, including U.S.
Treasury Bills and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, the
Farmers Home Administration, the Export-Import Bank of the United States, the
Small Business Administration, the Government National Mortgage Association, the
Federal National Mortgage Association, the General Services Administration, the
Central Bank for Cooperatives, the Federal Home Loan Mortgage Corporation, the
Federal Intermediate Credit Banks and the Maritime Administration.

INVESTMENT COMPANY SECURITIES

Each Fund may invest in securities issued by other investment
companies which invest in high-quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. In addition to the advisory fees and other expenses a
Fund bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by each Fund within the limits prescribed by the 1940 Act,
which include, subject to certain exceptions, a prohibition against a Fund
investing more than 10% of the value of its total assets in such securities.

BORROWING AND REVERSE REPURCHASE AGREEMENTS

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<PAGE>

and price (a "reverse repurchase agreement"). The SEC views reverse repurchase
agreements as a form of borrowing. At the time a Fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account liquid
assets having a value equal to the repurchase price, including accrued interest.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Fund may decline below the repurchase price of those
securities.

ILLIQUID SECURITIES

Neither Fund will knowingly invest more than 15% of the value of its
net assets in securities that are illiquid. A security will be considered
illiquid if it may not be disposed of within seven days at approximately the
value at which the particular Fund has valued the security. Each Fund may
purchase securities which are not registered under the Securities Act of 1933,
as amended (the "Act"), but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Act. Any such security will not
be considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.

PORTFOLIO TURNOVER

Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
the investment objective of the particular Fund. Portfolio investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover may involve correspondingly
greater brokerage commission expenses and other transaction costs, which must be
borne directly by a Fund and ultimately by its shareholders. High portfolio
turnover may result in the realization of substantial net capital gains. To the
extent net short-term capital gains are realized, any distributions resulting
from such gains are considered ordinary income for federal income tax purposes.
(See "Additional Information Concerning Taxes.")

INVESTMENT LIMITATIONS

The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a
Fund only by a vote of the holders of a majority of such Fund's outstanding
shares. As used herein, a "vote of the holders of a majority of the outstanding
shares" of the Company or a particular Fund means, with respect to the approval
of an investment advisory agreement or a change in a fundamental investment
policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of the Company or such Fund, or (b) 67% or more of the shares
of the Company or such Fund present at a meeting if more than 50% of the
outstanding shares of the Company or such Fund are represented at the meeting in
person or by proxy. Investment limitations which are "operating policies" with
respect to a Fund may be changed by the Company's Board of Directors without
shareholder approval.

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<PAGE>

The following investment limitations are fundamental with respect to
each of the Funds. Each Fund may not:

1. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, (ii) the
Energy and Natural Resources Fund may lend portfolio securities in an amount not
exceeding 30% of its total assets, and (iii) the Real Estate Fund may lend
portfolio securities in accordance with its investment objective and policies;
and

2. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (i) with respect to the Energy and Natural
Resources Fund, there is no limitation with respect to securities of companies
in the energy and other natural resources groups of industries or securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
and (ii) with respect to the Real Estate Fund: (a) the Fund will concentrate
its investments in the securities of issuers principally engaged in the real
estate business, (b) there is no limitation with respect to securities issued or
guaranteed by the U.S. government, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and repurchase agreements secured
by such securities, and (c) neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for purposes of
this policy.

The following investment limitations are fundamental with respect to
the Energy and Natural Resources Fund. The Fund may not:

3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;

4. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate;

5. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitation contained in the Prospectus
might be considered to be the issuance of a senior security;

6. Purchase or sell commodities or invest in oil, gas, or other
mineral exploration or development programs; provided, however, that the Fund
may, in accordance with its investment objective and policies, (i) purchase
publicly traded securities of companies engaging in whole or in part in such
activities or invest in liquidating trust receipts, certificates of beneficial
ownership or other instruments, (ii) enter into commodity futures contracts and
other futures contracts, (iii) enter into options on commodities and futures
contracts, (iv) invest in gold and other precious metal bullion and coins, and
(v) enter into forward contracts on foreign

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<PAGE>

currencies and precious metals; and

7. Borrow money except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes.) The Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding. Optioned stock held in escrow is not deemed to be a
pledge.

The following investment limitations are operating policies with
respect to the Energy and Natural Resources Fund. The Fund may not:

8. Purchase securities on margin, make short sales of securities, or
maintain a short position;

9. Invest in companies for the purpose of exercising management or
control; and

10. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.

The following investment limitations are fundamental with respect to
the Real Estate Fund. The Fund may not:

11. Borrow money or mortgage, pledge or hypothecate its assets except
to the extent permitted under the 1940 Act. Optioned stock held in escrow is
not deemed to be a pledge;

12. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
its investment objective, policies and limitations may be deemed to be
underwriting;

13. Purchase or sell real estate, except that (a) the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by real estate or interests therein, and (b) the
Fund may hold and sell any real estate it acquires as a result of the Fund's
ownership of such securities;

14. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; and

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<PAGE>

15. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that the Fund may: (a) purchase publicly traded securities
of companies engaging in whole or in part in such activities or invest in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objective and policies, and (b)
purchase and sell options, forward contracts, futures contracts and futures
options.

The following investment limitations are operating policies with
respect to the Real Estate Fund. The Fund may not:

16. Purchase securities on margin, make short sales of securities, or
maintain a short position;

17. Invest in companies for the purpose of exercising management or
control; and

18. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.

* * *

The Funds may not invest in obligations of foreign branches of
financial institutions or in domestic branches of foreign banks if immediately
after such purchase (i) more than 5% of the value of their respective total
assets would be invested in obligations of any one foreign branch of the
financial institution or domestic branch of a foreign bank; or (ii) more than
20% of their respective total assets would be invested in foreign branches of
financial institutions or in domestic branches of foreign banks. In addition,
the Real Estate Fund will not purchase portfolio securities while borrowings in
excess of 5% of its total assets are outstanding. These investment policies may
be changed by the Company's Board of Directors without shareholder approval.

For the purpose of Investment Limitation Nos. 4 and 13, the
prohibition of purchases of real estate includes acquisition of limited
partnership interests in partnerships formed with a view toward investing in
real estate, but does not prohibit purchases of shares in real estate investment
trusts.

In addition to the above investment limitations, each Fund currently
intends to refrain from entering into arbitrage transactions.

If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's investments will not constitute a violation of such limitation.

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<PAGE>

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Company's sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA
15237-5829. The Distributor has agreed to use appropriate efforts to solicit
all purchase orders.

At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.

In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.

The net asset value of each Fund is determined and the shares of each
Fund are priced at the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), currently 4:00 p.m. (Eastern time). Net asset value
and pricing for each Fund are determined on each day the Exchange and the
Adviser are open for trading (a "Business Day"). Currently, the holidays which
the Funds observe are New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset value per
share for purposes of pricing sales and redemptions is calculated by dividing
the value of all securities and other assets allocable to the Fund, less the
liabilities allocable to the Fund, by the number of its outstanding shares.

As described below, shares may be sold to customers ("Customers") of
financial institutions ("Shareholder Organizations"). Shares are also offered
for sale directly to institutional investors and to members of the general
public. Different types of Customer accounts at the Shareholder Organizations
may be used to purchase shares, including eligible agency and trust accounts.
In addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the

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<PAGE>

Customer. Investors purchasing shares may include officers, directors, or
employees of the particular Shareholder Organization.

The Company has authorized certain brokers to accept on its behalf
purchase, exchange and redemption requests. Such brokers are authorized to
designate other intermediaries to accept purchase, exchange and redemption
requests on behalf of the Company. The Company will be deemed to have received
a purchase, exchange or redemption request when the request is received by an
authorized broker or designated intermediary in good order.

Prior to February 14, 1997, shares of the Energy and Natural Resources
Fund was offered for sale with a maximum sales charge of 4.50%. For the fiscal
year ended March 31, 1997, total sales charges paid by shareholders of the
Energy and Natural Resources Fund was $1,141. The Distributor retained $696 of
the foregoing sales charges with respect to the Fund for the fiscal year ended
March 31, 1997.

PURCHASE OF SHARES

Shares of the Funds are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Company's sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.

Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Company. A Shareholder
Organization may elect to hold of record shares for its Customers and to record
beneficial ownership of shares on the account statements provided by it to its
Customers. If it does so, it is the Shareholder Organization's responsibility
to transmit to the Distributor all purchase requests for its Customers and to
transmit, on a timely basis, payment for such requests to Chase Global Funds
Services Company ("CGFSC"), the Funds' sub-transfer agent, in accordance with
the procedures agreed to by the Shareholder Organization and the Distributor.
Confirmations of all such Customer purchases (and redemptions) will be sent by
CGFSC to the particular Shareholder Organization. As an alternative, a
Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization
continues to place its Customers' purchase (and redemption) requests with the
Funds, CGFSC will send confirmations of such transactions and periodic account
statements directly to the shareholders of record. Shares in the Funds bear the
expense of fees payable to Shareholder Organizations for such services. See
"Shareholder Organizations."

-21-
<PAGE>

adviser or certified financial planner for further information on transaction
fees. Investors may also purchase shares directly from the Distributor in
accordance with procedures described in the Prospectus.

Direct Investors may purchase shares by completing the Application
accompanying the Prospectus and mailing it, together with a check payable to
Excelsior Funds, Inc., to:

Excelsior Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

Subsequent investments in an existing account in a Fund may be made at
any time by sending to the above address a check payable to Excelsior Funds,
Inc. along with: (a) the detachable form that regularly accompanies the
confirmation of a prior transaction; (b) a subsequent order form which may be
obtained from CGFSC; or (c) a letter stating the amount of the investment, the
name of the Fund and the account number in which the investment is to be made.
Institutional Investors may purchase shares by transmitting their purchase
orders to CGFSC by telephone at (800) 446-1012 or by terminal access.
Institutional Investors must pay for shares with federal funds or funds
immediately available to CGFSC.

Investors may also purchase shares by wiring federal funds to CGFSC.
Prior to making an initial investment by wire, an Investor must telephone CGFSC
at (800) 446-1012 (from overseas, call (617) 557-8280) for instructions.
Federal funds and registration instructions should be wired through the Federal
Reserve System to:

The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account No. 9102732915
For further credit to:
Excelsior Funds
Wire Control Number
Account Registration
(including account number)

Investors making initial investments by wire must promptly complete
the Application accompanying the Prospectus and forward it to CGFSC.
Redemptions by Investors will not be processed until the completed Application
for purchase of shares has been received by CGFSC and accepted by the
Distributor. Investors making subsequent investments by wire should follow the
above instructions.

-22-
<PAGE>

purchase with respect to their accounts. Depending upon the terms of the
particular account, Shareholder Organizations may charge a Customer's account
fees for automatic investment and other cash management services provided. The
Company reserves the right to reject any purchase order, in whole or in part, or
to waive any minimum investment requirements. Third party checks will not be
accepted as payment for Fund shares.

REDEMPTION PROCEDURES

A request for the redemption of shares will receive the net asset
value per share next computed after the request is received in good order by the
Company's sub-transfer agent or an authorized broker or designated intermediary.

Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Company, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

Shares may be redeemed by a Direct Investor by submitting a written
request for redemption to:

Excelsior Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

-23-
<PAGE>

Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor institutions
generally include banks, broker/dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. All eligible guarantor institutions must participate in the
Securities Transfer Agents Medallion Program ("STAMP") in order to be approved
by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.

CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for shares redeemed will
ordinarily be made by mail within five Business Days after receipt by CGFSC of
the redemption request in good order. Questions with respect to the proper form
for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).

Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States. Direct
Investors who are shareholders of record may also redeem shares by instructing
CGFSC by telephone to mail a check for redemption proceeds of $500 or more to
the shareholder of record at his or her address of record. Institutional
Investors may also redeem shares by instructing CGFSC by telephone at (800)
446-1012 or by terminal access. Only redemptions of $500 or more will be wired
to a Direct Investor's account. The redemption proceeds for Direct Investors
must be paid to the same bank and account as designated on the Application or in
written instructions subsequently received by CGFSC.

In order to arrange for redemption by wire or telephone after an
account has been opened or to change the bank or account designated to receive
redemption proceeds, a Direct Investor must send a written request to the
Company c/o CGFSC, at the address listed above. Such requests must be signed by
the Direct Investor, with signatures guaranteed, as discussed above. Further
documentation may be requested.

CGFSC and the Distributor reserve the right to refuse a wire or
telephone redemption if it is believed advisable to do so. Procedures for
redeeming shares by wire or telephone may be modified or terminated at any time
by the Company, CGFSC or the Distributor. The Company, CGFSC, and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions that are reasonably believed to be genuine.
In attempting to confirm that telephone instructions are genuine, the Company
will use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration.

-24-
<PAGE>

the need for more immediate access to his or her investment should purchase
shares by federal funds or bank wire or by certified or cashier's check. Banks
normally impose a charge in connection with the use of bank wires, as well as
certified checks, cashier's checks and federal funds. If a Direct Investor's
purchase check is not collected, the purchase will be cancelled and CGFSC will
charge a fee of $25.00 to the Direct Investor's account.

Except as described in "Investor Programs" below, Investors may be
required to redeem shares in a Fund after 60 days' written notice if due to
Investor redemptions the balance in the particular account with respect to the
Fund remains below $500. If a Customer has agreed with a particular Shareholder
Organization to maintain a minimum balance in his or her account at the
institution with respect to shares of a Fund, and the balance in such account
falls below that minimum, the Customer may be obliged by the Shareholder
Organization to redeem all or part of his or her shares to the extent necessary
to maintain the required minimum balance.

OTHER REDEMPTION INFORMATION

The Company may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.

In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.

The Company reserves the right to honor any request for redemption or
repurchase of a Fund's shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. The Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.

Under certain circumstances, the Company may, in its discretion,
accept securities as payment for shares. Securities acquired in this manner
will be limited to securities issued in transactions involving a BONA FIDE
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of the Fund acquiring such
securities.

-25-
<PAGE>

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

An Investor who owns shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

(3) A fixed-percentage withdrawal (based on the current value of the
account); or

(4) A declining-balance withdrawal.

Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a program of
systematic investing in a Fund while at the same time participating in the
Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the Systematic
Withdrawal Plan directly from their Shareholder Organizations.

EXCHANGE PRIVILEGE

Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Company or Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund" and,
collectively with the Company, the "Companies") or for Shares of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.

-26-
<PAGE>

For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.

RETIREMENT PLANS

Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):

IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;

Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit themselves and
their employees; and

Keogh Plans for self-employed individuals.

Investors investing in the Funds pursuant to Profit Sharing and
Money-Purchase Plans and Keogh Plans are not subject to the minimum investment
and forced redemption provisions described above. The minimum initial
investment for IRAs is $250 per Fund and the minimum subsequent investment is
$50 per Fund. Detailed information concerning eligibility, service fees and
other matters related to these plans can be obtained by calling (800) 446-1012
(from overseas, call (617) 557-8280). Customers of Shareholder Organizations
may purchase shares of the Funds pursuant to retirement plans if such plans are
offered by their Shareholder Organizations.

-27-
<PAGE>

AUTOMATIC INVESTMENT PROGRAM

The Automatic Investment Program permits Investors to purchase shares
(minimum of $50 per Fund per transaction) at regular intervals selected by the
Investor. The minimum initial investment for an Automatic Investment Program
account is $50 per Fund. Provided the Investor's financial institution allows
automatic withdrawals, shares are purchased by transferring funds from an
Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days.

The Automatic Investment Program is one means by which an Investor may
use "Dollar Cost Averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, Dollar Cost Averaging should
usually be followed on a sustained, consistent basis. Investors should be
aware, however, that shares bought using Dollar Cost Averaging are purchased
without regard to their price on the day of investment or to market trends. In
addition, while Investors may find Dollar Cost Averaging to be beneficial, it
will not prevent a loss if an Investor ultimately redeems his shares at a price
which is lower than their purchase price. The Company may modify or terminate
this privilege at any time or charge a service fee, although no such fee
currently is contemplated. An Investor may also implement the Dollar Cost
Averaging method on his own initiative or through other entities.

ADDITIONAL INFORMATION

Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.

DESCRIPTION OF CAPITAL STOCK

The Company's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of common stock, $.001 par value
per share, and to classify or reclassify any unissued shares of the Company into
one or more classes or series by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Company's authorized common stock is currently
classified into 41 series of shares representing interests in 17 investment
portfolios.

