EXCELSIOR FUNDS INC, 485APOS, 1999-05-28

EXCELSIOR FUNDS INC
485APOS, 1999-05-28

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<PAGE>

As filed with the Securities and Exchange Commission on May 28, 1999
Registration Nos. 2-92665; 811-4088

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Excelsior Funds, Inc.: Post-Effective Amendment No. 33

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

Excelsior Funds, Inc.: Amendment No. 35

(Exact Name of Registrant as Specified in Charter)

73 Tremont Street
Boston, Massachusetts 02108-3913
(Address of Principal Executive Offices)

Registrant's Telephone Number: (800) 446-1012

W. Bruce McConnel, III
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)

It is proposed that this post-effective amendment will become effective (check
appropriate box)

/ / Immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/X/ on August 1, 1999 pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.

If appropriate, check the following box:

/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

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

Title of Securities Being Registered................Shares of Common Stock
<PAGE>

EXCELSIOR FUNDS, INC.

BLENDED EQUITY FUND
VALUE AND RESTRUCTURING FUND
SMALL CAP FUND
LARGE CAP GROWTH FUND
ENERGY AND NATURAL RESOURCES FUND
REAL ESTATE FUND

EXCELSIOR INSTITUTIONAL TRUST

VALUE EQUITY FUND
OPTIMUM GROWTH FUND

PROSPECTUS

AUGUST 1, 1999

INVESTMENT ADVISER
UNITED STATES TRUST COMPANY OF NEW YORK
U.S. TRUST COMPANY

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
ANY FUND SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. IT IS A CRIME FOR ANYONE TO TELL YOU OTHERWISE.

Page 1 of 41
<PAGE>

HOW TO READ THIS PROSPECTUS

Excelsior Funds, Inc. and Excelsior Institutional Trust are mutual fund families
that offer shares in separate investment portfolios which have individual
investment goals and strategies. This prospectus gives you important information
about the Blended Equity, Value and Restructuring, Small Cap, Large Cap Growth,
Energy and Natural Resources, and Real Estate Funds of Excelsior Funds, Inc. and
the Value Equity and Optimum Growth Funds of Excelsior Institutional Trust
(each, a Fund) that you should know before investing. United States Trust
Company of New York and U.S. Trust Company (together, U.S. Trust or the Adviser)
serve as investment adviser to each Fund. The Value Equity and Optimum Growth
Funds offer two classes of shares: Shares, which are offered in this prospectus,
and Institutional Shares, which are offered in a separate prospectus. Please
read this prospectus and keep it for future reference.

THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT THE FUNDS. FOR MORE DETAILED INFORMATION ABOUT
EACH FUND, PLEASE SEE:

<TABLE>
<CAPTION>
PAGE
<S> <C>
BLENDED EQUITY FUND XXX
VALUE AND RESTRUCTURING FUND XXX
SMALL CAP FUND XXX
LARGE CAP GROWTH FUND XXX
ENERGY AND NATURAL RESOURCES FUND XXX
REAL ESTATE FUND XXX
VALUE EQUITY FUND XXX
OPTIMUM GROWTH FUND XXX
MORE INFORMATION ABOUT RISK XXX
EACH FUND'S OTHER INVESTMENTS XXX
EACH FUND'S INVESTMENT OBJECTIVE XXX
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS XXX
PURCHASING, SELLING AND EXCHANGING FUND SHARES XXX
DISTRIBUTION OF FUND SHARES XXX
DIVIDENDS, DISTRIBUTIONS AND TAXES XXX
FINANCIAL HIGHLIGHTS XXX
HOW TO OBTAIN MORE INFORMATION ABOUT
EXCELSIOR FUNDS, INC. AND EXCELSIOR INSTITUTIONAL TRUST Back Cover
</TABLE>

Page 2 of 41
<PAGE>

INTRODUCTION

Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.

Each Fund has its own investment goal and strategies for reaching that goal. The
investment managers invest Fund assets in a way that they believe will help a
Fund achieve its goal. Still, investing in each Fund involves risk and there is
no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.

The value of your investment in a Fund is based on the market value of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities a Fund owns and the markets in which they trade. The
effect on a Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.

THE ADVISER'S EQUITY INVESTMENT STRATEGY

The Adviser manages each Fund's investments with a view toward long-term
success. The Adviser's strategy generally does not change with short-term
variations in financial markets.

The Adviser begins with a belief that all worthwhile investments are grounded in
value and that it is possible to identify fundamental values that, eventually,
should be reflected in the market prices of Fund investments. The Adviser seeks
to identify these fundamental values through its constant assessment of the
security's value to its market price. The Adviser frequently selects Fund
investments using the following criteria:

OPPORTUNITY: Industries and companies may be positioned to provide
solutions to or benefit from complex problems. Examples of these would be
the aging of the U.S. population or the need to enhance industrial
productivity.

TRANSACTION VALUE: Companies may have real underlying asset values greater
than their market prices. Differences between a company's real asset value
and the price of its shares often are corrected over time through
restructuring or other business combinations.

EARLY LIFE CYCLE: Companies may have products that are in the earlier
stages of development or that seek to exploit new markets. Over time, the
value of such companies may come to be recognized in the market.

Page 3 of 41
<PAGE>

BLENDED EQUITY FUND

FUND SUMMARY

INVESTMENT GOAL Long-term capital appreciation

INVESTMENT FOCUS Common stocks of U.S. companies

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Invests in common stocks that the Adviser
believes are undervalued in the market

INVESTOR PROFILE Investors seeking growth of capital, and who are
willing to accept the risks of investing in
equity securities

INVESTMENT STRATEGY OF THE BLENDED EQUITY FUND

The Blended Equity Fund invests primarily in large capitalization common stocks
of U.S. and, to a lesser extent, foreign companies that the Adviser believes
have value that is not currently reflected in their market prices. The Adviser
generally diversifies the Fund's investments over a variety of industries and
types of companies. The Fund may invest in companies of any size, including
small, high growth companies.

The Adviser takes a long-term approach to managing the Fund and tries to
identify companies with characteristics that will lead to future earnings growth
or recognition of their true value. The Adviser looks for companies that are
positioned to provide solutions to or benefit from complex social and economic
trends, or whose products are early in their life cycle and will experience
accelerating growth in the future. In addition, the Adviser invests a smaller
portion of the Fund's assets in a quantitatively selected segment of large
capitalization U.S. companies designed to complement the Fund's core holdings
and reduce portfolio volatility. In considering whether to sell one or more
portfolio holdings, the Adviser will generally seek to minimize the tax impact
of any such sale(s).

PRINCIPAL RISKS OF INVESTING IN THE BLENDED EQUITY FUND

Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate substantially from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

The Fund is also subject to the risk that undervalued common stocks may
underperform other segments of the equity markets or the equity markets as a
whole.

Page 4 of 41
<PAGE>

PERFORMANCE INFORMATION

The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO1.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Blended Equity Fund X.XX% X.XX% X.XX%
[insert index name] X.XX% X.XX% X.XX%
</TABLE>

WHAT IS AN INDEX?