-28-
<PAGE>

Company's Board of Directors.

Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of a Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the Company's portfolios, of any general assets of the Company
not belonging to any particular portfolio of the Company which are available for
distribution. In the event of a liquidation or dissolution of the Company, its
shareholders will be entitled to the same distribution process.

Shareholders of the Company are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
the Company's shares may elect all of the Company's directors, regardless of
votes of other shareholders.

Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of the Company voting
without regard to class.

The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a Fund to another management investment company
for consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding shares of the Fund
involved to be redeemed at their net asset value; or (c) combine the assets
belonging to a Fund with the assets belonging to another portfolio of the
Company, if the Board of Directors reasonably determines that such combination
will not have a material adverse effect on shareholders of any portfolio
participating in such combination, and, in connection therewith, to cause all
outstanding shares of the Fund involved to be redeemed at their net asset value
or converted into shares of another class of the Company's common stock at net
asset value. The exercise of such authority by the Board of Directors will be
subject to the provisions of the 1940 Act, and the Board of Directors will not
take any action described in this paragraph unless the proposed action has been
disclosed in

-29-
<PAGE>

writing to the particular Fund's shareholders at least 30 days prior thereto.

Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.

Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional shares.

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

The business and affairs of the Funds are managed under the direction
of the Company's Board of Directors. The directors and executive officers of
the Company, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:

-30-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ------------- ------------------------
<S> <C> <C>
Frederick S. Wonham(1) Chairman of the Retired; Director of the Company and Excelsior
238 June Road Board, President Tax-Exempt Fund (since 1995); Trustee of Excelsior
Stamford, CT 06903 and Treasurer Funds and Excelsior Institutional Trust (since
Age: 68 1995); Vice Chairman of U.S. Trust Corporation and
U.S. Trust New York (from February 1990 until
September 1995); and Chairman, U.S. Trust Company
(from March 1993 to May 1997).

Donald L. Campbell Director Retired; Director of the Company and Excelsior
333 East 69th Street Tax-Exempt Fund (since 1984); Director of UST
Apt. 10-H Master Variable Series, Inc. (from 1994 to June
New York, NY 10021 1997); Trustee of Excelsior Institutional Trust
Age: 73 (since 1995); and Director, Royal Life Insurance
Co. of New York (since 1991).

Rodman L. Drake Director Director of the Company and Excelsior Tax-Exempt
Continuation Investments Group, Inc. Fund (since 1996); Trustee of Excelsior
1251 Avenue of the Americas Institutional Trust and Excelsior Funds (since
9th Floor 1994); Director, Parsons Brinkerhoff, Inc.
New York, NY 10020 (engineering firm) (since 1995); President,
Age: 56 Continuation Investments Group, Inc. (since 1997);
President, Mandrake Group (investment and
consulting firm) (1994-1997); Director, Hyperion
Total Return Fund, Inc. and four other funds for
which Hyperion Capital Management, Inc. serves as
investment adviser (since 1991); Co-Chairman, KMR
Power Corporation (power plants) (from 1993 to
1996); Director, The Latin America Smaller
Companies Fund, Inc. (1993-1998); Member of
Advisory Board, Argentina Private Equity Fund L.P.
(from 1992 to 1996) and Garantia L.P. (Brazil)
(from 1993 to 1996); and Director, Mueller
Industries, Inc. (from 1992 to 1994).

- ------------------------
(1) This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-31-
<PAGE>

Wolfe J. Frankl Director Retired; Director of the Company and Excelsior
2320 Cumberland Road Tax-Exempt Fund (since 1986); Director of UST
Charlottesville, VA 22901-7726 Master Variable Series, Inc. (from 1994 to June
Age: 78 1997); Trustee of Excelsior Institutional Trust
(since 1995); Director, Deutsche Bank Financial,
Inc. (since 1989); Director, The Harbus
Corporation (since 1951); and Trustee, HSBC Funds
Trust and HSBC Mutual Funds Trust (since 1988).

Jonathan Piel Director Director of the Company and Excelsior Tax-Exempt
558 E. 87th Street Fund (since 1996); Trustee of
New York, NY 10128 Excelsior Institutional Trust and Excelsior Funds
Age: 60 (since 1994); Vice President and Editor, Scientific
American, Inc. (from 1986 to 1994); Director, Group
for The South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee, Knight
Journalism Fellowships, Massachusetts Institute of
Technology (since 1984).

Robert A. Robinson Director Director of the Company and Excelsior Tax-Exempt
Church Pension Group Fund (since 1987); Director of UST Master Variable
800 Second Avenue Series, Inc. (from 1994 to June 1997); Trustee of
New York, NY 10017 Excelsior Institutional Trust (since 1995);
Age: 73 President Emeritus, The Church Pension Fund and its
affiliated companies (since 1966); Trustee, H.B. and
F.H. Bugher Foundation and Director of its wholly
owned subsidiaries -- Rosiclear Lead and Flourspar
Mining Co. and The Pigmy Corporation (since 1984);
Director, Morehouse Publishing Co. (1974- 1998);
Trustee, HSBC Funds Trust and HSBC Mutual Funds
Trust (since 1982); and Director, Infinity Funds,
Inc. (since 1995).

-32-
<PAGE>

<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ------------- ------------------------
<S> <C> <C>
Alfred C. Tannachion(2) Director Retired; Director of the Company and Excelsior
6549 Pine Meadows Drive Tax-Exempt Fund (since 1985); Chairman of the Board
Spring Hill, FL 34606 of Excelsior Fund and Excelsior Tax-Exempt Fund
Age: 73 (1991-1997) and Excelsior the Company as defined in
the Institutional Trust (1996-1997); President and
Treasurer of Excelsior Fund and 1940 Act. Excelsior
Tax-Exempt Fund (1994-1997) and Excelsior
Institutional Trust (1996-1997);
Chairman of the Board, President and Treasurer of
UST Master Variable Series, Inc. (1994-1997); and
Trustee of Excelsior Institutional Trust (since
1995).

W. Bruce McConnel, III Secretary Partner of the Law Firm of Drinker Biddle & Reath
One Logan Square LLP.
18th & Cherry Streets
Philadelphia, PA 19103-6996
Age: 56

Michael P. Malloy Assistant Secretary Partner of the Law Firm of Drinker Biddle & Reath
One Logan Square LLP.
18th & Cherry Streets
Philadelphia, PA 19103-6996
Age: 40

Eddie Wang Assistant Manager of Blue Sky Compliance, Chase Global Funds
Chase Global Funds Secretary Services Company (November 1996 to Present); and
Services Company Officer and Manager of Financial Reporting,
73 Tremont Street Investors Bank & Trust Company (January 1991
Boston, MA 02108-3913 to November 1996).
Age: 38

Patricia M. Leyne Assistant Assistant Vice President, Senior Manager of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services Company
Services Company (since July 1998); Assistant Treasurer, Manager of
73 Tremont Street Fund Administration, Chase Global Funds Services
Boston, MA 02108-3913 Company (from November 1996 to July 1998);
Age: 32 Supervisor, Chase Global Funds Services Company
(from September 1995 to November 1996); Fund
Administrator, Chase Global Funds Services Company
(from February 1993 to September 1995).
</TABLE>

- ------------------------
(2) This director is considered to ba an "interested person" of the Company as
defined in the 1940 Act.

-33-
<PAGE>

Each director of the Company receives an annual fee of $9,000 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to
receive an additional $5,000 per annum for services in such capacity. Drinker
Biddle & Reath LLP, of which Messrs. McConnel and Malloy are partners, receives
legal fees as counsel to the Company. The employees of CGFSC do not receive any
compensation from the Company for acting as officers of the Company. No person
who is currently an officer, director or employee of the Adviser serves as an
officer, director or employee of the Company. As of July 13, 1999, the
directors and officers of the Company as a group owned beneficially less than 1%
of the outstanding shares of each fund of the Company, and less than 1% of the
outstanding shares of all funds of the Company in the aggregate.

-34-
<PAGE>

The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.

<TABLE>
<CAPTION>
Pension or Retirement Total Compensation from the
Aggregate Benefits Accrued as Part Company
Name of Compensation from of and Fund Complex*
Person/Position the Company Fund Expenses Paid to Directors
--------------- ----------- ------------- -----------------
<S> <C> <C> <C>
Donald L. Campbell
Director $15,000 None $33,250(3)**

Rodman L. Drake
Director $16,500 None $41,250(4)**

Joseph H. Dugan
Director $16,500 None $36,500(3)**

Wolfe J. Frankl
Director $16,500 None $36,500(3)**

W. Wallace McDowell, Jr.***
Director $11,250 None $28,000(4)**

Jonathan Piel
Director $16,500 None $41,500(4)**

Robert A. Robinson
Director $16,500 None $36,500(3)**

Alfred C. Tannachion
Director $16,500 None $36,500(3)**

Frederick S. Wonham
Chairman of the Board,
President and Treasurer $21,500 None $51,500(4)**
</TABLE>

- -----------------------
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt
Fund, Excelsior Funds and Excelsior Institutional Trust

** Number of investment companies in the Fund Complex for which
director served as director or trustee.
*** Mr. Mcdowell resigned from the Company, Excelsior Tax-Exempt
Fund, Excelsior Funds and Excelsior Institutional Trust on
May 21, 1999.

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<PAGE>

INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS

U.S. Trust New York and U.S. Trust Company (collectively with
U.S. Trust New York, "U.S. Trust" or the "Adviser") serve as investment advisers
to the Funds. In the Investment Advisory Agreements, the Adviser has agreed to
provide the services described in the Prospectus. The Adviser has also agreed
to pay all expenses incurred by it in connection with its activities under the
respective agreements other than the cost of securities, including brokerage
commissions, purchased for the Funds.

Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Energy and Natural Resources Fund pursuant to an advisory
agreement substantially similar to the Investment Advisory Agreement currently
in effect for the Fund.

For the services provided and expenses assumed pursuant to the
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly, at the annual rate of 0.60% of the average
daily net assets of the Energy and Natural Resources Fund, and 1.00% of the
average daily net assets of the Real Estate Fund.

From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.

For the fiscal year ended March 31, 1999, the Company paid U.S. Trust
advisory fees of $219,983 and $295,825 with respect to the Energy and Natural
Resources and Real Estate Funds, respectively. For the same period, U.S. Trust
waived advisory fees totaling $41,522 and $86,406 with respect to the Energy and
Natural Resources and Real Estate Funds, respectively.

For the fiscal year or period ended March 31, 1998, the Company paid
U.S. Trust advisory fees of $225,193 and $109,381 with respect to the Energy and
Natural Resources and Real Estate Funds, respectively. For the same period,
U.S. Trust waived advisory fees totaling $30,724 and $28,552 with respect to the
Energy and Natural Resources and Real Estate Funds, respectively.

For the fiscal year ended March 31, 1997, the Company paid U.S. Trust New
York advisory fees of $165,176 with respect to the Energy and Natural Resources
Fund. For the same period, U.S. Trust New York waived advisory fees totaling
$12,264 with respect to the Energy and Natural Resources Fund.

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<PAGE>

conducting its Asset Management Group independently of its Banking Group.

Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Company's administrators pursuant to an
administration agreement substantially similar to the Administration Agreement
currently in effect for the Company.

The Administrators also provide administrative services to the other
investment portfolios of the Company and to all of the investment portfolios of
Excelsior Tax-Exempt Fund and Excelsior Institutional Trust which are also
advised by U.S. Trust and its affiliates and distributed by the Distributor.
For services provided to all of the investment portfolios of the Company,
Excelsior Tax-Exempt Fund and Excelsior Institutional Trust (except for the
international portfolios of the Company and Excelsior Institutional Trust), the
Administrators are entitled jointly to fees, computed daily and paid monthly,
based on the combined aggregate average daily net assets of the three companies
(excluding the international portfolios of the Company and Excelsior
Institutional Trust) as follows:

COMBINED AGGREGATE AVERAGE DAILY NET ASSETS
OF THE COMPANY, EXCELSIOR TAX-EXEMPT FUND AND
EXCELSIOR INSTITUTIONAL TRUST (EXCLUDING
THE INTERNATIONAL PORTFOLIOS OF THE COMPANY
AND EXCELSIOR INSTITUTIONAL TRUST)
<TABLE>
<CAPTION>
ANNUAL FEE
----------
<S> <C>
First $200 million . . . . . . . . . . . . . . . . . . . . . . . . . .0.200%
Next $200 million. . . . . . . . . . . . . . . . . . . . . . . . . . .0.175%
Over $400 million. . . . . . . . . . . . . . . . . . . . . . . . . . .0.150%
</TABLE>

Administration fees payable to the Administrators by each portfolio of
the Company, Excelsior Tax-Exempt Fund and Excelsior Institutional Trust are
allocated in proportion to their relative average daily net assets at the time
of determination. From time to time, the Administrators may voluntarily waive
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time.

For the fiscal year or period ended March 31, 1999, the Company paid CGFSC,

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<PAGE>

Federated Administrative Services and U.S. Trust $59,511 and $58,438 in the
aggregate with respect to the Energy and Natural Resources and Real Estate
Funds, respectively. For the same period, CGFSC, Federated Administrative
Services and U.S. Trust waived administration fees totaling $7,177 and $43
with respect to the Energy and Natural Resources and Real Estate Funds,
respectively.

For the fiscal year or period ended March 31, 1998, the Company paid
CGFSC, Federated Administrative Services and U.S. Trust $63,037 and $20,453 in
the aggregate with respect to the Energy and Natural Resources and Real Estate
Funds, respectively. For the same period, CGFSC, Federated Administrative
Services and U.S. Trust waived administration fees totaling $2,222 and $0 with
respect to the Energy and Natural Resources and Real Estate Funds, respectively.

For the fiscal year ended March 31, 1997, the Company paid CGFSC, Federated
Administrative Services and U.S. Trust New York $45,467 in the aggregate with
respect to the Energy and Natural Resources Fund. For the same period, CGFSC,
Federated Administrative Services and U.S. Trust New York waived administration
fees totaling $6 with respect to the Energy and Natural Resources Fund.

BANKING LAWS

Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as shares of the Funds, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent, or custodian to
such an investment company, or from purchasing shares of such company for and
upon the order of customers. The Adviser, CGFSC and certain Shareholder
Organizations may be subject to such banking laws and regulations. State
securities laws may differ from the interpretations of federal law discussed in
this paragraph and banks and financial institutions may be required to register
as dealers pursuant to state law.

Should legislative, judicial, or administrative action prohibit or
restrict the activities of the Adviser or other Shareholder Organizations in
connection with purchases of Fund shares, the Adviser and such Shareholder
Organizations might be required to alter materially or discontinue the
investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would
affect their net asset values per share or result in financial loss to any
shareholder.

SHAREHOLDER ORGANIZATIONS

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<PAGE>

Fund's payment of not more than the annual rate of 0.40% of the average daily
net assets of the Fund's shares beneficially owned by Customers of the
Shareholder Organization. Such services may include: (a) acting as recordholder
of shares; (b) assisting in processing purchase, exchange and redemption
transactions; (c) transmitting and receiving funds in connection with Customer
orders to purchase, exchange or redeem shares; (d) providing periodic statements
showing a Customer's account balances and confirmations of transactions by the
Customer; (e) providing tax and dividend information to shareholders as
appropriate; (f) transmitting proxy statements, annual reports, updated
prospectuses and other communications from the Company to Customers; and (g)
providing or arranging for the provision of other related services. It is the
responsibility of Shareholder Organizations to advise Customers of any fees that
they may charge in connection with a Customer's investment. Until further
notice, the Adviser and Administrators have voluntarily agreed to waive fees
payable by a Fund in an aggregate amount equal to administrative service fees
payable by that Fund.

The Company's agreements with Shareholder Organizations are governed
by an Administrative Services Plan (the "Plan") adopted by the Company.
Pursuant to the Plan, the Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of the Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").

Any material amendment to the Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Company's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Company's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company will be
committed to the discretion of such Disinterested Directors.

For the fiscal year ended March 31, 1999, payments to Shareholder
Organizations totaled $48,699 and $37,486 with respect to the Energy and
Natural Resources and Real Estate Funds, respectively. Of these amounts,
$15,896 and $37,231 were paid to affiliates of U.S. Trust with respect to the
Energy and Natural Resources and Real Estate Funds, respectively.

For the fiscal year or period ended March 31, 1998, payments to Shareholder
Organizations totaled $29,091 and $1,794 with respect to the Energy and Natural
Resources and Real Estate Funds, respectively, of which $21,008 and $1,794,
respectively, was paid to affiliates of U.S. Trust.

For the fiscal year ended March 31, 1997, payments to Shareholder
Organizations totaled $12,270 with respect to the Energy and Natural Resources
Fund, all of which was paid to affiliates of U.S. Trust.

-39-
<PAGE>

EXPENSES

Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include:
taxes; interest; fees (including fees paid to the Company's directors and
officers who are not affiliated with the Distributor or the Administrators); SEC
fees; state securities qualifications fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders;
advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent, and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses; costs of independent pricing
services; costs of shareholder reports and shareholder meetings; and any
extraordinary expenses. The Funds also pay for brokerage fees and commissions
in connection with the purchase of portfolio securities.

CUSTODIAN AND TRANSFER AGENT

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under
the Custodian Agreement, Chase has agreed to: (i) maintain a separate account
or accounts in the name of the Funds; (ii) make receipts and disbursements of
money on behalf of the Funds; (iii) collect and receive all income and other
payments and distributions on account of the Funds' portfolio securities; (iv)
respond to correspondence from securities brokers and others relating to its
duties; (v) maintain certain financial accounts and records; and (vi) make
periodic reports to the Company's Board of Directors concerning the Funds'
operations. Chase may, at its own expense, open and maintain custody accounts
with respect to the Funds with other banks or trust companies, provided that
Chase shall remain liable for the performance of all its custodial duties under
the Custodian Agreement, notwithstanding any delegation. Communications to the
custodian should be directed to Chase, Mutual Funds Service Division, 3 Chase
MetroTech Center, 8th Floor, Brooklyn, NY 11245.

U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for its meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. For its transfer
agency, dividend disbursing, and subaccounting services, U.S. Trust New York is
entitled to receive $15.00 per annum per account and subaccount. In addition,
U.S. Trust New York is entitled to be reimbursed for its out-of-pocket expenses
for the cost of forms, postage, processing purchase and redemption orders,
handling of proxies, and other similar expenses in connection with the above
services. U.S. Trust New York is located at 114 W. 47th Street, New York, New
York 10036.

-40-
<PAGE>

under the Transfer Agency Agreement, notwithstanding any delegation. Pursuant
to this provision in the agreement, U.S. Trust New York has entered into a
sub-transfer agency arrangement with CGFSC, an affiliate of Chase, with respect
to accounts of shareholders who are not Customers of U.S. Trust New York. CGFSC
is located at 73 Tremont Street, Boston, Massachusetts 02108-3913. For the
services provided by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00
per annum per account or subaccount plus out-of-pocket expenses. CGFSC receives
no fee directly from the Company for any of its sub-transfer agency services.
U.S. Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.

PORTFOLIO TRANSACTIONS

Subject to the general control of the Company's Board of Directors,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of all portfolio securities of the Funds.

The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Funds' portfolio turnover rates may also be
affected by cash requirements for redemptions of shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectus for the Funds' portfolio
turnover rates.

Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. In executing portfolio
transactions for the Funds, the Adviser may use affiliated brokers in accordance
with the requirements of the 1940 Act. The Adviser may also take into account
the sale of Fund shares in allocating brokerage transactions.

For the fiscal year ended March 31, 1999, the Energy and Natural
Resources and Real Estate Funds paid brokerage commissions aggregating
$199,479 and $61,187, respectively, none of which were paid to affiliates of
U.S. Trust.

For the fiscal year ended March 31, 1998, the Energy and Natural
Resources Fund paid brokerage commissions aggregating $122,934, of which $630
was paid to UST Securities Corp., an affiliate of U.S. Trust. For the same
period, the percentage of total commissions paid by the Energy and Natural
Resources Fund to UST Securities Corp. was 0.51%, and the percentage of the
total amount of the Energy and Natural Resources Fund's brokerage transactions
involving the payment of commissions that was effected through UST Securities
Corp. was 0.62%. For the same period, the average commissions per share paid by
the Energy and Natural Resources Fund to UST Securities Corp. and other
unaffiliated brokers were $0.09

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<PAGE>

and $0.08, respectively.

For the fiscal period ended March 31, 1998, the Real Estate Fund paid
brokerage commissions aggregating $103,563, none of which were paid to
affiliates of U.S. Trust.

For the fiscal year ended March 31, 1997, the Energy and Natural
Resources Fund paid brokerage commissions aggregating $108,284, of which $3,330
was paid to UST Securities Corp. For the same period, the percentage of total
brokerage commissions paid by the Energy and Natural Resources Fund to UST
Securities Corp. was 3.08%, and the percentage of the total amount of the Energy
and Natural Resources Fund's brokerage transactions involving the payment of
commissions that was effected through UST Securities Corp. was 4.19%. For the
same period, the average commissions per share paid by the Energy and Natural
Resources Fund to UST Securities Corp. and other unaffiliated brokers were $0.09
and $0.08, respectively.

Transactions in domestic over-the-counter markets are generally
principal transactions with dealers, and the costs of such transactions involve
dealer spreads rather than brokerage commissions. With respect to
over-the-counter transactions, the Funds, where possible, will deal directly
with the dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.

The Investment Advisory Agreements between the Company and the Adviser
provide that, in executing portfolio transactions and selecting brokers or
dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and
whether such broker or dealer is selling shares of the Company, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.

In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Company's Board
of Directors from time to time with respect to the extent and continuation of
the policy, to cause the Funds to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser to the accounts as to which it exercises investment discretion.
Such brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the stock market and the
economy.

-42-
<PAGE>

During the fiscal year ended March 31, 1999, the Adviser directed Fund
brokerage transactions to brokers because of research services provided. The
amounts of such transactions and their related commissions are as follows:

<TABLE>
<CAPTION>
FUND AMOUNT OF TRANSACTIONS RELATED COMMISSION
---- ---------------------- ------------------
<S> <C> <C>
Energy and Natural Resources Fund $ 28,145,304 $ 63,394
Real Estate Fund $ 7,988,470 $ 26,924
</TABLE>

Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund and another
investment company or common trust fund, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to the Fund and such other investment company
or common trust fund. In some instances, this investment procedure may
adversely affect the price paid or received by the Funds or the size of the
position obtained by the Funds. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for the Funds with those to be
sold or purchased for other investment companies or common trust funds in order
to obtain best execution.

PORTFOLIO VALUATION

Assets in the Funds which are traded on a recognized domestic stock
exchange are valued at the last sale price on the securities exchange on which
such securities are primarily traded or at the last sale price on the national
securities market. Securities traded only on over-the-counter markets are
valued on the basis of closing over-the-counter bid prices. Securities for
which there were no transactions are valued at the average of the most recent
bid and asked prices. An option or futures contract is valued at the last sales
price quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, the mean between the last bid
and asked prices. Gold and silver bullion held by the Energy and Natural
Resources Fund will be valued at the last spot settlement price on the Commodity
Exchange, Inc., and platinum and palladium bullion will be valued at the last
spot settlement price or, if not available, the settlement price of the nearest
contract month on the New York Mercantile Exchange. Restricted securities and
securities, precious metals or other assets for

-43-
<PAGE>

which market quotations are not readily available are valued at fair value,
pursuant to guidelines adopted by the Company's Board of Directors.

Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an event subsequent
to the time where value was so established is likely to have changed such value,
then the fair value of those securities will be determined by consideration of
other factors under the direction of the Board of Directors. A security which
is listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Investments in
debt securities having a maturity of 60 days or less are valued based upon the
amortized cost method. All other foreign securities are valued at the last
current bid quotation if market quotations are available, or at fair value as
determined in accordance with guidelines adopted by the Board of Directors. For
valuation purposes, quotations of foreign securities in foreign currency are
converted to U.S. dollars equivalent at the prevailing market rate on the day of
conversion. Some of the securities acquired by a Fund may be traded on foreign
exchanges or over-the-counter markets on days which are not Business Days. In
such cases, the net asset value of the shares may be significantly affected on
days when investors can neither purchase nor redeem the Fund's shares. The
Company's administrators have undertaken to price the securities in the Funds'
portfolio, and may use one or more independent pricing services in connection
with this service.

INDEPENDENT AUDITORS

Ernst & Young LLP, independent auditors, 200 Clarendon Street,
Boston, MA 02116, serve as auditors of the Company. The Funds' Financial
Highlights included in the Prospectus and the financial statements for the
period ended March 31, 1999 incorporated by reference in this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
included in their reports thereon which appear therein.

COUNSEL

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, and Mr. Malloy, Assistant Secretary of the Company, are partners),
One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103,
is counsel to the Company and will pass upon the legality of the shares offered
by the Prospectus.

ADDITIONAL INFORMATION CONCERNING TAXES

The following supplements the tax information contained in the
Prospectus.

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<PAGE>

earnings are distributed in accordance with applicable requirements. If, for
any reason, a Fund does not qualify for a taxable year for the special federal
tax treatment afforded regulated investment companies, such Fund would be
subject to federal tax on all of its taxable income at regular corporate rates,
without any deduction for distributions to shareholders. In such event,
dividend distributions would be taxable as ordinary income to shareholders to
the extent of the Fund's current and accumulated earnings and profits and would
be eligible for the dividends received deduction in the case of corporate
shareholders.

Each Fund will distribute substantially all of its taxable income
including its net capital gain (the excess of long-term capital over short-term
capital loss), if any. As noted in the Funds' Prospectus, the dividends and
distributions you receive may be subject to federal, state and local taxation,
depending upon your tax situation. Distributions you receive from a Fund will
generally be taxable regardless of whether they are paid in cash or reinvested
in additional shares. Distributions attributable to the net capital gain of a
fund will be taxable to you as long-term capital gain, regardless of how long
you have held your shares. Other Fund distributions will generally be taxable
as ordinary income.

Any loss realized on shares held for six months or less will be
treated as a long-term capital loss to the extent of any capital gain dividends
that were received on the shares.

The one major exception to these tax principles is that distributions
on, and sales, exchanges and redemptions of share held in an IRA (or other
tax-qualified plan) will not be currently taxable.

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<PAGE>

Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.

Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so either that they are not subject to backup withholding or that
they are "exempt recipients."

With respect to the Real Estate Fund, the dividends received deduction
is not available for dividends attributable to distributions made by a REIT to
the Fund. In addition, distributions paid by REITs often include a "return of
capital." The Code requires a REIT to distribute at least 95% of its taxable
income to investors. In many cases, however, because of "non-cash" expenses
such as property depreciation, an equity REIT's cash flow will exceed its
taxable income. The REIT may distribute this excess cash to offer a more
competitive yield. This portion of the distribution is deemed a return of
capital, and is generally not taxable to shareholders. However, if shareholders
receive a return of capital, the basis of their shares is decreased by the
amount of such return of capital. This, in turn, affects the capital gain or
loss realized when shares of the Fund are exchanged or sold. If the Real Estate
Fund makes distributions in excess of its earnings, a shareholder's basis in the
Fund will be reduced by the amount of such return of capital if such shareholder
elects to receive distributions in cash (as opposed to having them reinvested in
additional shares of the Fund). If a shareholder's basis is reduced to zero,
any further return of capital distribution is taxable as a capital gain.

The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state, local and foreign taxes.

PERFORMANCE INFORMATION

The Funds may advertise the "average annual total return" for their
shares. Such total return figure reflects the average percentage change in the
value of an investment in a Fund from the beginning date of the measuring period
to the end of the measuring period. Average total return figures will be given
for the most recent one-year period, and may be given for other periods as well
(such as from the commencement of a Fund's operations, or on a year-by-year
basis). The average annual total return is computed by determining the average
annual compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:

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<PAGE>

1/n
ERV
T = [(-----) - 1]
P

Where: T = average annual total return.

ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
(or other) periods at the end of the applicable
period (or a fractional portion thereof).

P = hypothetical initial payment of $1,000.

n = period covered by the computation, expressed in
years.

Each Fund may also advertise the "aggregate total return" for its
shares for various periods, representing the cumulative change in the value of
an investment in the Fund for the specific period. The aggregate total return
is computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate
total return is as follows:

ERV
Aggregate Total Return = [(------)] - 1
P

The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in a Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.

Based on the foregoing calculations, the average annual total returns for
the shares of the Energy and Natural Resources and Real Estate Funds for the one
year period ended March 31, 1999 were -12.23% and -17.55%, respectively. The
average annual total returns for the shares of the Energy and Natural Resources
Fund for the five year period ended March 31, 1999 was 4.41%. The average
annual total return for the shares of the Energy and Natural Resources Fund for
the period from December 31, 1992 (commencement of operations) to March 31, 1999
was 11.54%. The average annual total return for the shares of the Real Estate
Fund for the period October 1, 1997 (commencement of operations) to March 31,
1999 was -10.75%.

The Funds may also from time to time include in advertisements, sales
literature

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<PAGE>

and communications to shareholders a total return figure that is not calculated
according to the formulas set forth above in order to compare more accurately a
Fund's performance with other measures of investment return. For example, in
comparing a Fund's total return with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of an index, a Fund may calculate its
aggregate total return for the period of time specified in the advertisement or
communication by assuming the investment of $10,000 in shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value.

The total return of the Funds may be compared to that of other mutual funds
with similar investment objectives and to other relevant indices or to ratings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. For example, the total return of
a Fund may be compared to data prepared by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. and Weisenberger Investment Company Service. The
total return of the Real Estate Fund may be compared to the S&P REIT Index, an
unmanaged index of over 100 publicly-traded equity, mortgage and hybrid REITs
which have high levels of liquidity and market capitalizations of at least $100
million, or the Morgan Stanley REIT Index, an unmanaged index of all
publicly-traded equity REITs (except health care REITs) which have total market
capitalizations of at least $100 million and are considered liquid. Total
return and yield data as reported in national financial publications such as
MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET JOURNAL and THE NEW YORK
TIMES, or in publications of a local or regional nature, may also be used in
comparing the performance of a Fund. Advertisements, sales literature or
reports to shareholders may from time to time also include a discussion and
analysis of each Fund's performance, including, without limitation, those
factors, strategies and techniques that, together with market conditions and
events, materially affected each Fund's performance.

The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Adviser as to
current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not

-48-
<PAGE>

limited to, stocks, bonds, Treasury bills and shares of a Fund. In addition,
advertisements, sales literature or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or communications may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.

The Real Estate Fund may advertise the standardized effective 30-day (or
one month) yield calculated in accordance with the method prescribed by the SEC
for mutual funds. Such yield will be calculated for the Fund according to the
following formula:

a-b 6
Yield = 2 [(-------- + 1) - 1]
cd

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of
reimbursements).

c = average daily number of shares outstanding that
were entitled to receive dividends.

d = maximum offering price per share on the last day
of the period.

For the purpose of determining interest earned during the period
(variable "a" in the formula), the Real Estate Fund will compute the yield to
maturity of any debt obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest). Such yield
is then divided by 360, and the quotient is multiplied by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity of a debt obligation with a
call provision is deemed to be the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. The
Fund will calculate interest gained on tax-exempt obligations issued without
original issue discount and having a current market discount by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations with original issue discount, where the discount based on the
current market value exceeds the then-remaining portion of original issue
discount, the yield to maturity is the imputed rate based on the original issue
discount calculation. Conversely, where the discount based on the current
market value is less than the remaining portion of the original issue discount,
the yield to maturity is based on the market value.

Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the Real Estate Fund to all shareholder accounts
and to the particular series of

-49-
<PAGE>

shares in proportion to the length of the base period and the Fund's mean (or
median) account size. Undeclared earned income will be subtracted from the
maximum offering price per share (variable "d" in the formula). Based on the
foregoing calculations, the Real Estate Fund's standardized effective yield for
the 30-day period ended March 31, 1999 was 7.74%.

Performance and yields will fluctuate and any quotation of performance and
yield should not be considered as representative of a Fund's future performance.
Since yields fluctuate, yield data cannot necessarily be used to compare an
invest in the Funds with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Shareholders should remember that performance and yield
are generally functions of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses, and market conditions. Any
fees charged by Shareholder Organizations with respect to accounts of Customers
that have invested in shares will not be included in calculations of performance
and yield.

MISCELLANEOUS

As used herein, "assets allocable to the Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company not belonging to a particular portfolio of the Company. In
determining a Fund's net asset value, assets allocable to the Fund are charged
with the direct liabilities in respect of the Fund and with a share of the
general liabilities of the Company which are normally allocated in proportion to
the relative asset values of the Company's portfolios at the time of allocation.
Subject to the provisions of the Company's Charter, determinations by the Board
of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets with respect to a particular Fund, are conclusive.