An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.

FUND FEES AND EXPENSES

EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE FEES AND
EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.

Page 5 of 41
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment Advisory Fees .XX%
Other Expenses
Administrative Servicing Fee .XX%
Other Operating Expenses .XX%
Total Other Expenses .XX%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
</TABLE>

THE FUND'S ACTUAL TOTAL ANNUAL FUND OPERATING EXPENSES FOR THE MOST RECENT
FISCAL YEAR WERE LESS THAN THE AMOUNT SHOWN ABOVE AS A RESULT OF THE ADVISER'S
VOLUNTARY FEE WAIVERS. THE ADVISER HAS VOLUNTARILY AGREED TO WAIVE ITS
INVESTMENT ADVISORY FEE OR OTHER FEES IN AN AMOUNT EQUAL TO THE ADMINISTRATIVE
SERVICING FEE PAID BY THE FUND. THE ADVISER MAY DISCONTINUE ALL OR PART OF THESE
WAIVERS AT ANY TIME. WITH THESE FEE WAIVERS, THE FUND'S ACTUAL TOTAL OPERATING
EXPENSES FOR THE LAST FISCAL YEAR ARE AS FOLLOWS:

BLENDED EQUITY FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.

The Example also assumes that each year your investment has a 5% return and Fund
expenses remain the same. Although your actual costs and returns might be
different, your approximate costs of investing $10,000 in the Fund would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 6 of 41
<PAGE>

VALUE AND RESTRUCTURING FUND

FUND SUMMARY

INVESTMENT GOAL Long-term capital appreciation

INVESTMENT FOCUS Equity securities of U.S. issuers

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Investing in common stocks of companies
which the Adviser believes are
undervalued by the market and whose
share price are expected to benefit from
the value created through restructuring
or industry consolidation

INVESTOR PROFILE Investors seeking long-term capital
appreciation, and who are willing to
bear the risks of investing in equity
securities of issuers expected to
experience a restructuring or business
combination

INVESTMENT STRATEGY OF THE VALUE AND RESTRUCTURING FUND

The Value and Restructuring Fund invests primarily in common stocks of U.S. and,
to a lesser extent, foreign companies whose share price, in the opinion of the
Adviser, does not reflect the economic value of the company's assets, but where
the Adviser believes restructuring efforts or industry consolidation will serve
to highlight the true value of the company.

In choosing investments for the Fund, the Adviser looks for companies where
restructuring activities, such as consolidations, outsourcing, spin-off or
reorganization, will offer significant value to the issuer and increase its
investment potential. The Adviser may select companies of any size for the Fund
and the Fund invests in a diversified group of companies across a number of
different industries.

PRINCIPAL RISKS OF INVESTING IN THE VALUE AND RESTRUCTURING FUND

The smaller capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these small companies may have limited product lines, markets and
financial resources, and may depend upon a relatively small management group.
Therefore, small cap stocks may be more volatile than those of larger companies.
These securities may be traded over-the-counter or listed on an exchange and may
or may not pay dividends.

Page 7 of 41
<PAGE>

The Fund is also subject to the risk that equity securities of issuers expected
to experience a restructuring or business combination may underperform other
segments of the equity markets or the equity markets as a whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO3.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Value and Restructuring Fund X.XX% X.XX% X.XX%*
[insert index name] X.XX% X.XX% X.XX%**
</TABLE>

* Since December 31, 1992
** Since [calc. date for index]

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

Page 8 of 41
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

VALUE AND RESTRUCTURING FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 9 of 41
<PAGE>

SMALL CAP FUND

FUND SUMMARY

INVESTMENT GOAL Capital appreciation

INVESTMENT FOCUS Equity securities of small cap U.S.
issuers

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Investing in equity securities of smaller
companies that are expected to achieve
substantial long-term earnings growth

INVESTOR PROFILE Investors seeking capital appreciation,
and who are willing to tolerate the risks
of investing in smaller companies

INVESTMENT STRATEGY OF THE SMALL CAP FUND

The Small Cap Fund invests primarily in equity securities of smaller U.S.-based
companies that are in the early stages of development and which the Adviser
believes have the potential to achieve substantial long-term earnings growth.

In selecting investments for the Fund, the Adviser applies a bottom-up
investment approach designed to identify innovative companies whose potential is
not yet reflected in their market values. Generally, the Fund invests in
companies with market capitalizations of $1.5 billion or less, but the Adviser
also considers to a lesser degree larger or more mature companies engaged in new
or higher growth operations that the Adviser believes will result in accelerated
earnings growth.

PRINCIPAL RISKS OF INVESTING IN THE SMALL CAP FUND

The Fund is also subject to the risk that small capitalization growth stocks may
underperform other segments of the equity markets or the equity markets as a
whole.

Page 10 of 41
<PAGE>

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO4.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Fund X.XX% X.XX% X.XX%*
[insert index name] X.XX% X.XX% X.XX%**
</TABLE>

* Since December 31, 1992
** Since [calc. date for index]

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

Page 11 of 41
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

SMALL CAP FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 12 of 41
<PAGE>

LARGE CAP GROWTH FUND

FUND SUMMARY

INVESTMENT GOAL Long-term return

INVESTMENT FOCUS Common stocks of large U.S. companies

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Invests in common stocks of large companies
that the Adviser believes have above-average
growth prospects

INVESTOR PROFILE Investors seeking growth of capital, and who
are willing to accept the risks of investing
in equity securities of larger companies

INVESTMENT STRATEGY OF THE LARGE CAP GROWTH FUND

The Large Cap Growth Fund invests primarily in common stocks of large U.S.
companies with market capitalizations over $5 billion that the Adviser believes
have above-average growth prospects.

The Adviser takes a long-term approach to managing the Fund and invests in
companies with characteristics that it believes will lead to future earnings
growth or recognition of their true value. In selecting particular investments,
the Adviser applies a bottom-up investment approach designed to identify the
best companies in the most rapidly growing industries. Frequently, these are
well established companies that are positioned to provide solutions to or
benefit from complex social and economic trends. However, the Fund also may
invest in smaller, high growth companies when the Adviser expects their earnings
to grow at an above-average rate.

PRINCIPAL RISKS OF INVESTING IN THE LARGE CAP GROWTH FUND

The Fund is also subject to the risk that large capitalization growth stocks may
underperform other segments of the equity markets or the equity markets as a
whole.

PERFORMANCE INFORMATION

Page 13 of 41
<PAGE>

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO5.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
- ----------------------------------------------------------------------
<S> <C> <C>
Large Cap Growth Fund X.XX% X.XX%*
[insert index name] X.XX% X.XX%**
</TABLE>

* Since October 1, 1997
** Since [calc. date for index]

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

LARGE CAP GROWTH FUND ____%

Page 14 of 41
<PAGE>

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 15 of 41
<PAGE>

ENERGY AND NATURAL RESOURCES FUND

FUND SUMMARY

INVESTMENT GOAL Long-term capital appreciation

INVESTMENT FOCUS Equity securities of U.S. and foreign energy
and natural resources companies

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Investing in equity securities of U.S. and
foreign issuers engaged in the energy and
natural resources groups of industries

INVESTOR PROFILE Investors seeking long-term growth of
capital, and who are willing to accept
the risks of investing in a non-diversified
portfolio of energy and natural resources
companies

INVESTMENT STRATEGY OF THE ENERGY AND NATURAL RESOURCES FUND

The Energy and Natural Resources Fund invests primarily in equity securities of
U.S. and foreign companies engaged in the energy and natural resources
industries. These companies include those engaged in the discovery, development,
production or distribution of energy or other natural resources and companies
that develop technologies and furnish supplies and services to these companies.
In selecting investments for the Fund, the Adviser takes a long-term approach
and seeks to identify companies whose value is not recognized in the prices of
their securities or with characteristics that will lead to above-average
earnings growth.

Energy companies normally will constitute a significant portion of the Fund's
investments, and the Fund typically invests at least 50% of its assets in crude
oil, petroleum and natural gas companies. The Fund also may invest a portion of
its assets in precious metals, such as gold bullion, and companies engaged in
the production of precious metals. The Fund invests in companies of any size,
including small, high growth companies.

PRINCIPAL RISKS OF INVESTING IN THE ENERGY AND NATURAL RESOURCES FUND

The Fund is subject to the risk that the securities of issuers in the same
industry that the Fund purchases will underperform other market sectors or the
market as a whole. To the extent that the Fund's investments are concentrated in
issuers conducting business in the same industry, the Fund is subject to
legislative or regulatory changes, adverse market conditions and/or increased
competition affecting that industry.

Page 16 of 41
<PAGE>

Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily affect the U.S. economy or
similar issuers located in the United States. In addition, investments in
foreign countries are generally denominated in a foreign currency. As a result,
changes in the value of those currencies compared to the U.S. dollar may affect
(positively or negatively) the value of a Fund's investments. These currency
movements may happen separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country. These
various risks will be even greater for investments in emerging market countries
since political turmoil and rapid changes in economic conditions are more likely
to occur in these countries.

The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political/regulatory occurrence affecting one or more
of these issuers, and may experience increased volatility due to its investments
in those securities.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO1.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy and Natural Resources Fund X.XX% X.XX% X.XX%*
[insert index name] X.XX% X.XX% X.XX%**
</TABLE>

* Since December 31, 1992
** Since [calc. date for index]

Page 17 of 41
<PAGE>

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

ENERGY AND NATURAL RESOURCES FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 18 of 41
<PAGE>

REAL ESTATE FUND

FUND SUMMARY

INVESTMENT GOAL Current income and long-term capital
appreciation

INVESTMENT FOCUS Equity securities of companies engaged in the
real estate business

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Investing in equity securities of real estate
investment trusts (REITs) and other issuers
engaged in the real estate industry

INVESTOR PROFILE Investors seeking current income and long-term
growth of capital, and who are willing to
accept the risks of investing in a
non-diversified portfolio of real estate
issuers

INVESTMENT STRATEGY OF THE REAL ESTATE FUND

The Real Estate Fund invests primarily in REITs and other publicly-traded equity
securities of U.S. and, to a lesser extent, foreign companies engaged in the
real estate industry. REITs pool investors' funds for investment directly in
real estate (equity REITs), real estate loans (mortgage REITs), or a combination
of the two (hybrid REITs). The Fund intends to invest primarily in equity and
hybrid REITs. The Fund also invests in other issuers engaged in the real estate
business, such as developers, mortgage lenders and servicers, construction
companies and building material suppliers.

The Adviser takes a long-term approach to managing the Fund and seeks to
identify companies with characteristics that will lead to above-average earnings
growth. The Adviser analyzes demographic and macroeconomic factors to determine
regional allocations. Based on its regional allocations, the Adviser selects
particular investments based on its analysis of valuation relative to underlying
real estate values.

PRINCIPAL RISKS OF INVESTING IN THE REAL ESTATE FUND

Page 19 of 41
<PAGE>

The Fund's investments in the securities of REITs and companies principally
engaged in the real estate industry may subject the Fund to the risks associated
with the direct ownership of real estate. Risks commonly associated with the
direct ownership of real estate include fluctuations in the value of underlying
properties and defaults by borrowers or tenants. In addition to these risks,
REITs are dependent on specialized management skills and some REITs may have
investments in relatively few properties, or in a small geographic area or a
single type of property. These factors may increase the volatility of the Fund's
investments in REITs.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO2.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
- ----------------------------------------------------------------------
<S> <C> <C>
Real Estate Fund X.XX% X.XX%*
[insert index name] X.XX% X.XX%**
</TABLE>

* Since October 1, 1997
** Since [calc. date for index]

WHAT IS AN INDEX?

Page 20 of 41
<PAGE>

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

REAL ESTATE FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 21 of 41
<PAGE>

VALUE EQUITY FUND

FUND SUMMARY

INVESTMENT GOAL Long-term capital appreciation

INVESTMENT FOCUS Common stocks of U.S. companies

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Investing in common stocks that the Adviser
believes are undervalued by the market

INVESTOR PROFILE Investors seeking growth of capital, and
who are willing to accept the risks of
investing in equity securities

INVESTMENT STRATEGY OF THE VALUE EQUITY FUND

The Value Equity Fund invests primarily in common stocks of U.S. and, to a
lesser extent, foreign companies that the Adviser believes are undervalued at
current market prices. The Adviser generally diversifies the Fund's investments
over a variety of industries and the Fund may invest in companies of any size,
including small, high growth companies.

In selecting investments for the Fund, the Adviser combines fundamental research
with valuation constraints to identify companies trading at what the Adviser
believes are reasonable prices and displaying characteristics expected to lead
to greater recognition of true value. The Adviser believes that events such as
restructuring activities and industry consolidations can be the catalysts
necessary to realize this value.

PRINCIPAL RISKS OF INVESTING IN THE VALUE EQUITY FUND

The Fund is also subject to the risk that its undervalued equity securities may
underperform other segments of the equity markets or the equity markets as a
whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the performance of the Fund's Shares from year
to year.