As of July 13, 1999, U.S. Trust and its affiliates held of record
substantially all of the Company's outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.

As of July 13, 1999, the name, address and percentage ownership of
each person that owned beneficially or of record 5% or more of the outstanding
shares of a Fund were as follows: ENERGY AND NATURAL RESOURCES FUND: Charles
Schwab & Co., Inc., Special Custody A/C For Benefit of Customers, Attn: Mutual
Funds, 101 Montgomery Street, San Francisco, California 94104, 22.33%; and REAL
ESTATE FUND: U.S. Trust Retirement Fund, c/o United States Trust Company of New
York, 114 West 47th Street, New York, New York 10036, L0.35% and Eugene Higgins
Residuary, c/o United States Trust Company of New York, 114 West 47th Street,
New York, New York 10036, 8.55%.

-50-
<PAGE>

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, 1999 (the
"1999 Annual Report") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the 1999 Annual Report
are incorporated by reference herein. The financial statements included in the
1999 Annual Report for the Funds have been audited by the Company's independent
auditors, Ernst & Young LLP, whose reports thereon also appear in the 1999
Annual Report and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 1999 Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.

-51-
<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating will also be used upon
the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.

"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be

A-1
<PAGE>

evidenced by many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.

"Not Prime" - Issuers do not fall within any of the Prime rating
categories.

"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.

"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.

A-2
<PAGE>

"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.

"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.

"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.

"D" - Securities are in actual or imminent payment default.

"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.

A-3
<PAGE>

"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:

"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.

Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

A-4
<PAGE>

economic conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation.

"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.

"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.

"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due,
even if the applicable grace period has not expired, unless S & P believes that
such payments will be made during such grace period. The "D" rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.

"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

A-5
<PAGE>

Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic ranking category.

The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.

"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.

"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater
economic stress.

"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with

A-6
<PAGE>

dividend arrearages.

The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:

"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.

"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.

"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.

"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving
partial or full recovery in a

A-7
<PAGE>

reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the following
serve as general guidelines. "DDD" obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. "DD"
indicates potential recoveries in the range of 50%-90%, and "D" the lowest
recovery potential, i.e., below 50%.

"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.

"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.

"D" - This designation indicates that the long-term debt is in
default.

A-8
<PAGE>

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.

MUNICIPAL NOTE RATINGS

"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.

"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.

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

"SG" - this designation denotes speculative quality. Debt instruments
in this

A-9
<PAGE>

category lack margins of protection.

Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.

A-10

<PAGE>

EXCELSIOR FUNDS, INC.

International Fund
Latin America Fund
Pacific/Asia Fund
Pan European Fund
Emerging Markets Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1999

This Statement of Additional Information is not a prospectus but
should be read in conjunction with the current prospectus for the International,
Latin America, Pacific/Asia, Pan European and Emerging Markets Funds
(individually, a "Fund" and collectively, the "Funds") of Excelsior Funds, Inc.
dated August 1, 1999 (the "Prospectus"). A copy of the Prospectus may be
obtained by writing Excelsior Funds, Inc. c/o Chase Global Funds Services
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.

The audited financial statements and related report of Ernst &
Young LLP, independent auditors, contained in the annual report to the Funds'
shareholders for the fiscal year ended March 31, 1999 are incorporated herein by
reference in the section entitled "Financial Statements." No other parts of the
annual report are incorporated herein by reference. Copies of the annual report
may be obtained upon request and without charge by calling (800) 446-1012.

<PAGE>

TABLE OF CONTENTS

Page
----

CLASSIFICATION AND HISTORY.....................................................1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS....................................1
Foreign Investment Risks..............................................1
Additional Investment Policies........................................4
Additional Information on Portfolio Instruments.......................7
Investment Limitations...............................................20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................23
Purchase Of Shares...................................................24
Redemption Procedures................................................26
Other Redemption Information.........................................29
INVESTOR PROGRAMS.............................................................29
Systematic Withdrawal Plan...........................................29
Exchange Privilege...................................................30
Retirement Plans.....................................................31
Automatic Investment Program.........................................31
Additional Information...............................................32
DESCRIPTION OF CAPITAL STOCK..................................................32
MANAGEMENT OF THE FUNDS.......................................................34
Directors And Officers...............................................34
Investment Advisory And Administration Agreements....................39
Banking Laws.........................................................41
Shareholder Organizations............................................41
Expenses ............................................................42
Custodian And Transfer Agent.........................................43
PORTFOLIO TRANSACTIONS........................................................44
PORTFOLIO VALUATION...........................................................46
INDEPENDENT AUDITORS..........................................................47
COUNSEL ......................................................................47
ADDITIONAL INFORMATION CONCERNING TAXES.......................................47
Generally............................................................47
PERFORMANCE INFORMATION.......................................................49
MISCELLANEOUS.................................................................51
FINANCIAL STATEMENTS..........................................................52
APPENDIX A.................................................................. A-1

<PAGE>

CLASSIFICATION AND HISTORY

Excelsior Funds, Inc. (the "Company") is an open-end, management
investment company. Each Fund is a separate series of the Company and is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Company was organized as a Maryland Corporation on August
2, 1984. Prior to December 28, 1995, the Company was known as "UST Master Funds,
Inc." Prior to August 1, 1997, the Latin America Fund was known as the Emerging
Americas Fund.

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of each of the International, Latin
America, Pacific/Asia and Pan European Funds may not be changed without the vote
of the holders of a majority of its outstanding shares (as defined below). The
investment objective of the Emerging Markets Fund may be changed without
shareholder approval. Except as expressly noted below, each Fund's investment
policies may be changed without shareholder approval.

FOREIGN INVESTMENT RISKS

Investments in securities of foreign issuers involve certain
risks not ordinarily associated with investments in securities of domestic
issuers. Foreign securities markets, while growing in volume, have, for the most
part, substantially less volume than U.S. markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable U.S.-based companies. There is generally less government
supervision and regulation of foreign exchanges, brokers and issuers than there
is in the U.S. The rights of investors in certain foreign countries may be more
limited than those of shareholders of U.S. corporations and the Funds might have
greater difficulty taking appropriate legal action in a foreign court than in a
U.S. court.

Investing in securities of issuers located in developing or
emerging market countries may impose greater risks not typically associated with
investing in more established markets. For example, in many emerging markets
there is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in more
established markets. Securities traded in certain emerging markets may also be
subject to risks due to the inexperience of financial intermediaries, the lack
of modern technology, and the lack of a sufficient capital base to expand
business operations. Developing countries may also impose restrictions on a
Fund's ability to repatriate investment income or capital. Even where there is
no outright restriction on repatriation of investment income or capital, the
mechanics of repatriation may affect certain aspects of the operations of a
Fund. In addition, some of the currencies in emerging markets have experienced
devaluations relative to the U.S. dollar, and major adjustments have been made
periodically in certain of such currencies. Certain developing countries also
face serious exchange restraints and their currencies may not be internationally
traded.

-1-
<PAGE>

Governments of some developing countries exercise substantial
influence over many aspects of the private sector. In some countries, the
government owns or controls many companies, including the largest in the
country. As such, government actions in the future could have a significant
effect on economic conditions in developing countries, which could affect
private sector companies, a Fund and the value of its securities. The leadership
or policies of emerging market countries may also halt the expansion of or
reverse the liberalization of foreign investment policies and adversely affect
existing investment opportunities. Certain developing countries are also among
the largest debtors to commercial banks and foreign governments. Trading in debt
obligations issued or guaranteed by such governments or their agencies and
instrumentalities involves a high degree of risk. Countries such as certain
Eastern European countries also involve the risk of reverting to a centrally
planned economy.

Foreign securities markets also have different registration,
clearance and settlement procedures. Registration, clearance and settlement of
securities in developing countries involve risks not associated with securities
transactions in the United States and other more developed markets. In certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in registration, clearance or settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
registration, clearance or settlement problems could cause the Fund to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to registration, clearance or settlement problems could result
either in losses to a Fund due to subsequent declines in value of the portfolio
security or, if the Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser.

As an example, the registration, clearing and settlement of
securities transactions in Russia are subject to significant risks not normally
associated with securities transactions in the United States and other more
developed markets. Ownership of shares in Russian companies is reflected by
entries in share registers maintained by registrar companies or the companies
themselves, and the issuance of extracts of the register, although the
evidentiary value of such extracts is uncertain. Formal share certificates may
be obtained in certain limited cases. Russian share registers may be unreliable,
and a Fund could possibly lose its registration through oversight, negligence or
fraud. Russia also lacks a centralized registry to record securities
transactions and registrar companies are located throughout Russia. There can be
no assurance that registrar companies will provide extracts to potential
purchasers in a timely manner or at all and are not necessarily subject to
effective state supervision. In addition, while registrars are liable under law
for losses resulting from their errors, it may be difficult for a Fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration. Although Russian companies with more
than 1,000 shareholders are required by law to employ an independent company to
maintain share registers, in practice, such companies have not always followed
this law. Because of this lack of independence of registrars, management of a
Russian company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. These practices may also
prevent a Fund from investing in the

-2-
<PAGE>

securities of certain Russian companies deemed suitable by the Adviser and could
cause a delay in the sale of Russian securities by a Fund if the company deems a
purchaser unsuitable, which may expose the Fund to potential loss on its
investment.

From time to time, a Fund may invest a significant portion of its
total assets in the securities of issuers located in the same country.
Investment in a particular country of a significant portion of a Fund's total
assets will make the Fund's performance more dependent upon the political and
economic circumstances of that country than a mutual fund that is more
geographically diversified.

Dividends and interest payable on a Fund's foreign portfolio
securities may be subject to foreign withholding taxes. Each Fund also may be
subject to taxes on trading profits in some countries. In addition, some
countries have a transfer or stamp duties tax on certain securities
transactions. The imposition of these taxes will increase the cost to a Fund of
investing in any country imposing such taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under the federal income
tax provisions, they may reduce the net return to the Fund's shareholders.
Investors should also understand that the expense ratio of the Funds can be
expected to be higher than those of funds investing in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as the higher cost of investment research, higher cost of custody of
foreign securities, higher commissions paid on comparable transactions on
foreign markets and additional costs arising from delays in settlements of
transactions involving foreign securities.

The introduction of a single currency, the euro, on January 1,
1999 for participating nations in the European Economic and Monetary Union
presents unique uncertainties, including the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2001 and beyond; whether the interest rate, tax and labor
regimes of European countries participating in the euro will converge over time;
and whether the conversion of the currencies of other countries in the European
Union ("EU"), such as the United Kingdom and Denmark, into the euro and the
admission of other non-EU countries such as Poland, Latvia and Lithuania as
members of the EU may have an impact on the euro. These or other factors,
including political and economic risks, could cause market disruptions, and
could adversely affect the value of securities held by a Fund.

The Latin American economies have experienced considerable
difficulties in the past decade. Although there have been significant
improvements in recent years, the Latin American economies continue to
experience significant problems, including high inflation rates and high
interest rates. Inflation and rapid fluctuations in inflation rates have had and
may continue to have very negative effects on the economies and securities
markets of certain Latin American countries. The emergence of the Latin American
economies and securities markets will require continued economic and fiscal
discipline which has been lacking at times in the past, as well as stable
political and social conditions. There is no assurance that economic initiatives

-3-
<PAGE>

will be successful. Recovery may also be influenced by international economic
conditions, particularly those in the United States, and by world prices for oil
and other commodities.

The extent of economic development, political stability and
market depth of different countries in the Pacific/Asia region varies widely.
Certain countries in the region are either comparatively underdeveloped or are
in the process of becoming developed, and investments in the securities of
issuers in such countries typically involve greater potential for gain or loss
than investments in securities of issuers in more developed countries. Certain
countries in the region also depend to a large degree upon exports of primary
commodities and, therefore, are vulnerable to changes in commodity prices which,
in turn, may be affected by a variety of factors. The Pacific/Asia Fund may be
particularly sensitive to changes in the economies of certain countries in the
Pacific/Asia region resulting from any reversal of economic liberalization,
political unrest or the imposition of sanctions by the United States or other
countries.

ADDITIONAL INVESTMENT POLICIES

In determining the preferred allocation of investments of the
Funds among various geographic regions and countries, the Adviser will consider,
among other things, regional and country-by-country prospects for economic
growth, anticipated levels of inflation, prevailing interest rates, the
historical patterns of government regulation of the economy and the outlook for
currency relationships.

The International Fund does not intend to have, at any time, a
specified percentage of its assets invested either for growth or for income, and
all or any portion of its assets may be allocated among these two components
based on the Adviser's analysis of the prevailing market conditions. Although
the Fund will seek to realize its investment objective primarily through
investments in foreign equity securities, it may, from time to time, assume a
defensive position by allocating all or any portion of its assets to foreign
debt obligations. While there are no prescribed limits on geographic
distribution, the Fund will normally include in its portfolio securities of
issuers collectively having their principal business in no fewer than three
foreign countries.

The countries in which the International Fund may invest, include
but are not limited to: Japan, France, the United Kingdom & Possessions, Italy,
Germany, Switzerland, the Netherlands, Australia, Singapore, Sweden, Canada,
Ireland, Thailand, Spain, Portugal, Hong Kong, Israel, Argentina, Chile,
Hungary, India, Philippines and Portugal.

Under normal circumstances, each of the Latin America,
Pacific/Asia and Pan European Funds (collectively, the "Regional Funds") will
invest at least 65% of its total assets in securities of issuers based in its
targeted region. A company is "based in" a region if it derives more than half
of its assets, revenues or profits from such region. The Regional Funds
currently do not expect to invest more than 25% of their total assets in the
securities issued by any single foreign government. Any such investment would
subject the particular Regional Fund to the

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<PAGE>

risks presented by investing in securities of such foreign government to a
greater extent than it would if that Fund's assets were not so concentrated.

The countries in which the Pacific/Asia fund may invest, include
but are not limited to: Japan, Singapore, Hong Kong, Australia, South Korea,
Thailand, New Zealand, Philippines, and India. The countries in which the Latin
America Fund may invest, include but are not limited to: Mexico, Brazil,
Argentina, Chile, Peru, and Brazil. The countries in which the Pan European Fund
may invest, include but are not limited to: France, the United Kingdom &
Possessions, Italy, Germany, the Netherlands, Switzerland, Sweden, Ireland,
Spain, Portugal, Croatia, Finland, Poland, and Turkey.

Under normal market and economic conditions, at least 75% of the
International and each Regional Fund's assets will be invested in foreign
securities. Foreign securities include common stock, preferred stock, securities
convertible into common stock, warrants, bonds, notes and other debt obligations
issued by foreign entities, as well as shares of U.S. registered investment
companies that invest primarily in foreign securities. Foreign debt securities
purchased by a Fund may include obligations issued in the Eurocurrency markets
and obligations of foreign governments and their political subdivisions. In
addition, each Fund may invest in U.S. government obligations, including the
when-issued securities of such issuers, and obligations issued by U.S. companies
which are either denominated in foreign currency and sold abroad or, if
denominated in U.S. dollars, payment on which is determined by reference to some
other foreign currency.

Convertible and non-convertible debt securities purchased by the
International and Regional Funds will be rated "investment grade" (i.e.,
classified within the four highest ratings of a nationally recognized
statistical rating organization such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P")) or, if unrated,
determined by the Adviser to be of comparable quality. Debt obligations rated in
the lowest of the top four "investment grade" ratings ("Baa" by Moody's and
"BBB" by S&P) are considered to have some speculative characteristics and may be
more sensitive to adverse economic change than higher rated securities. Each
Fund will sell in an orderly fashion as soon as possible any convertible and
non-convertible debt securities it holds if they are downgraded below "Baa" by
Moody's or below "BBB" by S&P. Foreign securities are generally unrated. In
purchasing foreign equity securities, the Adviser will look generally to
established foreign companies. Each Fund may purchase securities both on
recognized stock exchanges and in over-the-counter markets. Most of the Funds'
portfolio transactions will be effected in the primary trading market for the
given security.