Page 22 of 41
<PAGE>

<TABLE>
<S> <C>
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE AVERAGE ANNUAL TOTAL RETURNS OF THE FUND'S SHARES FOR
THE PERIODS ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO1.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
- ----------------------------------------------------------------------
<S> <C> <C>
Value Equity Fund (Shares) X.XX% X.XX%*
[insert index name] X.XX% X.XX%**
</TABLE>

* Since January 15, 1997
** Since [calc. date for index]

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment Advisory Fees .XX%
Distribution (12b-1) Fees .XX%
Other Expenses
Administrative Servicing Fee .XX%
Other Operating Expenses .XX%
Total Other Expenses .XX%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
</TABLE>

Page 23 of 41
<PAGE>

VALUE EQUITY FUND (SHARES) ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER" AND
"DISTRIBUTION OF FUND SHARES."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 24 of 41
<PAGE>

OPTIMUM GROWTH FUND

FUND SUMMARY

INVESTMENT GOAL Superior, risk-adjusted total return

INVESTMENT FOCUS Common stocks of U.S. companies

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Invests in common stocks that the
Adviser believes have strong growth
prospects

INVESTOR PROFILE Investors seeking total return, and who
are willing to accept the risks of
investing in equity securities

INVESTMENT STRATEGY OF THE OPTIMUM GROWTH FUND

The Optimum Growth Fund invests primarily in common stocks of U.S. companies
that the Adviser believes have growth prospects that exceed those of the overall
market. The Fund generally invests in mid- to large-capitalization companies in
a variety of industries.

The Adviser takes a long-term approach to managing the Fund and tries to
identify high quality companies with consistent or rising earnings growth
records. Typically, these companies are industry leaders with the potential to
dominate their markets by being the low cost, high quality producers of products
or services. In addition to its core portfolio selections, the Adviser further
diversifies Fund investments with a structured segment of issuers included in
the Russell 1000 Growth Index, which includes growth-oriented issuers selected
from among the 1000 largest U.S. issuers. From this universe, the Adviser
systematically selects companies that it believes, based on quantitative
screening, complement the issuers in the Fund's core portfolio.

PRINCIPAL RISKS OF INVESTING IN THE OPTIMUM GROWTH FUND

The Fund is also subject to the risk that large capitalization U.S. stocks may
underperform other segments of the equity markets or the equity markets as a
whole.

Page 25 of 41
<PAGE>

PERFORMANCE INFORMATION

This bar chart shows changes in the performance of the Fund's Shares from year
to year.

<TABLE>
<S> <C>
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE AVERAGE ANNUAL TOTAL RETURNS OF THE FUND'S SHARES FOR
THE PERIODS ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO2.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
- ----------------------------------------------------------------------
<S> <C> <C>
Optimum Growth Fund (Shares) X.XX% X.XX%*
[insert index name] X.XX% X.XX%**
</TABLE>

* Since July 3, 1996
** Since [calc. date for index]

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

Page 26 of 41
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

OPTIMUM GROWTH FUND (SHARES) ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER" AND
"DISTRIBUTION OF FUND SHARES."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 27 of 41
<PAGE>

MORE INFORMATION ABOUT RISK

<TABLE>
<S><C>
EQUITY RISK - Equity securities include public and privately issued All Funds
equity securities, common and preferred stocks, warrants, rights to
subscribe to common stock and convertible securities, as well as
instruments that attempt to track the price movement of equity indices.
Investments in equity securities and equity derivatives in general are
subject to market risks that may cause their prices to fluctuate over
time. The value of securities convertible into equity securities, such
as warrants or convertible debt, is also affected by prevailing interest
rates, the credit quality of the issuer and any call provision.

MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are fixed income Real Estate Fund
securities representing an interest in a pool of underlying mortgage
loans. They are sensitive to changes in interest rates, but may respond
to these changes differently from other fixed income securities due to
the possibility of prepayment of the underlying mortgage loans. As a
result, it may not be possible to determine in advance the actual
maturity date or average life of a mortgage-backed security. Rising
interest rates tend to discourage refinancings, with the result that the
average life and volatility of the security will increase, exacerbating
its decrease in market price. When interest rates fall, however,
mortgage-backed securities may not gain as much in market value because
of the expectation of additional mortgage prepayments that must be
reinvested at lower interest rates. Prepayment risk may make it
difficult to calculate the average maturity of a portfolio of
mortgage-backed securities and, therefore, to assess the volatility risk
of that portfolio.

FOREIGN SECURITY RISKS - Investments in securities of foreign companies All Funds
or governments can be more volatile than investments in U.S. companies
or governments. Diplomatic, political, or economic developments,
including nationalization or appropriation, could affect investments in
foreign countries. Foreign securities markets generally have less
trading volume and less liquidity than U.S. markets. In addition, the
value of securities denominated in foreign currencies, and of dividends
from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign companies or
governments generally are not subject to uniform accounting, auditing,
and financial reporting standards comparable to those applicable to
domestic U.S. companies or governments. Transaction costs are generally
higher than those in the U.S. and expenses for custodial arrangements of
foreign securities may be somewhat greater than typical expenses for
custodial arrangements of similar U.S. securities. Some foreign
governments levy withholding taxes against dividend and interest
income. Although a portion of these taxes is

Page 28 of 41
<PAGE>

recoverable, the non-recovered portion will reduce the income received
from the securities comprising the portfolio.

CURRENCY RISK - Investments in foreign securities denominated in foreign All Funds
currencies involve additional risks, including:

- - A Fund may incur substantial costs in connection with
conversions between various currencies.

- - Only a limited market currently exists for hedging transactions relating
to currencies in certain emerging markets.

YEAR 2000 RISK - The Funds depend on the smooth functioning of computer All Funds
systems in almost every aspect of their business. Like other mutual funds,
businesses and individuals around the world, the Funds could be adversely
affected if the computer systems used by their service providers do not
properly process dates on and after January 1, 2000, and distinguish between
the year 2000 and the year 1900. This is commonly known as the "Year 2000
Problem." The Adviser and the Funds' other service providers advise that
they are taking steps to address the Year 2000 Problem with respect to the
computer systems that they use. Currently, they do not anticipate that the
transition to the 21st Century will have any material impact on their ability
to continue to service the Funds at current levels. At this time, however,
there can be no assurance that their efforts will be sufficient to avoid any
adverse impact on the Funds as a result of the Year 2000 Problem. In
addition, the Funds and their shareholders may experience losses as a result
of computer difficulties experienced by issuers of portfolio securities or
third parties, such as custodians, banks, broker-dealers or others with which
the Funds do business.

Furthermore, many foreign countries are not as prepared as the U.S. for All Funds
the year 2000 transition. As a result, computer difficulties in foreign
markets and with foreign institutions as a result of the Year 2000 Problem
may add to the possibility of losses to the Funds and their shareholders.
</TABLE>

Page 29 of 41
<PAGE>

EACH FUND'S OTHER INVESTMENTS

In addition to the investments and strategies described in this prospectus, each
Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in detail in our Statement of
Additional Information. Of course, a Fund cannot guarantee that it will achieve
its investment goal.

The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, each Fund may hold cash and/or
invest up to 100% of its assets in short-term investments that would not
ordinarily be consistent with a Fund's objectives. A Fund will do so only if
the Adviser believes that the risk of loss outweighs the opportunity for
capital gains or higher income.

EACH FUND'S INVESTMENT OBJECTIVE

The Blended Equity Fund seeks long-term capital appreciation.

The Value and Restructuring Fund seeks long-term capital appreciation.

The Small Cap Fund seeks long-term capital appreciation.

The Large Cap Growth Fund seeks superior, risk-adjusted total return. This
objective may be changed without shareholder approval.

The Energy and Natural Resources Fund seeks to provide long-term capital
appreciation.

The Real Estate Fund seeks current income and long-term capital appreciation.
This objective may be changed without shareholder approval.

The Value Equity Fund seeks long-term capital appreciation. This objective may
be changed without shareholder approval.

The Optimum Growth Fund seeks superior, risk-adjusted total return. This
objective may be changed without shareholder approval.

INVESTMENT ADVISER

Page 30 of 41
<PAGE>

U.S. Trust Company is a Connecticut state bank and trust company. Each is a
wholly-owned subsidiary of U.S. Trust Corporation, a registered bank holding
company.

U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. On December 31, 1998,
U.S. Trust had approximately $65 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W. 47th
Street, New York, NY 10036. U.S. Trust Company has its principal offices at 225
High Ridge Road, East Building, Stamford, CT 06905.

The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.

The Board of Directors of Excelsior Funds, Inc. and the Board of Trustees of
Excelsior Institutional Trust supervise the Adviser and establish policies that
the Adviser must follow in its management activities.

For the fiscal year ended March 31, 1999, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:

<TABLE>
<S> <C>
BLENDED EQUITY FUND ___%
VALUE AND RESTRUCTURING FUND ___%
SMALL CAP FUND ___%
LARGE CAP GROWTH FUND ___%
ENERGY AND NATURAL RESOURCES FUND ___%
REAL ESTATE FUND ___%
VALUE EQUITY FUND ___%
OPTIMUM GROWTH FUND ___%
</TABLE>

PORTFOLIO MANAGERS

Leigh H. Weiss and Bruce Tavel have served as the Blended Equity Fund's
portfolio co-managers since 1997. Mr. Weiss, a Managing Director and Senior
Portfolio Manager, has been with U.S. Trust since 1993. Prior to joining U.S.
Trust, Mr. Weiss was a portfolio manager with Goldman, Sachs & Co. Mr. Tavel, a
Managing Director and head of U.S. Trust's Structured Investments Division, has
been with U.S. Trust since 1980. Mr. Weiss and Mr. Tavel are primarily
responsible for the day to day management of the Blended Equity Fund's
portfolio. Research, analyses, trade execution and other facilities provided by
U.S. Trust and other personnel also play a significant role in portfolio
management and performance.

David J. Williams has served as the Value and Restructuring Fund and Value
Equity Fund portfolio manager since their inceptions. Mr. Williams, a Managing
Director and Senior Portfolio Manager of the Personal Investment Division of
U.S. Trust, has been with U.S. Trust since 1987. Mr. Williams is primarily
responsible for the day to day management of the Value and Restructuring and the
Value Equity Funds' portfolios. Research, analyses, trade execution and other
facilities provided by U.S. Trust and other personnel also play a significant
role in portfolio management and performance.

Page 31 of 41
<PAGE>

Timothy Pettee and Margaret Doyle have served as the Small Cap Fund's
portfolio co-managers since 1998. Mr. Pettee, a Managing Director and
Director of Equity Research, has been with U.S. Trust since 1998. Prior to
joining U.S. Trust, Mr. Pettee was a Vice President and fund manager with
Alliance Capital Management in New York. Ms. Doyle, a Vice President in U.S.
Trust's equity research division, has been with U.S. Trust since 1998. From
1996 to 1998, Ms. Doyle was a Vice President and Investment Officer with J&W
Seligman & Co. in New York. From 19___ to 1996, Ms. Doyle was an Equity
Research Analyst with Solomon Brothers, Inc. in New York. Mr. Pettee and Ms.
Doyle are primarily responsible for the day to day management of the Small
Cap Fund's portfolio. Research, analyses, trade execution and other
facilities provided by U.S. Trust and other personnel also play a significant
role in portfolio management and performance.

All investment decisions for the Large Cap Growth Fund and the Optimum Growth
Fund are made by a committee of investment professionals and no persons are
primarily responsible for making recommendations to that committee. United
States Trust Company of New York provides its investment advisory services to
the Large Cap Growth Fund and the Optimum Growth Fund primarily through its
Campbell Cowperthwait division.

Michael E. Hoover has served as the Energy and Natural Resources Fund's
portfolio manager since 1995. Mr. Hoover, Senior Vice President and Senior
Analyst, has been with U.S. Trust since 1989. Mr. Hoover is primarily
responsible for the day to day management of the Energy and Natural Resources
Fund's portfolio. Research, analyses, trade execution and other facilities
provided by U.S. Trust and other personnel also play a significant role in
portfolio management and performance.

Joan Ellis has served as the Real Estate Fund's portfolio manager or co-manager
since its inception. Ms. Ellis, Senior Vice President in the Investment Research
Division, has been with U.S. Trust since 1984. Ms. Ellis is primarily
responsible for the day to day management of the Real Estate Fund's portfolio.
Research, analyses, trade execution and other facilities provided by U.S. Trust
and other personnel also play a significant role in portfolio management and
performance.

PURCHASING, SELLING AND EXCHANGING FUND SHARES

This section tells you how to buy, sell (sometimes called "redeem") or exchange
shares of the Funds.

HOW TO PURCHASE FUND SHARES

You may purchase shares directly by:
- - Mail
- - Telephone
- - Wire, or
- - Automatic Investment Program

Page 32 of 41
<PAGE>

by wire or through the automatic investment program, write your check, payable
in U.S. dollars, to "Excelsior Funds, Inc." (or "Excelsior Institutional Trust"
for Shares of the Value Equity or Optimum Growth Funds) and include the name of
the appropriate Fund(s) on the check. A Fund cannot accept third-party checks,
credit cards, credit card checks or cash. To purchase shares by wire, please
call us 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 Number 9102732915

For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration (including account number)

Investors making initial investments by wire must promptly complete the enclosed
application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above
instructions.

You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your institution may charge a fee for its services, in addition to the fees
charged by the Fund. You will also generally have to address your correspondence
or questions regarding a Fund to your institution.

GENERAL INFORMATION

You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). A Fund may reject any
purchase request if it is determined that accepting the request would not be in
the best interests of the Fund or its shareholders.

The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good order.
We consider requests to be in "good order" when all required documents are
properly completed, signed and received.

Each Fund calculates its NAV once each Business Day at the regularly-scheduled
close of normal trading on the NYSE (normally, 4:00 p.m., Eastern time). So, for
you to receive the current Business Day's NAV, a Fund must receive your purchase
request in good order before 4:00 p.m., Eastern time.

HOW WE CALCULATE NAV

NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.

In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Adviser thinks that they are
unreliable, fair value prices may be

Page 33 of 41
<PAGE>

determined in good faith using methods approved by the Board of Directors. Fixed
income investments with remaining maturities of 60 days or less generally are
valued at their amortized cost which approximates their market value.

Some Funds may hold securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the market value of a Fund's investments may change on
days when you cannot purchase or sell Fund shares.