Under normal conditions, at least 65% of the Emerging Markets
Fund's total assets will be invested in emerging country equity securities.
While there are no prescribed limited on its geographic distribution, the Fund
will normally invest in securities of issuers from at least three different
emerging countries. With respect to the Fund, equity securities include common
and preferred stocks, convertible securities, rights and warrants to purchase
common stocks, and sponsored and unsponsored depository receipts and other
similar instruments. There are currently over 130 countries which, in the
opinion of the Adviser, are generally considered to

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<PAGE>

be emerging or developing countries by the international financial community,
approximately 40 of which currently have stock markets. These countries
generally include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most nations located in Western Europe.
Currently, investing in many emerging countries is not feasible or may involve
unacceptable political risks. The countries in which the Fund may invest
include, but are not limited to: Argentina; Botswana; Brazil; Chile; China;
Colombia; Ghana; Greece; Hong Kong; Hungary; India; Indonesia; Israel; Jamaica;
Jordan; Kenya; Malaysia; Mexico; Morocco; Nigeria; Pakistan; Peru; Philippines;
Poland; Portugal; Russia; South Africa; South Korea; Sri Lanka; Taiwan;
Thailand; Turkey; Venezuela; and Zimbabwe.

As markets in other countries develop, the Emerging Markets Fund
may expand and further diversify the emerging countries in which it invests. The
Fund generally intends to invest only in securities in countries where the
currency is freely convertible to U.S. dollars.

An emerging country security is one issued by a company that, in
the opinion of the Adviser, has one or more of the following characteristics:
(i) its principal securities trading market is in an emerging country; (ii)
alone or on a consolidated basis it derives 50% or more of its annual revenue
from either goods produced, sales made or services performed in emerging
countries; or (iii) it is organized under the laws of, and has a principal
office in, an emerging country. The Adviser will base determinations as to
eligibility on publicly available information and inquiries made to the
companies.

To the extent that the Emerging Markets Fund's assets are not
invested in emerging country equity securities, the remainder of its assets may
be invested in: (i) debt securities denominated in the currency of an emerging
country or issued or guaranteed by an emerging country company or the government
of an emerging country; (ii) equity or debt securities of corporate or
governmental issuers located in industrialized countries; (iii) short-term
medium-term debt securities; and (iv) other securities described below under
"Additional Information on Portfolio Instruments." When deemed appropriate by
the Adviser, the Fund may invest up to 10% of its total assets in lower quality
debt securities. Lower quality debt securities, also known as "junk bonds," are
often considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than those of higher quality securities and
may decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. Securities in the lowest quality
category may present the risk of default, or may be in default.

Additional risks associated with lower-rated fixed income
securities are (a) the relative youth and growth of the market for such
securities, (b) the relatively low trading market liquidity for the securities,
(c) the impact that legislation may have on the high-yield bond market (and, in
turn, on the Fund's net asset value and investment practices), (d) the operation
of mandatory sinking fund or call/redemption provisions during periods of
declining interest rates whereby the Fund may be required to reinvest premature
redemption proceeds in lower yielding portfolio securities and (e) the
creditworthiness of the issuers of such securities. During an economic downturn
or substantial period of rising interest rates, highly-leveraged issuers may

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<PAGE>

experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet projected
business goals and to obtain additional financing. An economic downturn could
also disrupt the market for lower-rated bonds generally and adversely affect the
value of outstanding bonds and the ability of the issuers to repay principal and
interest. If the issuer of a lower-rated security held by the Fund defaulted,
the Fund could incur additional expenses to seek recovery. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower-rated securities held by the Fund,
especially in a thinly traded market.

Under unusual economic and market conditions, each Fund may
restrict the securities markets in which its assets are invested and may invest
all or a major portion of its assets in U.S. government obligations or in U.S.
dollar-denominated securities of U.S. companies. During normal market
conditions, up to 25% of each Fund's assets may also be held on a continuous
basis in cash or invested in U.S. money market instruments to meet redemption
requests or to take advantage of emerging investment opportunities.

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

FORWARD CURRENCY TRANSACTIONS

Each Fund will conduct its currency exchange transactions either
on a spot (i.e. cash) basis at the rate prevailing in the currency exchange
markets, or by entering into forward currency contracts. A forward currency
contract involves an obligation to purchase or sell a specific currency for a
set price at a future date. In this respect, forward currency contracts are
similar to foreign currency futures contracts described below; however, unlike
futures contracts, which are traded on recognized commodities exchanges, forward
currency contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts.

A Fund's participation in forward currency contracts will be
limited to hedging involving either specific transactions or portfolio
positions. The Adviser does not expect to hedge positions as a routine
investment technique, but anticipates hedging principally with respect to
specific transactions. Transaction hedging involves the purchase or sale of
foreign currency with respect to specific receivables or payables of the Fund
generally arising in connection with the purchase or sale of its portfolio
securities. The purpose of transaction hedging is to "lock in" the U.S. dollar
equivalent price of such specific securities. Position hedging is the sale of
foreign currency with respect to portfolio security positions denominated or
quoted in that currency. The Funds will not speculate in foreign currency
exchange transactions. Transaction and position hedging will not be limited to
an overall percentage of a Fund's assets, but will be employed as necessary to
correspond to particular transactions or positions. A Fund may not hedge its
currency positions to an extent greater than the aggregate market value (at the
time of entering into the forward contract) of the securities held in its
portfolio denominated, quoted in, or currently convertible into that particular
currency. When the Funds engage in forward currency transactions, certain asset
segregation requirements must

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<PAGE>

be satisfied. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation requirements are not applicable when
a Fund "covers" a forward currency position generally by entering into an
offsetting position.

At or before the maturity of a forward sale contract, a Fund may
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between a
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.

GOLD BULLION

Each Fund may invest up to 5% of its total assets in gold bullion
by purchasing gold bars primarily of standard weight (approximately 400 troy
ounces) at the best available prices in the New York bullion market. However,
the Adviser will have discretion to purchase or sell gold bullion in other
markets, including foreign markets, if better prices can be obtained. Gold
bullion is valued by the Funds at the mean between the closing bid and asked
prices in the

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<PAGE>

New York bullion market as of the close of the New York Stock Exchange each
business day. When there is no readily available market quotation for gold
bullion, the bullion will be valued by such method as determined by the
Company's Board of Directors to best reflect its fair value. For purpose of
determining net asset value, gold held by a Fund, if any, will be valued in U.S.
dollars. Investments in gold will not produce dividends or interest income, and
the Funds can look only to price appreciation for a return on such investments.

MONEY MARKET INSTRUMENTS

"Money market instruments" which may be purchased by each Fund in
accordance with its policies include, among other things, bank obligations,
commercial paper and corporate bonds with remaining maturities of 13 months or
less.

Investments by a Fund in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by each Fund.

Commercial paper may include variable and floating rate
instruments. While there may be no active secondary market with respect to a
particular instrument purchased by a Fund, each Fund may, from time to time as
specified in the instrument, demand payment of the principal of the instrument
or may resell the instrument to a third party. The absence of an active
secondary market, however, could make it difficult for a Fund to dispose of the
instrument if the issuer defaulted on its payment obligation or during periods
when a Fund is not entitled to exercise its demand rights, and a Fund could, for
this or other reasons, suffer a loss with respect to such instrument.

REPURCHASE AGREEMENTS

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<PAGE>

seven days will be considered illiquid securities and will be subject to the
limitations discussed below under "Illiquid Securities."

The seller under a repurchase agreement will be required to
maintain the value of the securities which are subject to the agreement and held
by a Fund at not less than the repurchase price. Default or bankruptcy of the
seller would, however, expose a Fund to possible delay in connection with the
disposition of the underlying securities or loss to the extent that proceeds
from a sale of the underlying securities were less than the repurchase price
under the agreement.

The repurchase price under a repurchase agreement generally
equals the price paid by a Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Securities subject to repurchase
agreements are held by the Funds' custodian (or sub-custodian) or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.

SECURITIES LENDING

To increase return on its portfolio securities, each Fund may
lend its portfolio securities to broker/dealers pursuant to agreements requiring
the loans to be continuously secured by collateral equal at all times in value
to at least the market value of the securities loaned. Collateral for such loans
may include cash, securities of the U.S. government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total assets.
There may be risks of delay in receiving additional collateral or in recovering
the securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans are made only to
borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.

When a Fund lends its portfolio securities, it continues to
receive interest or dividends on the securities lent and may simultaneously earn
interest on the investment of the cash loan collateral, which will be invested
in readily marketable, high-quality, short-term obligations. Although voting
rights, or rights to consent, attendant to securities lent pass to the borrower,
such loans may be called at any time and will be called so that the securities
may be voted by a Fund if a material event affecting the investment is to occur.

GOVERNMENT OBLIGATIONS

Examples of the types of U.S. government obligations that may
be held by the Funds include, in addition to U.S. Treasury Bills, the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, Federal National Mortgage Association,
General

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<PAGE>

Services Administration, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks and Maritime
Administration.

OPTIONS

The Regional Funds and Emerging Markets Fund may purchase put and
call options for hedging purposes or to increase total return. Such purchases
would be in an amount not exceeding 5% of each Fund's net assets. Such options
may or may not be listed on a U.S. or foreign exchange and issued by the Options
Clearing Corporation, and may relate to particular securities, various stock or
bond indices or foreign currencies. Unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.

Purchase of options is a highly specialized activity which
entails a substantial risk of a complete loss of the amounts paid as premiums to
the writer of the options. Regardless of how much the market price of the
underlying security or the value of a foreign currency increases or decreases,
the option buyer's risk is limited to the amount of the original investment for
the purchase of the option. However, options may be more volatile than the
underlying securities or currency, and therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities or currency. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and the
writer has the obligation to sell to the clearing corporation, the underlying
security or currency at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security or
currency. The premium paid to the writer is in consideration for undertaking the
obligations under the option contract. A listed put option gives the purchaser
the right to sell to a clearing corporation the underlying security or currency
at the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security or currency. Put and call
options purchased by the Funds will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.

In addition, each Fund may engage in writing covered call options
(options on securities owned by such Fund) and enter into closing purchase
transactions with respect to such options. Such options must be listed on a U.S.
or foreign exchange and may or may not be issued by Options Clearing
Corporation. The aggregate value of the securities subject to options written by
a Fund may not exceed 25% of the value of its net assets. By writing a covered
call option, a Fund forgoes the opportunity to profit from an increase in the
market price of the underlying security above the exercise price except insofar
as the premium represents such a profit, and it will not be able to sell the
underlying security until the option expires or is exercised or the Fund effects
a closing purchase transaction by purchasing an option of the same series.

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<PAGE>

Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the writer will have
incurred a loss on the transaction. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
There is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered option writer, unable to effect a closing
purchase transaction, will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the writer in such circumstances will be subject to the risk of
market decline in the underlying security during such period. A Fund will write
an option on a particular security only if the Adviser believes that a liquid
secondary market will exist on an exchange for options of the same series, which
will permit the Fund to make a closing purchase transaction in order to close
out its position.

When a Fund writes an option, an amount equal to the net premium
(the premium less the commission) received by that Fund is included in the
liability section of that Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked
to market to reflect the current value of the option written. The current value
of the traded option is the last sale price or, in the absence of a sale, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date, or if the Fund involved enters into a closing
purchase transaction, the Fund will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold), and the deferred credit related to such option will be eliminated. If an
option is exercised, the Fund involved may deliver the underlying security from
its portfolio or purchase the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received, and the Fund involved will realize a gain or loss. Premiums from
expired call options written by the Funds and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. The use of covered call options is not a primary investment technique of
the Funds and such options will normally be written on underlying securities as
to which the Adviser does not anticipate significant short-term capital
appreciation.

FUTURES CONTRACTS AND RELATED OPTIONS

Each Fund may invest in futures contracts and related options.
Each Fund may enter into interest rate futures contracts and other types of
financial futures contracts, including foreign currency futures contracts, as
well as any index or foreign market futures which are available on recognized
exchanges or in other established financial markets. A futures contract on
foreign currency creates a binding obligation on one party to deliver, and a
corresponding obligation on another party to accept delivery of, a stated
quantity of a foreign currency for an amount fixed in U.S. dollars. Foreign
currency futures, which operate in a manner similar to interest rate futures
contracts, may be used by the Funds to hedge against exposure to

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<PAGE>

fluctuations in exchange rates between the U.S. dollar and other currencies
arising from multinational transactions.

The Funds will not engage in futures transactions for
speculation, but only as a hedge against changes in market values of securities
which a Fund holds or intends to purchase. In addition, a Fund may enter into
futures transactions in order to offset an expected decrease in the value of its
portfolio positions that might otherwise result from a currency exchange
fluctuation. The Funds will engage in futures transactions only to the extent
permitted by the Commodity Futures Trading Commission ("CFTC") and the
Securities and Exchange Commission ("SEC"). When investing in futures contracts,
the Funds must satisfy certain asset segregation requirements to ensure that the
use of futures is unleveraged. When a Fund takes a long position in a futures
contract, it must maintain a segregated account containing liquid assets equal
to the purchase price of the contract, less any margin or deposit. When a Fund
takes a short position in a futures contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the securities underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation requirements are not applicable when
a Fund "covers" an options or futures position generally by entering into an
offsetting position. Each Fund will limit its hedging transactions in futures
contracts and related options so that, immediately after any such transaction,
the aggregate initial margin that is required to be posted by a Fund under the
rules of the exchange on which the futures contract (or futures option) is
traded, plus any premiums paid by such Fund on its open futures options
positions, does not exceed 5% of such Fund's total assets, after taking into
account any unrealized profits and unrealized losses on the Fund's open
contracts (and excluding the amount that a futures option is "in-the-money" at
the time of purchase). An option to buy a futures contracts is "in-the-money" if
the then-current purchase price of the underlying futures contract exceeds the
exercise or strike price; an option to sell a futures contract is "in-the-money"
if the exercise or strike price exceeds the then-current purchase price of the
contract that is the subject of the option. In addition, the use of futures
contracts is further restricted to the extent that no more than 10% of each
Fund's total assets may be hedged.

Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Fund would continue
to be required to make daily cash payments to maintain its required margin. In
such situations, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on a Fund's
ability to effectively hedge.

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<PAGE>

factors. There may be an imperfect correlation, or no correlation at all,
between movements in the price of the futures contracts (or options) and
movements in the price of the instruments being hedged. In addition, investments
in futures may subject a Fund to losses due to unanticipated market movements
which are potentially unlimited. Further, there is no assurance that a liquid
market will exist for any particular futures contract (or option) at any
particular time. Consequently, a Fund may realize a loss on a futures
transaction that is not offset by a favorable movement in the price of
securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements. For example, if a Fund
has hedged against the possibility of a decline in the market adversely
affecting securities held by it and securities prices increase instead, the Fund
will lose part or all of the benefit to the increased value of its securities
which it has hedged because it will have approximately equal offsetting losses
in its futures positions. In addition, in some situations, if a Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.

As noted above, the risk of loss in trading futures contracts in
some strategies can be substantial, due both to the low margin deposits
required, and the extremely high degree of leverage involved in futures pricing.
As a result, a relatively small price movement in a futures contract may result
in immediate and substantial loss (as well as gain) to the investor. For
example, if at the time of purchase, 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit,
before any deduction for the transaction costs, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the contract.

Utilization of futures transactions by a Fund involves the risk
of loss by the Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related option.

Most futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.

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<PAGE>

which could at times make it difficult or impossible to liquidate existing
positions or to recover excess variation margin payments.

OPTIONS ON FUTURES CONTRACTS

Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.

Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
instruments being hedged, an option may or may not be less risky than ownership
of the futures contract or such instruments. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). Although
permitted by their fundamental investment policies, the Funds do not currently
intend to write futures options, and will not do so in the future absent any
necessary regulatory approvals.

WHEN-ISSUED AND FORWARD TRANSACTIONS

When a Fund agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the

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amount of the commitment in a separate account. Normally, the custodian will set
aside portfolio securities to satisfy a purchase commitment and, in such case,
the Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. Because a Fund
will set aside cash or liquid assets to satisfy its purchase commitments in the
manner described, its liquidity and ability to manage its portfolio might be
affected in the event its forward commitments or commitments to purchase
"when-issued" securities ever exceed 25% of the value of its assets.

The market value of the securities underlying a "when-issued"
purchase or a forward commitment to purchase securities and any subsequent
fluctuations in their market value are taken into account when determining the
market value of a Fund starting on the day the Fund agrees to purchase the
securities. The Fund does not earn interest on the securities it has committed
to purchase until they are paid for and delivered on the settlement date.