MINIMUM PURCHASES

To purchase shares for the first time, you must invest at least $500 ($250 for
IRAs) in any Fund (except for the Value Equity or Optimum Growth Funds, where
there is no minimum initial investment).

Your subsequent investments must be made in amounts of at least $50, except that
there is no minimum subsequent investment for the Value Equity or Optimum Growth
Funds.

A Fund may accept investments of smaller amounts at its discretion.

AUTOMATIC INVESTMENT PROGRAM

If you have a checking, money market or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.

With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.

HOW TO SELL YOUR FUND SHARES

You may sell shares directly by:
- - Mail
- - Telephone, or
- - Systematic Withdrawal Plan

Holders of Fund shares may sell (sometimes called "redeem") shares by following
procedures established when they opened their account or accounts. If you have
questions, call (800) 446-1012 (from overseas, call (617) 557-8280) or for the
Value Equity or Optimum Growth Funds, call (800) 909-1989 (from overseas, call
(617) 557-1755).

You may sell your shares by sending a written request for redemption to:

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

Page 34 of 41
<PAGE>

Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.

If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares.

If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 446-1012
(from overseas, call (617) 557-8280) or for the Value Equity or Optimum
Growth Funds, call (800) 909-1989 (from overseas, call (617) 557-1755). The
minimum amount for telephone redemptions is $500. We may reject a telephone
redemption request if we deem it advisable to do so.

If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).

The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.

SYSTEMATIC WITHDRAWAL PLAN

If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals from any Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.

RECEIVING YOUR MONEY

Normally, we will send your sale proceeds within five Business Days after we
receive your request in good order. Your proceeds can be wired to your bank
account (if more than $500) or sent to you by check. IF YOU RECENTLY PURCHASED
YOUR SHARES BY CHECK, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK
HAS CLEARED (WHICH MAY TAKE UP TO 15 BUSINESS DAYS).

REDEMPTIONS IN KIND

We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes on
any capital gains from the sale as with any redemption.

INVOLUNTARY SALES OF YOUR SHARES

Page 35 of 41
<PAGE>

If your account balance drops below $500 because of redemptions, you may be
required to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.

SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES

A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in our Statement of Additional Information.

HOW TO EXCHANGE YOUR SHARES

You may exchange your shares on any Business Day for shares of any portfolio of
Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc., or for Shares of any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged directly by mail, or by
telephone if you previously selected the telephone exchange option on the
account application.

You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.

IF YOU RECENTLY PURCHASED SHARES BY CHECK YOU MAY NOT BE ABLE TO EXCHANGE YOUR
SHARES UNTIL YOUR CHECK HAS CLEARED (WHICH MAY TAKE UP TO 15 BUSINESS DAYS).
This exchange privilege may be changed or canceled at any time upon 60 days'
notice.

When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.

TELEPHONE TRANSACTIONS

Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards and
procedures to confirm the identity of callers and the authenticity of
instructions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.

AUTHORIZED INTERMEDIARIES

Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund shares.
These intermediaries may authorize other organizations to accept purchase,
redemption and exchange requests for Fund shares. These requests are normally
executed at the NAV next determined after the intermediary

Page 36 of 41
<PAGE>

receives the request in good order. Authorized intermediaries are responsible
for transmitting requests and delivering funds on a timely basis.

SHAREHOLDER SERVICING

The Funds are permitted to pay a shareholder servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing periodic account
statements. The shareholder servicing fee may be up to 0.40% of the average
daily net asset value of Fund shares held by clients of a shareholder
organization.

DISTRIBUTION OF FUND SHARES

The Value Equity and Optimum Growth Funds have adopted a distribution plan
that allows Shares of the Funds to pay distribution out of its own assets and
not out of the assets of the Funds. Because these fees are paid out of a
Fund's assets continuously, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.

Distribution fees, as a percentage of average daily net assets, are as follows:

<TABLE>
<S> <C>
Value Equity Fund 0.35%
Optimum Growth Fund 0.35%
</TABLE>

The Funds' distributor may institute promotional incentive programs for
dealers, which will be paid for by the distributor out of its own assets and
not out of the assets of the Funds. Under any such program, the distributor
may provide incentives, in the form of cash or other compensation, including
merchandise, airline vouchers, trips and vacation packages, to dealers
selling shares of a Fund.

DIVIDENDS, DISTRIBUTIONS AND TAXES

Each Fund distributes its income quarterly.

Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.

Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends and
distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice.

TAXES

PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax issues
that affect the Funds and their shareholders. This summary is based on current
tax laws, which may change.

Page 37 of 41
<PAGE>

Each Fund will distribute substantially all of its income and capital gains, if
any. 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 may be taxable whether or not you reinvest them. Income
distributions are generally taxable at ordinary income tax rates. Capital gains
distributions are generally taxable at the rates applicable to long-term capital
gains. EACH SALE OR EXCHANGE IS A TAXABLE EVENT.

Each Fund may be able to pass along a tax credit for foreign income taxes they
pay. The Fund will notify you if it gives you the credit.

MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.

Page 38 of 41
<PAGE>

FINANCIAL HIGHLIGHTS

The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund's
financial performance for the past five years, or, if shorter, the period of
the Fund's operations. Some of this information reflects financial
information for a single Fund share. The total returns in the table represent
the rate that you would have earned (or lost) on an investment in a Fund,
assuming you reinvested all of your dividends and distributions. This
information has been audited by ___________________, independent public
accountants. Their report, along with each Fund's financial statements,
appears in the annual report that accompanies our Statement of Additional
Information. You can obtain the annual report, which contains more
performance information, at no charge by calling (800) 446-1012 (from
overseas, call (617) 557-8280).

Page 39 of 41
<PAGE>

EXCELSIOR FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST

INVESTMENT ADVISER

United States Trust Company of New York
114 W. 47th Street
New York, New York 10036

U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905

DISTRIBUTOR

Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829

More information about each Fund is available without charge through the
following:

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAIs dated August 1, 1999 include detailed information about Excelsior
Funds, Inc. and Excelsior Institutional Trust. The SAIs are on file with the
SEC and are incorporated by reference into this prospectus. This means that
the SAIs, for legal purposes, are a part of this prospectus.

ANNUAL AND SEMI-ANNUAL REPORTS

These reports list each Fund's holdings and contain information from the Fund's
managers about strategies, and recent market conditions and trends. The reports
also contain detailed financial information about the Funds.