BRADY BONDS

The Latin America and Emerging Markets Funds may invest in Brady
Bonds, which are securities created through the exchange of existing commercial
bank loans to Latin American public and private entities for new bonds in
connection with debt restructuring under a debt restructuring plan announced by
former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan").
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily the U.S. dollar) and are currently actively traded in the
over-the-counter secondary market for Latin American debt instruments.

Dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are collateralized in full
as to principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Interest payments on these Brady Bonds generally are collateralized
by cash or securities in an amount that, in the case of fixed rate bonds, is
equal to at least one year of rolling interest payments or, in the case of
floating rate bonds, initially is equal to at least one year's rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter.

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<PAGE>

All Mexican Brady Bonds issued to date, except New Money Bonds,
have principal repayments at final maturity fully collateralized by U.S.
Treasury zero coupon bonds (or comparable collateral in other currencies) and
interest coupon payments collateralized on an 18-month rolling-forward basis by
funds held in escrow by an agent for the bondholders. Approximately half of the
Venezuelan Brady Bonds issued to date have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral in other currencies), while slightly more than half have interest
coupon payments collateralized on a 14-month rolling-forward basis by securities
held by the Federal Reserve Bank of New York as collateral agent.

Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").

ADRS, EDRS AND GDRS

Each Fund may invest indirectly in the securities of foreign
issuers through sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar instruments. ADRs typically are issued by an American bank or
trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental
Depository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic
underlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR and
GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs, EDRs and
GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile
than if such instruments were sponsored by the issuer.

Each Fund may also invest indirectly in foreign securities
through share entitlement certificates. Share entitlement certificates are
transferable securities similar to depository receipts which are structured like
global debt issues to facilitate trading on an international basis. The holder
of a share entitlement certificate holds a fully collateralized obligation of
the issuer the value of which is linked directly to that of the underlying
foreign security.

WORLD EQUITY BENCHMARK SHARES-SM-

Each Fund may invest up to 5% of its total assets in World Equity
Benchmark Shares-SM- issued by The Foreign Fund, Inc. ("WEBS"), closed-end funds
and similar securities of other issuers. WEBS are shares of an investment
company that invests substantially all of its assets in securities included in
the Morgan Stanley Capital International ("MSCI") indices for

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<PAGE>

specific countries. Because the expense associated with an investment in WEBS
may be substantially lower than the expense of small investments directly in the
securities comprising the indices they seek to track, U.S. Trust believes that
investments in WEBS may provide a cost-effective means of diversifying a Fund's
assets across a broad range of equity securities.

The market prices of WEBS are expected to fluctuate in accordance
with both changes in the net asset values of their underlying indices and the
supply and demand of WEBS on the exchanges on which they are traded. To date,
WEBS have traded at relatively modest discounts and premiums to their net assets
values. However, WEBS have a limited operating history, and information is
lacking regarding the actual performance and trading liquidity of WEBS for
extended periods or over complete market cycles. In addition, there is no
assurance that the requirements of the exchanges necessary to maintain the
listing of WEBS will continue to be met or will remain unchanged. In the event
substantial market or other disruptions affecting WEBS should occur in the
future, the liquidity and value of a Fund's Shares could be adversely affected.

INVESTMENT COMPANY SECURITIES

Each Fund may invest in securities issued by other investment
companies which invest in high-quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. Each Fund may also purchase shares of investment
companies investing primarily in foreign securities, including so called
"country funds," which have portfolios consisting exclusively of securities of
issuers located in one foreign country, and funds that invest in securities
included in foreign security indices, such as WEBS. The Regional Funds will
limit their investments in such funds to those funds which invest in the
appropriate regions in light of their respective investment policies. Securities
of other investment companies will be acquired by a Fund within the limits
prescribed by the 1940 Act, which include, subject to certain exceptions, a
prohibition against the Fund investing more than 10% of the value of its total
assets in such securities. In addition to the advisory fees and other expenses
each Fund bears directly in connection with its own operations, as a shareholder
of another investment company, each Fund would bear its pro rata portion of the
other investment company's advisory fees and other expenses. As such, a Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative.

BORROWING AND REVERSE REPURCHASE AGREEMENTS

Each Fund may borrow funds, in an amount up to 10% of the value
of its total assets, for temporary or emergency purposes, such as meeting larger
than anticipated redemption requests, and not for leverage. Each Fund may also
agree to sell portfolio securities to financial institutions such as banks and
broker-dealers and to repurchase them at a mutually agreed date and price (a
"reverse repurchase agreement"). The SEC views reverse repurchase agreements as
a form of borrowing. At the time a Fund enters into a reverse repurchase
agreement, it will place in a segregated custodial account liquid assets having
a value equal to the repurchase price,

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<PAGE>

including accrued interest. Reverse repurchase agreements involve the risk that
the market value of the securities sold by a Fund may decline below the
repurchase price of those securities.

ILLIQUID SECURITIES

No Fund will knowingly invest more than 10% (15%, with respect to
the Emerging Markets Fund) of the value of its net assets in securities that are
illiquid. A security will be considered illiquid if it may not be disposed of
within seven days at approximately the value at which the particular Fund has
valued the security. Each Fund may purchase securities which are not registered
under the Securities Act of 1933, as amended (the "1933 Act"), but which can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be consider illiquid so long as it is
determined by the Adviser, acting under guidelines approved and monitored by the
Board, that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in a Fund
during any period that qualified institutional buyers are no longer interested
in purchasing these restricted securities.

The Emerging Markets Fund may also purchase non-publicly traded
securities, private placements and other restricted securities. The securities
may involve a higher degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from sales could be less than those originally paid by the
Fund or less than what may be considered the fair value of such securities.
Furthermore, companies whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements which might
be applicable if their securities were publicly traded. If such securities are
required to be registered under the securities laws of one or more jurisdictions
before being resold, the Fund may be required to bear the expenses of
registration.

PORTFOLIO TURNOVER

Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
attaining the investment objective of the particular Fund. Portfolio investments
may be sold for a variety of reasons, such as a more favorable investment
opportunity or other circumstances bearing on the desirability of continuing to
hold such investments. A high rate of portfolio turnover may involve
correspondingly greater brokerage commission expenses and other transaction
costs, which must be borne directly by a Fund and ultimately by its
shareholders. High portfolio turnover may result in the realization of
substantial net capital gains.

MISCELLANEOUS

The International and Regional Funds may not invest in oil, gas
or mineral leases.

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<PAGE>

INVESTMENT LIMITATIONS

The investment limitations enumerated below are matters of
fundamental policy. Fundamental investment limitations may be changed with
respect to a Fund only by a vote of the holders of a majority of such Fund's
outstanding shares. As used herein, a "vote of the holders of a majority of the
outstanding shares" of the Company or a particular Fund means, with respect to
the approval of an investment advisory agreement or a change in a fundamental
investment policy, the affirmative vote of the lesser of (a) more than 50% of
the outstanding shares of the Company or such Fund, or (b) 67% or more of the
shares of the Company or such Fund present at a meeting if more than 50% of the
outstanding shares of the Company or such Fund are represented at the meeting in
person or by proxy. Investment limitations which are "operating policies" with
respect to a Fund may be changed by the Company's Board of Directors without
shareholder approval.

The following investment limitations are fundamental with respect
to each Fund. A Fund may not:

1. Act as an underwriter of securities within the meaning of
the Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;

2. Purchase or sell real estate, except that the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate;

3. Issue any senior securities, except insofar as any borrowing
in accordance with the Fund's investment limitation contained in the Prospectus
might be considered to be the issuance of a senior security;

4. Purchase securities of any one issuer, other than U.S.
government obligations, if immediately after such purchase more than 5% of the
value of its total assets would be invested in the securities of such issuer,
except that up to 25% of the value of its total assets may be invested without
regard to this 5% limitation;

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<PAGE>

6. Make loans, except that (i) a Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, (ii) each
of the International, Latin America, Pacific/Asia and Pan European Funds may
lend portfolio securities in an amount not exceeding 30% of its total assets,
and (iii) the Emerging Markets Fund may lend portfolio securities in accordance
with its investment objective and policies.

The following investment limitations are fundamental with respect
to the International Fund, but are operating policies with respect to the Latin
America, Pacific/Asia, Pan European and Emerging Markets Funds. Each Fund may
not:

7. Purchase securities on margin, make short sales of
securities, or maintain a short position;

8. Invest in companies for the purpose of exercising management
or control; and

9. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.

The following investment limitations are fundamental with respect
to the International Fund. The International Fund may not:

10. Invest in or sell put options, call options, straddles,
spreads, or any combination thereof; provided, however, that the Fund may write
covered call options with respect to its portfolio securities that are traded on
a national securities exchange or on foreign exchanges and may enter into
closing purchase transactions with respect to such options if, at the time of
the writing of such option, the aggregate value of the securities subject to the
options written by the Fund does not exceed 25% of the value of its total
assets; and provided that the Fund may enter into forward currency contracts in
accordance with its investment objective and policies;

11. Invest more than 5% of its total assets in securities issued
by companies which, together with any predecessor, have been in continuous
operation for fewer than three years;

12. Purchase or sell commodities futures contracts or invest in
oil, gas, or other mineral exploration or development programs; provided,
however, that (i) this shall not prohibit the Fund from purchasing publicly
traded securities of companies engaging in whole or in part in such activities;
and (ii) the Fund may enter into forward currency contracts, futures contracts
and related options and may invest up to 5% of its total assets in gold bullion;
and

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<PAGE>

13. Knowingly invest more than 10% of the value of its total
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available.

The following investment limitation is fundamental with respect
to the International, Latin America, Pacific/Asia and Pan European Funds. Each
of such Funds may not:

14. Borrow money, except from banks for temporary purposes, and
then in amounts not in excess of 10% of the value of its total assets at the
time of such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes). The Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding. Optioned stock held in escrow is not deemed to be a
pledge.

The following investment limitation is fundamental with respect
to the Latin America, Pacific/Asia, Pan European and Emerging Markets Funds.
Each of such Funds may not:

15. Purchase or sell commodities or commodities futures
contracts or invest in oil, gas, or other mineral exploration or development
programs; provided, however, that (i) this shall not prohibit a Fund from
purchasing publicly traded securities of companies engaging in whole or in part
in such activities; and (ii) a Fund may enter into forward currency contracts,
futures contracts and related options and may invest up to 5% of its total
assets in gold bullion.

The Emerging Markets Fund may not:

16. Borrow money or mortgage, pledge or hypothecate its assets
except to the extent permitted under the 1940 Act.

* * *

In addition to the investment limitations described above, as a
matter of fundamental policy for each Fund which may not be changed without the
vote of the holders of a majority of the Fund's outstanding shares, a Fund may
not invest in the securities of any single issuer if, as a result, the Fund
holds more than 10% of the outstanding voting securities of such issuer.

The International Fund will not invest more than 25% of the value
of its total assets in domestic bank obligations.

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<PAGE>

For the purpose of Investment Limitation No. 2, the prohibition
of purchases of real estate includes acquisition of limited partnership
interests in partnerships formed with a view toward investing in real estate,
but does not prohibit purchases of shares in real estate investment trusts.

In addition to the above investment limitations, each Fund
currently intends to limit its investments in warrants so that, valued at the
lower of cost or market value, they do not exceed 5% of the Fund's net assets.
For the purpose of this limitation, warrants acquired by a Fund in units or
attached to securities will be deemed to be without value. Each Fund also
intends to refrain entering into arbitrage transactions.

The International Fund may not purchase or sell commodities
except as provided in Investment Limitation No. 12 above.

If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of a Fund's portfolio securities will not constitute a violation
of such limitation.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

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<PAGE>

In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.

The net asset value of each Fund is determined and the shares of
each Fund are priced at the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), currently 4:00 p.m. (Eastern time). Net asset value
and pricing for each Fund are determined on each day the Exchange and the
Adviser are open for trading (a "Business Day"). Currently, the holidays which
the Funds observe are New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset value per share
for purposes of pricing sales and redemptions is calculated by dividing the
value of all securities and other assets allocable to the Fund, less the
liabilities allocable to the Fund, by the number of its outstanding shares.

As described below, shares may be sold to customers ("Customers")
of financial institutions ("Shareholder Organizations"). Shares are also offered
for sale directly to institutional investors and to members of the general
public. Different types of Customer accounts at the Shareholder Organizations
may be used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.

PURCHASE OF SHARES

Shares of the Funds are offered for sale at their net asset value
per share next computed after a purchase request is received in good order by
the Company's sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.

Shares may be purchased directly by individuals ("Direct
Investors") or by institutions ("Institutional Investors" and, collectively with
Direct Investors, "Investors").

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<PAGE>

Shares may also be purchased by Customers of the Adviser, its affiliates and
correspondent banks, and other Shareholder Organizations that have entered into
agreements with the Company. A Shareholder Organization may elect to hold of
record shares for its Customers and to record beneficial ownership of shares on
the account statements provided by it to its Customers. If it does so, it is the
Shareholder Organization's responsibility to transmit to the Distributor all
purchase requests for its Customers and to transmit, on a timely basis, payment
for such requests to Chase Global Funds Services Company ("CGFSC"), the Funds'
sub-transfer agent, in accordance with the procedures agreed to by the
Shareholder Organization and the Distributor. Confirmations of all such Customer
purchases (and redemptions) will be sent by CGFSC to the particular Shareholder
Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with CGFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase (and
redemption) requests with the Funds, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Funds bear the expense of fees payable to Shareholder
Organizations for such services. See "Shareholder Organizations."

Direct Investors may purchase shares by completing the
Application accompanying the Prospectus and mailing it, together with a check
payable to Excelsior Funds Inc., to:

Excelsior Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

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<PAGE>

The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account No. 9102732915
For further credit to:
Excelsior Funds
Wire Control Number
Account Registration
(including account number)

Investors making initial investments by wire must promptly
complete the Application accompanying the Prospectus and forward it to CGFSC.
Redemptions by Investors will not be processed until the completed Application
for purchase of shares has been received by CGFSC and accepted by the
Distributor. Investors making subsequent investments by wire should follow the
above instructions.

REDEMPTION PROCEDURES

A request for the redemption of shares will receive the net asset
value per share next computed after the request is received in good order by the
Company's sub-transfer agent or an authorized broker or designated intermediary.

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<PAGE>

available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

Shares may be redeemed by a Direct Investor by submitting a
written request for redemption to:

Excelsior Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

A written redemption request to CGFSC must (i) state the number
of shares to be redeemed, (ii) identify the shareholder account number and tax
identification number, and (iii) be signed by each registered owner exactly as
the shares are registered. If the shares to be redeemed were issued in
certificate form, the certificates must be endorsed for transfer (or accompanied
by a duly executed stock power) and must be submitted to CGFSC together with the
redemption request. A redemption request for an amount in excess of $50,000 per
account, or for any amount if the proceeds are to be sent elsewhere than the
address of record, must be accompanied by signature guarantees from any eligible
guarantor institution approved by CGFSC in accordance with its Standards,
Procedures and Guidelines for the Acceptance of Signature Guarantees ("Signature
Guarantee Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. All
eligible guarantor institutions must participate in the Securities Transfer
Agents Medallion Program ("STAMP") in order to be approved by CGFSC pursuant to
the Signature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines
and information on STAMP can be obtained from CGFSC at (800) 446-1012 or at the
address given above.

CGFSC may require additional supporting documents for redemptions
made by corporations, executors, administrators, trustees and guardians. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for shares redeemed will
ordinarily be made by mail within five Business Days after receipt by CGFSC of
the redemption request in good order. Questions with respect to the proper form
for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).

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<PAGE>

instructing CGFSC by telephone to mail a check for redemption proceeds of $500
or more to the shareholder of record at his or her address of record.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access. Only redemptions of $500 or more will
be wired to a Direct Investor's account. The redemption proceeds for Direct
Investors must be paid to the same bank and account as designated on the
Application or in written instructions subsequently received by CGFSC.

In order to arrange for redemption by wire or telephone after an
account has been opened or to change the bank or account designated to receive
redemption proceeds, a Direct Investor must send a written request to the
Company c/o CGFSC, at the address listed above. Such requests must be signed by
the Direct Investor, with signatures guaranteed, as discussed above. Further
documentation may be requested.

CGFSC and the Distributor reserve the right to refuse a wire or
telephone redemption if it is believed advisable to do so. Procedures for
redeeming shares by wire or telephone may be modified or terminated at any time
by the Company, CGFSC or the Distributor. The Company, CGFSC, and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions that are reasonably believed to be genuine.
In attempting to confirm that telephone instructions are genuine, the Company
will use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration.