TO OBTAIN MORE INFORMATION:

BY TELEPHONE: Excelsior Funds, Inc. call (800) 466-1012 (FROM OVERSEAS, CALL
(617) 557-8280) Excelsior Institutional Trust call (800) 909-1989 (FROM
OVERSEAS, CALL (617) 577-1755)

BY MAIL:
Excelsior Funds, Inc. or Excelsior Institutional Trust
73 Tremont Street
Boston, Massachusetts 02108-3913

Page 40 of 41
<PAGE>

BY E-MAIL: [VAR:FUND.EMAILADDRESS]]

BY INTERNET: [VAR:FUND.INTERNETADDRESS]]

FROM THE SEC: You can also obtain the SAIs or the Annual and Semi-Annual
reports, as well as other information about Excelsior Funds, Inc. and Excelsior
Institutional Trust, from the SEC's website ("HTTP://WWW.SEC.GOV"). You may
review and copy documents at the SEC Public Reference Room in Washington, DC
(for information call 1-800-SEC-0330). You may request documents by mail from
the SEC, upon payment of a duplicating fee, by writing to: Securities and
Exchange Commission, Public Reference Section, Washington, DC 20549-6009.
Excelsior Funds, Inc.'s and Excelsior Institutional Trust's Investment Company
Act registration numbers are 811-4088 and 811-8490, respectively.

Page 41 of 41
<PAGE>

EXCELSIOR FUNDS, INC.

PROSPECTUS
AUGUST 1, 1999

INCOME AND GROWTH FUND

INVESTMENT ADVISER
UNITED STATES TRUST COMPANY OF NEW YORK
U.S. TRUST COMPANY

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
ANY FUND SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE
OR COMPLETE. IT IS A CRIME FOR ANYONE TO TELL YOU OTHERWISE.

Page 1 of 18
<PAGE>

HOW TO READ THIS PROSPECTUS

Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals and strategies.
This prospectus gives you important information about the Income and Growth Fund
(the Fund) that you should know before investing. United States Trust Company of
New York and U.S. Trust Company (together, U.S. Trust or the Adviser) serve as
investment adviser to the Fund. Please read this prospectus and keep it for
future reference.

THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT THE FUND. FOR MORE DETAILED INFORMATION ABOUT
THE FUND, PLEASE SEE:

<TABLE>
<CAPTION>
PAGE
<S> <C>
PRINCIPAL INVESTMENT STRATEGIES AND RISKS XXX
PERFORMANCE INFORMATION AND EXPENSES XXX
MORE INFORMATION ABOUT RISK XXX
THE FUND'S OTHER INVESTMENTS XXX
THE FUND'S INVESTMENT OBJECTIVE XXX
THE INVESTMENT ADVISER AND PORTFOLIO MANAGER XXX
PURCHASING, SELLING AND EXCHANGING FUND SHARES XXX
DIVIDENDS, DISTRIBUTIONS AND TAXES XXX
FINANCIAL HIGHLIGHTS XXX
HOW TO OBTAIN MORE INFORMATION ABOUT
EXCELSIOR FUNDS, INC. Back Cover
</TABLE>

Page 2 of 18
<PAGE>

INTRODUCTION

The Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.

The Fund has its own investment goal and strategies for reaching that goal. The
investment managers invest Fund assets in a way that they believe will help the
Fund achieve its goal. Still, investing in the Fund involves risk and there is
no guarantee that the Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.

The value of your investment in the Fund is based on the market value of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the Fund owns and the markets in which they trade. The
effect on the Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.

THE ADVISER'S EQUITY INVESTMENT STRATEGY

The Adviser manages the Fund's investments with a view toward long-term success.
The Adviser's strategy generally does not change with short-term variations in
financial markets.

The Adviser begins with a belief that all worthwhile investments are grounded in
value and that it is possible to identify fundamental values that, eventually,
should be reflected in the market prices of Fund investments. The Adviser seeks
to identify these fundamental values through its constant assessment of the
security's value relative to its market price. The Adviser frequently selects
Fund investments using the following criteria:

Page 3 of 18
<PAGE>

INCOME AND GROWTH FUND

FUND SUMMARY

INVESTMENT GOAL Current income, with a secondary goal of moderate
capital appreciation

INVESTMENT FOCUS Income producing equity securities of U.S. issuers
and investment grade fixed income securities

SHARE PRICE VOLATILITY Medium

PRINCIPAL INVESTMENT
STRATEGY Investing in dividend paying equity securities
that have the potential for capital appreciation
and investment grade fixed income securities

INVESTOR PROFILE Investors seeking moderate current income and the
potential for capital appreciation, and who are
unwilling to accept risks of investing only in
equity securities

INVESTMENT STRATEGY OF THE INCOME AND GROWTH FUND

The Income and Growth Fund invests a substantial portion of its assets in income
producing equity securities of established U.S. and, to a lesser extent, foreign
companies that the Adviser believes also offer the opportunity for capital
appreciation. The Fund also will invest a portion of its assets in investment
grade fixed income securities. Investment grade securities are those rated at
the time of investment in one of the four highest rating categories by a major
rating agency, or determined by the Adviser to be of equivalent quality.

In selecting investments for the Fund, the Adviser first determines the Fund's
separate equity and fixed income strategies. The Adviser then determines the mix
of investments that, based on its economic analysis, will maximize the return
available from the equity and fixed income portions of the Fund.

PRINCIPAL RISKS OF INVESTING IN THE INCOME AND GROWTH FUND

The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa, and the volatility of lower rated securities is even
greater than that of higher rated securities. Also, longer-term securities are
generally more volatile, so the average maturity or duration of these securities
affects risk.

Page 4 of 18
<PAGE>

The Fund is also subject to the risk that income producing equity securities and
investment grade fixed income securities may underperform other segments of the
fixed income/equity markets or the fixed income/equity markets as a whole.

The Fund is also subject to the risk that the Adviser's asset allocation
decisions will not anticipate market trends successfully. For example, weighting
common stocks too heavily during a stock market decline may result in a failure
to preserve capital. Conversely, investing too heavily in fixed income
securities during a period of stock market appreciation may result in lower
total return.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO2.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
-------------------------------------- -------------- ------------- ---------------
<S> <C> <C> <C>
Income and Growth Fund X.XX% X.XX% X.XX%
[insert index name] X.XX% X.XX% X.XX%
</TABLE>

WHAT IS AN INDEX?

Page 5 of 18
<PAGE>

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------- ----------------------------------------
Investment Advisory Fee .XX%
Other Expenses
Administrative Servicing Fee .XX%
Other Operating Expenses .XX%
Total Other Expenses .XX%
- -------------------------------------------------------------------- ----------------------------------------
Total Annual Fund Operating Expenses X.XX%
</TABLE>

INCOME AND GROWTH FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 6 of 18
<PAGE>

MORE INFORMATION ABOUT RISK

EQUITY RISK - Equity securities include public and privately issued equity
securities, common and preferred stocks, warrants, rights to subscribe to common
stock and convertible securities, as well as instruments that attempt to track
the price movement of equity indices. Investments in equity securities and
equity derivatives in general are subject to market risks that may cause their
prices to fluctuate over time. The value of securities convertible into equity
securities, such as warrants or convertible debt, is also affected by prevailing
interest rates, the credit quality of the issuer and any call provision.

FIXED INCOME RISK - The market value of fixed income investments change in
response to interest rate changes and other factors. During periods of falling
interest rates, the values of outstanding fixed income securities generally
rise. Moreover, while securities with longer maturities tend to produce higher
yields, the prices of longer maturity securities are also subject to greater
market fluctuations as a result of changes in interest rates.