During periods of substantial economic or market change,
telephone redemptions may be difficult to complete. If an Investor is unable to
contact CGFSC by telephone, the Investor may also deliver the redemption request
to CGFSC in writing at the address noted above.

Except as described in "Investor Programs" below, Investors may
be required to redeem shares in a Fund after 60 days' written notice if due to
Investor redemptions the balance in the particular account with respect to the
Fund remains below $500. If a Customer has agreed with a particular Shareholder
Organization to maintain a minimum balance in his or her account at the
institution with respect to shares of a Fund, and the balance in such account
falls below that minimum, the Customer may be obliged by the Shareholder
Organization to redeem all or part of his or her shares to the extent necessary
to maintain the required minimum balance.

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<PAGE>

OTHER REDEMPTION INFORMATION

The Company may suspend the right of redemption or postpone the
date of payment for shares for more than 7 days during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.

In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.

Under certain circumstances, the Company may, in its discretion,
accept securities as payment for shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a BONA FIDE
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

An Investor who owns shares with a value of $10,000 or more may
begin a Systematic Withdrawal Plan. The withdrawal can be on a monthly,
quarterly, semiannual or annual basis. There are four options for such
systematic withdrawals. The Investor may request:

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

(3) A fixed-percentage withdrawal (based on the current value of
the account); or

(4) A declining-balance withdrawal.

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<PAGE>

EXCHANGE PRIVILEGE

Shares may be exchanged by wire, telephone or mail and must be
made to accounts of identical registration. There is no exchange fee imposed by
the Companies or Excelsior Institutional Trust. In order to prevent abuse of
this privilege to the disadvantage of other shareholders, the Companies and
Excelsior Institutional Trust reserve the right to limit the number of exchange
requests of Investors to no more than six per year. The Companies and Excelsior
Institutional Trust may modify or terminate the exchange program at any time
upon 60 days' written notice to shareholders, and may reject any exchange
request. Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, such program directly
from their Shareholder Organizations.

For federal income tax purposes, exchanges are treated as sales
on which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the

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<PAGE>

shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.

RETIREMENT PLANS

Shares are available for purchase by Investors in connection with
the following tax-deferred prototype retirement plans offered by United States
Trust Company of New York ("U.S. Trust New York"):

IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;

Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit
themselves and their employees; and

Keogh Plans for self-employed individuals.

Investors investing in the Funds pursuant to Profit Sharing and
Money-Purchase Plans and Keogh Plans are not subject to the minimum investment
and forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase shares
of the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.

AUTOMATIC INVESTMENT PROGRAM

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<PAGE>

investment or to market trends. In addition, while Investors may find Dollar
Cost Averaging to be beneficial, it will not prevent a loss if an Investor
ultimately redeems his shares at a price which is lower than their purchase
price. The Company may modify or terminate this privilege at any time or charge
a service fee, although no such fee currently is contemplated. An Investor may
also implement the Dollar Cost Averaging method on his own initiative or through
other entities.

ADDITIONAL INFORMATION

Customers of Shareholder Organizations may obtain information on
the availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.

DESCRIPTION OF CAPITAL STOCK

The Company's Charter authorizes its Board of Directors to issue
up to thirty-five billion full and fractional shares of common stock, $.001 par
value per share, and to classify or reclassify any unissued shares of the
Company into one or more classes or series by setting or changing in any one or
more respects their respective preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Company's authorized common stock is currently
classified into 41 series of shares representing interests in 17 investment
portfolios.

Each share in a Fund represents an equal proportionate interest
in the particular Fund with other shares of the same class, and is entitled to
such dividends and distributions out of the income earned on the assets
belonging to such Fund as are declared in the discretion of the Company's Board
of Directors.

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<PAGE>

Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by the matter. A portfolio is
affected by a matter unless it is clear that the interests of each portfolio in
the matter are substantially identical or that the matter does not affect any
interest of the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent public
accountants and the election of directors may be effectively acted upon by
shareholders of the Company voting without regard to class.

The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding shares of the Fund
involved to be redeemed at their net asset value; or (c) combine the assets
belonging to a Fund with the assets belonging to another portfolio of the
Company, if the Board of Directors reasonably determines that such combination
will not have a material adverse effect on shareholders of any portfolio
participating in such combination, and, in connection therewith, to cause all
outstanding shares of the Fund involved to be redeemed at their net asset value
or converted into shares of another class of the Company's common stock at net
asset value. The exercise of such authority by the Board of Directors will be
subject to the provisions of the 1940 Act, and the Board of Directors will not
take any action described in this paragraph unless the proposed action has been
disclosed in writing to the particular Fund's shareholders at least 30 days
prior thereto.

Notwithstanding any provision of Maryland law requiring a greater
vote of the Company's common stock (or of the shares of a Fund voting separately
as a class) in connection with any corporate action, unless otherwise provided
by law (for example, by Rule 18f-2, discussed above) or by the Company's
Charter, the Company may take or authorize such action upon the favorable vote
of the holders of more than 50% of the outstanding common stock of the Company
voting without regard to class.

Certificates for shares will not be issued unless expressly
requested in writing to CGFSC and will not be issued for fractional shares.

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<PAGE>

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

The directors and executive officers of the Company, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows:

Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
- ---------------- ------- ----------------------
<S> <C> <C>
Frederick S. Wonham(1) Chairman of the Board, Retired; Director of the Company and
238 June Road President and Treasurer Excelsior Tax-Exempt Fund (since 1995);
Stamford, CT 06903 Trustee of Excelsior Funds and Excelsior
Age: 68 Institutional Trust (since 1995); Vice
Chairman of U.S. Trust Corporation and
U.S. Trust New York (from February 1990 to
September 1995); and Chairman, U.S. Trust
Company (from March 1993 to May 1997).

Donald L. Campbell Director Retired; Director of the Company and
333 East 69th Street Excelsior Tax-Exempt Fund (since 1984);
Apt. 10-H Director of UST Master Variable Series,
New York, NY 10021 Inc. (from 1994 to June 1997); Trustee of
Age: 73 Excelsior Institutional Trust (since
1995); and Director, Royal Life Insurance
Co. of New York (since 1991).

- --------------------
(1) This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-34-
<PAGE>

Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
- ---------------- ------- ----------------------

Rodman L. Drake Director Director of the Company and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Fund (since 1996); Trustee,
1251 Avenue of the Americas, 9th Floor Excelsior Institutional Trust and Excelsior
New York, NY 10020 Funds (since 1994); Director, Parsons
Age: 56 Brinkerhoff, Inc. (engineering firm) (since
1995); President, Continuation
Investments Group, Inc. (since 1997);
President, Mandrake Group (investment
and consulting firm) (1994 - 1997);
Director, Hyperion Total Return Fund,
Inc. and four other funds for which
Hyperion Capital Management, Inc. serves
as investment adviser (since 1991); Co-
Chairman, KMR Power Corporation
(power plants) (from 1993 to 1996);
Director, The Latin America Smaller
Companies Fund, Inc. (1993-1998);
Member of Advisory Board, Argentina
Private Equity Fund L.P. (from 1992 to
1996) and Garantia L.P. (Brazil) (from
1993 to 1996); and Director, Mueller
Industries, Inc. (from 1992 to 1994).

Joseph H. Dugan Director Retired; Director of the Company and
913 Franklin Lake Road Excelsior Tax-Exempt Fund (since 1984);
Franklin Lakes, NJ 07417 Director of UST Master Variable Series,
Age: 74 Inc. (from 1994 to June 1997); and
Trustee of Excelsior Institutional Trust
(since 1995).

Wolfe J. Frankl Director Retired; Director of
2320 Cumberland Road the Company and Excelsior
Charlottesville, VA 22901-7726 Tax-Exempt Fund (since 1986);
Age: 78 Director of UST Master
Variable Series, Inc. (from 1994 to June
1997); Trustee of Excelsior Institutional
Trust (since 1995); Director, Deutsche
Bank Financial, Inc. (since 1989);
Director, The Harbus Corporation (since
1951); and Trustee, HSBC Funds Trust and
HSBC Mutual Funds Trust (since 1988).

-35-
<PAGE>

Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
- ---------------- ------- ----------------------

Jonathan Piel Director Director of the Company and Excelsior
558 E. 87th Street Tax-Exempt Fund (since 1996); Trustee of
New York, NY 10128 Excelsior Institutional Trust and
Age: 60 Excelsior Funds (since 1994); Vice
President and Editor, Scientific American,
Inc. (from 1986 to 1994); Director, Group
for The South Fork, Bridgehampton, New
York (since 1993); and Member, Advisory
Committee, Knight Journalism Fellowships,
Massachusetts Institute of Technology
(since 1984).

Robert A. Robinson Director Director of the Company and Excelsior
Church Pension Group Tax-Exempt Fund (since 1987); Director of
445 Fifth Avenue UST Master Variable Series, Inc. (from
New York, NY 10016 1994 to June 1997); Trustee of Excelsior
Age: 73 Institutional Trust (since 1995);
President Emeritus, The Church Pension
Fund and its affiliated companies (since
1966); Trustee, H.B. and F.H. Bugher
Foundation and Director of its wholly
owned subsidiaries - Rosiclear Lead and
Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974 - 1974);
Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1982); and Director,
Infinity Funds, Inc. (since 1995).

Alfred C. Tannachion(2) Director Retired; Director of the Company and
6549 Pine Meadows Drive Excelsior Tax-Exempt Fund (since 1985);
Spring Hill, FL 34606 Chairman of the Board of Excelsior Fund
Age: 73 and Excelsior Tax-Exempt Fund (1991-
1997) and Excelsior Institutional Trust
(1996-1997); President and Treasurer of
Excelsior Fund and Excelsior Tax-Exempt
Fund (1994-1997) and Excelsior
Institutional Trust (1996-1997); Chairman
of the Board, President and Treasurer of
UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).

- --------------------
(2) This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-36-
<PAGE>

Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
- ---------------- ------- ----------------------

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle
One Logan Square & Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle
One Logan Square & Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40

Eddie Wang Assistant Secretary Manager of Blue Sky Compliance, Chase
Chase Global Funds Global Funds Services Company (November
Services Company 1996 to present); and Officer and Manager
73 Tremont Street of Financial Reporting, Investors Bank &
Boston, MA 02108-3913 Trust Company (January 1991 to November
Age: 38 1996).

Patricia M. Leyne Assistant Treasurer Assistant Vice President, Senior
Chase Global Funds Manager of Fund Administration, Chase
Services Company Global Funds Services Company (since
73 Tremont Street July 1998); Assistant Treasurer,
Boston, MA 02108-3913 Manager of Fund Administration, Chase
Age: 32 Global Funds Services Company (from
November 1996 to July 1998);
Supervisor, Chase Global Funds
Services Company (from September
1995 to November 1996); Fund
Administrator, Chase Global Funds
Services Company (from February 1993
to September 1995).
</TABLE>

Each director of the Company receives an annual fee of $9,000
plus a meeting fee of $1,500 for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is entitled
to receive an additional $5,000 per annum for services in such capacity. Drinker
Biddle & Reath LLP, of which Messrs. McConnel and Malloy are partners, receives
legal fees as counsel to the Company. The employees of CGFSC do not receive any
compensation from the Company for acting as officers of the Company. No person
who is currently an officer, director or employee of the Adviser serves as an
officer, director or employee of the Company. As of July 13, 1999, the
directors and officers of the Company as a group owned beneficially less than 1%
of the outstanding shares of each fund of the Company, and less than 1% of the
outstanding shares of all funds of the Company in the aggregate.

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<PAGE>

The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.

<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from the Company
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position the Company Expenses to Directors
--------------- ------------- ---------- --------------

<S> <C> <C> <C>
Donald L. Campbell $15,000 None $33,250 (3)**
Director

Rodman L. Drake $16,500 None $41,250 (4)**
Director

Joseph H. Dugan $16,500 None $36,500 (3)**
Director

Wolfe J. Frankl $16,500 None $36,500 (3)**
Director

W. Wallace McDowell, Jr. *** $11,250 None $28,000 (4)**
Director

Jonathan Piel $16,500 None $41,500 (4)**
Director

Robert A. Robinson $16,500 None $36,500 (3)**
Director

Alfred C. Tannachion $16,500 None $36,500 (3)**
Director

Frederick S. Wonham $21,500 None $51,500 (4)**
Chairman of the Board,
President and Treasurer
</TABLE>

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

* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund,
Excelsior Funds and Excelsior Institutional Trust.

** Number of investment companies in the Fund Complex for which director
served as director or trustee.

*** Mr. McDowell resigned from the Company, Excelsior Tax-Exempt Fund,
Excelsior Funds and Excelsior Institutional Trust on May 21, 1999.

-38-
<PAGE>

INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS

U. S. Trust New York and U. S. Trust Company (collectively with
U. S. Trust New York, "U. S. Trust" or the "Adviser") serve as investment
advisers to the Funds. In the Investment Advisory Agreements, the Adviser has
agreed to provide the services described in the Prospectus. The Adviser has also
agreed to pay all expenses incurred by it in connection with its activities
under the agreements other than the cost of securities, including brokerage
commissions, purchased for the Funds.

Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the International, Latin America, Pacific/Asia and Pan European Funds
pursuant to advisory agreements substantially similar to the Investment Advisory
Agreements currently in effect for such Funds. Prior to November 1, 1996,
Foreign and Colonial Asset Management ("FACAM") served as sub-adviser to the
International and Pan European Funds, and Foreign & Colonial Emerging Markets
Ltd. ("FCEML") served as sub-adviser to the Latin America and Pacific/Asia
Funds.

For the services provided and expenses assumed pursuant to the
Investment Advisory Agreements, the Adviser is entitled to be paid a fee,
computed daily and paid monthly, at the annual rate of 1.00% of the average
daily net assets of each of the International, Latin America, Pacific/Asia and
Pan European Funds, and 1.25% of the average daily net assets of the Emerging
Markets Fund.

From time to time, the Adviser may voluntarily waive all or a
portion of the advisory fees payable to it by a Fund, which waiver may be
terminated at any time.

For the fiscal year ended March 31, 1999, the Company paid U.S.
Trust advisory fees of $1,935,661, $374,039, $255,375, $1,868,811 and $26,108
with respect to the International, Latin America, Pacific/Asia, Pan European and
Emerging Markets Funds, respectively. For the same period. U.S. Trust waived
advisory fees totaling $203,778, $40,751, $26,291, $142,822 and $48,466 with
respect to the International, Latin America, Pacific/Asia, Pan European and
Emerging Markets Funds, respectively.

For the fiscal year or period ended March 31, 1998, the Company
paid U.S. Trust advisory fees of $1,591,051, $870,385, $686,528, $1,536,067 and
$3,355 with respect to the International, Latin America, Pacific/Asia, Pan
European and Emerging Markets Funds, respectively. For the same period, U.S.
Trust waived advisory fees totaling $134,671, $94,398, $67,740, $119,690 and
$8,751 with respect to the International, Latin America, Pacific/Asia, Pan
European and Emerging Markets Funds, respectively.

For the fiscal year ended March 31, 1997, the Company paid U.S.
Trust New York advisory fees of $999,833, $494,539, $796,280 and $637,580 with
respect to the International, Latin America, Pacific/Asia and Pan European
Funds, respectively. For the same period, U.S. Trust New York waived advisory
fees totaling $87,156, $42,840, $65,538 and

-39-
<PAGE>

$48,946 with respect to the International, Latin America, Pacific/Asia and
Pan European Funds, respectively.

The Investment Advisory Agreements provide that the Adviser shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the performance of such agreements,
except that U. S. Trust New York and U. S. Trust Company shall be jointly, but
not severally, liable for a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for advisory services or a loss resulting
from willful misfeasance, bad faith or gross negligence in the performance of
their duties or from reckless disregard by them of their duties and obligations
thereunder. In addition, the Adviser has undertaken in the Investment Advisory
Agreements to maintain its policy and practice of conducting its Asset
Management Group independently of its Banking Group.

Prior to May 16, 1997, CGFSC, Federated Administrative Services
and U.S. Trust New York served as the Company's administrators pursuant to an
administrative agreement substantially similar to the Administration Agreement
currently in effect for the Company.

For the services provided to the Funds, the Administrators are
jointly entitled to a fee, computed daily and paid monthly, at the annual rate
of 0.20% of the average daily net assets of each Fund. From time to time, the
Administrators may voluntarily waive all or a portion of the administration fee
payable to them by a Fund, which waivers may be terminated at any time.

For the fiscal year ended March 31, 1999, the Company paid the
Administrators $427,509, $81,572, $56,059, $397,805 AND $11,814 in the aggregate
with respect to the International, Latin America, Pacific/Asia, Pan European and
Emerging Markets Funds, respectively. For the same period, the Administrators
waived fees totaling $379, $1,386, $274, $4,522 AND $0 with respect to the
International, Latin America, Pacific/Asia, Pan European and Emerging Markets
Funds, respectively.

For the fiscal year or period ended March 31, 1998, the Company
paid CGFSC, Federated Administrative Services and U.S. Trust $344,846, $190,906,
$150,789, $330,551 and $1,957 in the aggregate with respect to the
International, Latin America, Pacific/Asia, Pan European and Emerging Markets
Funds, respectively. For the same period, the administrators

-40-
<PAGE>

waived fees totaling $299, $2,051, $65, $607 and $0 with respect to the
International, Latin America, Pacific/Asia, Pan European and Emerging Markets
Funds, respectively.

For the fiscal year ended March 31, 1997, the Company paid CGFSC,
Federated Administrative Services and U.S. Trust New York $217,356, $107,418,
$172,296 and $137,304 in the aggregate with respect to the International, Latin
America, Pacific/Asia and Pan European Funds, respectively. For the same period,
CGFSC, Federated Administrative Services and U.S. Trust New York waived fees
totaling $47, $58, $68 and $1 with respect to the International, Latin America,
Pacific/Asia and Pan European Funds, respectively.

BANKING LAWS

Banking laws and regulations currently prohibit a bank holding
company registered under the Federal Bank Holding Company Act of 1956 or any
bank or non-bank affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as shares of the Funds, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent, or custodian to
such an investment company, or from purchasing shares of such company for and
upon the order of customers. The Adviser, CGFSC and certain Shareholder
Organizations may be subject to such banking laws and regulations. State
securities laws may differ from the interpretations of Federal law discussed in
this paragraph and banks and financial institutions may be required to register
as dealers pursuant to state law.

Should legislative, judicial, or administrative action prohibit
or restrict the activities of the Adviser or other Shareholder Organizations in
connection with purchases of Fund shares, the Adviser and such Shareholder
Organizations might be required to alter materially or discontinue the
investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would
affect their net asset values per share or result in financial loss to any
shareholder.

SHAREHOLDER ORGANIZATIONS

-41-
<PAGE>

Customers; and (g) providing or arranging for the provision of other related
services. It is the responsibility of Shareholder Organizations to advise
Customers of any fees that they may charge in connection with a Customer's
investment. Until further notice, the Adviser and Administrators have
voluntarily agreed to waive fees payable by a Fund in an aggregate amount equal
to administrative service fees payable by that Fund.

For the fiscal years ended March 31, 1999, 1998 and 1997,
payments to Shareholder Organizations totaled $204,157, $134,970 and $87,203;
$42,137, $96,449 and $42,898; $26,565, $67,805 and $65,606; and $147,344,
$120,297 and $48,947 with respect to the International, Latin America,
Pacific/Asia and Pan European Funds, respectively. Of these amounts, $202,445,
$133,194 and $87,203; $34,396, $86,789 and $42,877; $24,951, $67,453 and
$65,398; and $121,644, $117,511 and $48,947 were paid to affiliates of U.S.
Trust with respect to the International, Latin America, Pacific/Asia and Pan
European Funds, respectively. For the fiscal year or period ended March 31, 1999
and 1998, payments to Shareholder Organizations totaled $11,666 and $994
respectively, with respect to the Emerging Markets Fund, $11,666 and $994, of
which was paid to affiliates of U.S. Trust.

EXPENSES

Except as otherwise noted, the Adviser and the Administrators
bear all expenses in connection with the performance of their services. The
Funds bear the expenses incurred in their operations. Expenses of the Funds
include: taxes; interest; fees (including fees paid to the Company's directors
and officers who are not affiliated with the Distributor or the Administrators);
SEC fees; state securities qualifications fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders;
advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent, and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses; costs of independent pricing
services; costs of shareholder reports and shareholder meetings; and

-42-
<PAGE>

any extraordinary expenses. The Funds also pay for brokerage fees and
commissions in connection with the purchase of portfolio securities.

CUSTODIAN AND TRANSFER AGENT

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of
The Chase Manhattan Corporation, serves as the custodian of the Funds' assets.
Under the Custodian Agreement, Chase has agreed to: (i) maintain a separate
account or accounts in the name of the Funds; (ii) make receipts and
disbursements of money on behalf of the Funds; (iii) collect and receive all
income and other payments and distributions on account of the Funds' portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to the Company's Board of Directors concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreement, notwithstanding any delegation. Communications to
the custodian should be directed to Chase, Mutual Funds Service Division, 3
Chase MetroTech Center, 8th Floor, Brooklyn, NY 11245.

U.S. Trust New York may, at its own expense, delegate its
transfer agency obligations to another transfer agent registered or qualified
under applicable law, provided that U.S. Trust New York shall remain liable for
the performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. For the services
provided by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum
per account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Company for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.

-43-
<PAGE>

PORTFOLIO TRANSACTIONS

Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
Transactions on foreign stock exchanges involve payment for brokerage
commissions which are generally fixed. In executing portfolio transactions for
the Funds, the Adviser may use affiliated brokers in accordance with the
requirements of the 1940 Act. The Adviser may also take into account the sale of
Fund shares in allocating brokerage transactions.

For the fiscal years ended March 31, 1999, March 31, 1998 and
March 31, 1997, the International, Latin America, Pacific/Asia and Pan European
Funds paid brokerage commissions aggregating $562,633, $456,367 and $396,525;
$198,226, $529,715 and $254,681; $257,407, $470,122 and $700,865; and $563,583,
$384,700 and $296,765, respectively, none of which were paid to affiliates of
U.S. Trust. For the fiscal year or period ended March 31, 1999 and 1998, the
Emerging Markets Fund paid brokerage commissions aggregating $35,265 and
$15,112, respectively, none of which were paid to affiliates of U.S. Trust.

Transactions in both foreign and domestic over-the-counter
markets are generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, a Fund, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere. The cost of securities purchased from underwriters includes an
underwriting commission or concession.

The Investment Advisory Agreements between the Company and U.S.
Trust provide that, in executing portfolio transactions and selecting brokers or
dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the

-44-
<PAGE>

security, the financial condition and execution capability of the broker or
dealer and whether such broker or dealer is selling shares of the Company, and
the reasonableness of the commission, if any, for the specific transaction and
on a continuing basis.

In addition, the Investment Advisory Agreements authorize the
Adviser, to the extent permitted by law and subject to the review of the
Company's Board of Directors from time to time with respect to the extent and
continuation of the policy, to cause a Fund to pay a broker which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker for effecting the same transaction, provided that the
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser to the accounts as to which it exercises
investment discretion. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of stocks and their comparative earnings, or broad overviews of the stock
market and the economy. Such services might also include reports on global,
regional, and country-by-country prospects for economic growth, anticipated
levels of inflation, prevailing and expected interest rates, and the outlook for
currency relationships.

Supplementary research information so received is in addition to
and not in lieu of services required to be performed by U.S. Trust and does not
reduce the investment advisory fees payable by the Funds. Such information may
be useful to U.S. Trust in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to U.S. Trust in carrying out its obligations to the Funds.

Investment decisions for each Fund are made independently from
those for other investment companies, common trust funds and other types of
funds managed by U.S. Trust. Such other investment companies and funds may also
invest in the same securities as the Funds.

-45-
<PAGE>

When a purchase or sale of the same security is made at substantially the same
time on behalf of a Fund and another investment company or common trust fund,
the transaction will be averaged as to price, and available investments
allocated as to amount, in a manner which U.S. Trust believes to be equitable to
the Fund and such other investment company or common trust fund. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained by the Fund. To the
extent permitted by law, U.S. Trust may aggregate the securities to be sold or
purchased for the Funds with those to be sold or purchased for other investment
companies or common trust funds in order to obtain best execution.

PORTFOLIO VALUATION

The Funds' portfolio securities which are primarily traded on a
domestic exchange are valued at the last sale price on that exchange or, if
there is no recent sale, at the last current bid quotation. Portfolio securities
which are primarily traded on foreign securities exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an event subsequent to the time when value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors under the
direction of the Board of Directors.

A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security. Investments in debt securities having a maturity of 60 days or
less are valued based upon the amortized cost method. An option, futures or
foreign currency futures contract is valued at the last sales price quoted on
the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices. A forward currency contract is valued based on the last published
forward currency rate which reflects the duration of the contract and the value
of the underlying currency. All other foreign securities are valued at the last
current bid quotation if market quotations are available, or at fair value as
determined in accordance with guidelines adopted by the Board of Directors. For
valuation purposes, quotations of foreign securities in foreign currency are
converted to U.S. dollars equivalent at the prevailing market rate on the day of
conversion.

The Company's administrators have undertaken to price the
securities in each Fund's portfolio, and may use one or more independent pricing
services in connection with this service.

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<PAGE>

INDEPENDENT AUDITORS

Ernst & Young LLP, independent auditors, 200 Clarendon Street,
Boston, MA 02116, serve as auditors of the Company. The Funds' Financial
Highlights included in the Prospectus and the financial statements for the
fiscal year ended March 31, 1999 incorporated by reference in this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
included in their reports thereon which appear therein.

COUNSEL

ADDITIONAL INFORMATION CONCERNING TAXES

GENERALLY

The following supplements the tax information contained in the
Prospectus.

For federal income tax purposes, each Fund is treated as a
separate corporate entity and has qualified and intends to continue to qualify
as a regulated investment company. Such qualification generally relieves a Fund
of liability for federal income taxes to the extent its earnings are distributed
in accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, the Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions would be
taxable as ordinary income to shareholders to the extent of such Fund's current
and accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses), if any. Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.

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<PAGE>

cash or reinvested in additional shares. Distributions attributable to the net
capital gain of a Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares. Other Fund distributions will
generally be taxable as ordinary income.

It is expected that each Fund will be subject to Foreign
withholding taxes with respect to dividends or interest received from sources in
foreign countries. Each Fund may make an election to treat a proportionate
amount of such taxes as constituting a distribution to each shareholder, which
would allow each shareholder either (1) to credit such proportionate amount of
taxes against U.S. federal income tax liability or (2) to take such amount as an
itemized deduction.

Any loss realized on shares held for six months or less will be
treated as a long-term capital loss to the extent of any capital gain dividends
that were received on the shares.

The one major exception to these tax principles is that
distributions on, and sales, exchanges and redemptions of share held in an IRA
(or other tax-qualified plan) will not be currently taxable.

The tax principles applicable to transactions in financial
instruments and futures contacts and options that may be engaged in by a Fund,
and investments in passive foreign investment companies ("PFICS"), are complex
and, in some cases, uncertain. Such transactions and investments may cause a
Fund to recognize taxable income prior to the receipt of cash, thereby requiring
the Fund to liquidate other positions, or to borrow money, so as to make
sufficient distributions to shareholders to avoid corporate-level tax. Moreover,
some or all of the taxable income recognized may be ordinary income or
short-term capital gain, so that the distributions may be taxable to
Shareholders as ordinary income.

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<PAGE>

payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so either that they are not subject to backup
withholding or that they are "exempt recipients."

The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisers
concerning their specific situations and the application of state, local and/or
foreign taxes.

PERFORMANCE INFORMATION

1/n
ERV
T = [(-----) - 1]
P

Where: T = average annual total return.

ERV = ending redeemable value
of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or
10 year (or other) periods at the
end of the applicable period (or a
fractional portion thereof).

P = hypothetical initial payment of $1,000.

n = period covered by the computation, expressed
in years.

Each Fund may also advertise the "aggregate total return" for its
shares for various periods, representing the cumulative change in the value of
an investment in the Fund for the specific period. The aggregate total return is
computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:

-49-
<PAGE>

ERV
Aggregate Total Return = [(------)] - 1
P

The above calculations are made assuming that (1) all dividends
and capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, (2) all recurring fees
charged to all shareholder accounts are included, and (3) for any account fees
that vary with the size of the account, a mean (or median) account size in a
Fund during the periods is reflected. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period.

Based on the foregoing calculations, the average annual total
returns for the shares of the International Fund for the one, five and ten
year periods ended March 31, 1999 were -3.18%, 6.42% and 6.56%, respectively.
The average annual total returns for the shares of the Latin America,
Pacific/Asia and Pan European Funds for the one and five year periods ended
March 31, 1999 were -47.19% and -7.19%; 5.14% and -4.36%, and -8.84% and
13.93%, respectively. The average annual total returns for the shares of the
Latin America, Pacific/Asia and Pan European Funds for the period from
December 31, 1992 (commencement of operations) to March 31, 1999 were -1.23%,
2.82% and 13.58%, respectively. The aggregate total return for the shares of
the Emerging Markets Fund for the period from January 2, 1998 (commencement of
operations) to March 31, 1999 was - 41.21%.

The Funds may also from time to time include in advertisements,
sales literature and communications to shareholders a total return figure that
is not calculated according to the formulas set forth above in order to compare
more accurately a Fund's performance with other measures of investment return.
For example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.

-50-
<PAGE>

without limitation, those factors, strategies and techniques that together with
market conditions and events, materially affected each Fund's performance.

The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Adviser as to
current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisements, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.

MISCELLANEOUS

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<PAGE>

the Board of Directors as to the direct and allocable liabilities, and the
allocable portion of any general assets with respect to a particular Fund, are
conclusive.

As of July 13, 1999, the name, address and percentage ownership
of each person that beneficially owned 5% or more of the outstanding shares of a
Fund were as follows: Emerging Markets Fund: U.S. Trust Retirement Fund, c/o
United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 16.11%; Prudence Miller Agency, c/o United States Trust Company of
New York, 114 West 47th Street, New York, New York 10036, 7.48%; and Dan G.
Weiden IMA, c/o United States Trust Company of New York, 114 West 47th Street,
New York, New York 10036, 8.64%; and Latin America Fund: U.S. Trust Retirement
Fund, c/o United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036, 6.00%.

FINANCIAL STATEMENTS

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<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

"A-1" - Obligations are rated in the highest category indicating
that the obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.

"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

"D" - Obligations are in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.

A-1
<PAGE>

"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.

"Not Prime" - Issuers do not fall within any of the Prime rating
categories.

"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.

"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.

"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.

"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.

A-2
<PAGE>

"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.

Fitch IBCA short-term ratings apply to debt obligations that have
time horizons of less than 12 months for most obligations, or up to three years
for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:

"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.

"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.

"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.

"D" - Securities are in actual or imminent payment default.

Thomson Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:

"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.

"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."

A-3
<PAGE>

"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.

"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:

"AAA" - An obligation rated "AAA" has the highest rating assigned
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.

"BB" - An obligation rated "BB" is less vulnerable to nonpayment
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.

"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB," but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.

A-4
<PAGE>

"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.

"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.

"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due, even if the applicable grace period has not expired, unless S & P believes
that such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.

"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. If highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

A-5
<PAGE>

"A" - Bonds possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

"Baa" - Bonds are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.

Note: Moody's applies numerical modifiers 1, 2 and 3 in each
generic rating classification from "Aa" through "Caa." The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.

The following summarizes the long-term debt ratings used by Duff
& Phelps for corporate and municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.

"AA" - Debt is considered to be of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.

"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.

A-6
<PAGE>

"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.

To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.

The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:

"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

"AA" - Bonds considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.

"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.

"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.

"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.

A-7
<PAGE>

"CCC," "CC" and "C" - Bonds have high default risk. Default is a
real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.

"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "D" the lowest recovery potential, i.e., below 50%.

Entities rated in this category have defaulted on some or all of
their obligations. Entities rated "DDD" have the highest prospect for redemption
of performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.

To provide more detailed indications of credit quality, the Fitch
IBCA ratings from and including "AA" to "CCC" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.

Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:

"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.

"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.

"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more

A-8
<PAGE>

vulnerable to adverse developments (both internal and external) than obligations
with higher ratings.

"D" - This designation indicates that the long-term debt is in
default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.

MUNICIPAL NOTE RATINGS

A Standard and Poor's rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:

"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.

"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.

Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:

"MIG-1"/"VMIG-1" - This designation denotes best quality. There
is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.

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

A-9
<PAGE>

"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.

"SG" - This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.

Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.

A-10