CALL RISK - During periods of falling interest rates, certain debt
obligations with high interest rates may be prepaid (or "called") by
the issuer prior to maturity. This may cause a Fund's average weighted
maturity to fluctuate, and may require a Fund to invest the resulting
proceeds at lower interest rates.

CREDIT RISK - The possibility that an issuer will be unable to make
timely payments of either principal or interest.

EVENT RISK - Securities may suffer declines in credit quality and
market value due to issuer restructurings or other factors. This risk
should be reduced because of Fund's multiple holdings.

FOREIGN SECURITY RISKS - Investments in securities of foreign companies or
governments can be more volatile than investments in U.S. companies or
governments. Diplomatic, political, or economic developments, including
nationalization or appropriation, could affect investments in foreign countries.
Foreign securities markets generally have less trading volume and less liquidity
than U.S. markets. In addition, the value of securities denominated in foreign
currencies, and of dividends from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
companies or governments generally are not subject to uniform accounting,
auditing, and financial reporting standards

Page 7 of 18
<PAGE>

comparable to those applicable to domestic U.S. companies or governments.
Transaction costs are generally higher than those in the U.S. and expenses for
custodial arrangements of foreign securities may be somewhat greater than
typical expenses for custodial arrangements of similar U.S. securities. Some
foreign governments levy withholding taxes against dividend and interest income.
Although a portion of these taxes is recoverable, the non-recovered portion will
reduce the income received from the securities comprising the portfolio.

CURRENCY RISK - Investments in foreign securities denominated in foreign
currencies involve additional risks, including:

- - The Fund may incur substantial costs in connection with
conversions between various currencies.
- - Only a limited market currently exists for hedging
transactions relating to currencies in certain emerging
markets.

YEAR 2000 RISK - The Fund depends on the smooth functioning of computer
systems in almost every aspect of its business. Like other mutual funds,
businesses and individuals around the world, the Fund could be adversely
affected if the computer systems used by its service providers do not
properly process dates on and after January 1, 2000, and distinguish between
the year 2000 and the year 1900. This is commonly known as the "Year 2000
Problem." The Adviser and the Fund's other service providers advise that they
are taking steps to address the Year 2000 Problem with respect to the computer
systems that they use. Currently, they do not anticipate that the transition
to the 21st Century will have any material impact on their ability to
continue to service the Fund at current levels. At this time, however, there
can be no assurance that their efforts will be sufficient to avoid any
adverse impact on the Fund as a result of the Year 2000 Problem. In
addition, the Fund and its shareholders may experience losses as a result of
computer difficulties experienced by issuers of portfolio securities or third
parties, such as custodians, banks, broker-dealers or others with which the
Fund does business.

Furthermore, many foreign countries are not as prepared as the U.S. for the
year 2000 transition. As a result, computer difficulties in foreign markets
and with foreign institutions as a result of the Year 2000 Problem may add to
the possibility of losses to the Fund and its shareholders.

Page 8 of 18
<PAGE>

THE FUND'S OTHER INVESTMENTS

In addition to the investments and strategies described in this prospectus, the
Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in detail in our Statement of
Additional Information. Of course, the Fund cannot guarantee that it will
achieve its investment goal.

The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, the Fund may hold cash and/or
invest up to 100% of its assets in short-term investments that would not
ordinarily be consistent with the Fund's objectives. The Fund will do so only
if the Adviser believes that the risk of loss outweighs the opportunity for
capital gains or higher income.

THE FUND'S INVESTMENT OBJECTIVE

The Income and Growth Fund's primary investment objective is to seek to
provide moderate current income and then, as a secondary objective, to
achieve capital appreciation from its investments.

INVESTMENT ADVISER

United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to the Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U. S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.

The Adviser makes investment decisions for the Fund and continuously reviews,
supervises and administers the Fund's investment program.

The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.

For the fiscal year ended March 31, 1999, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:

INCOME AND GROWTH FUND ___%

PORTFOLIO MANAGER

Page 9 of 18
<PAGE>

Richard L. Bayles has served as the Fund's portfolio manager since 1990. Mr.
Bayles, a Managing Director and Senior Portfolio Manager of the Personal
Investment Division of U.S. Trust, has been with U.S. Trust since 1990. Mr.
Bayles is primarily responsible for the day to day management of the Income and
Growth Fund's portfolio. Research analyses, trade execution and other facilities
provided by U.S. Trust and other personnel also play a significant role in
portfolio management and performance.

PURCHASING, SELLING AND EXCHANGING FUND SHARES

This section tells you how to buy, sell (sometimes called "redeem") or exchange
shares of the Fund.

HOW TO PURCHASE FUND SHARES

You may purchase shares directly by:
- - Mail
- - Telephone
- - Wire, or
- - Automatic Investment Program

To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire or through the automatic
investment program, write your check, payable in U.S. dollars, to "Excelsior
Funds, Inc." and include the name of the Fund on the check. The Fund cannot
accept third-party checks, credit cards, credit card checks or cash. To purchase
shares by wire, please call us 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 Number 9102732915

For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration (including account number)

Page 10 of 18
<PAGE>

The Fund's distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Fund. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of the
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.

GENERAL INFORMATION

You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). The Fund may reject any
purchase request if it is determined that accepting the request would not be in
the best interests of the Fund or its shareholders.

The price per share (the offering price) will be the net asset value per share
(NAV) next determined after the Fund receives your purchase request in good
order. We consider requests to be in "good order" when all required documents
are properly completed, signed and received.

The Fund calculates its NAV once each Business Day at the regularly-scheduled
close of normal trading on the NYSE (normally, 4:00 p.m., Eastern time). So, for
you to receive the current Business Day's NAV, the Fund must receive your
purchase request in good order before 4:00 p.m., Eastern time.

HOW WE CALCULATE NAV

NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.

In calculating NAV, the Fund generally values the securities in its
investment portfolio at market prices. If market prices are unavailable or
the Adviser thinks that they are unreliable, fair value prices may be
determined in good faith using methods approved by the Board of Directors.
Fixed income investments with remaining maturities of 60 days or less
generally are valued at their amortized cost, which approximates their market
value.

MINIMUM PURCHASES

To purchase shares for the first time, you must invest at least $500 ($250 for
IRAs) in the Fund.

Your subsequent investments in the Fund must be made in amounts of at least $50.

The Fund may accept investments of smaller amounts at its discretion.

AUTOMATIC INVESTMENT PROGRAM

If you have a checking, money market or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.

Page 11 of 18
<PAGE>

With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.

HOW TO SELL YOUR FUND SHARES

You may sell shares directly by:
- - Mail
- - Telephone, or
- - Systematic Withdrawal Plan

You may sell your shares by sending a written request for redemption to:

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

Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.

If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares.

If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting the Fund directly by telephone at (800) 446-1012
(from overseas, call (617) 557-8280). The minimum amount for telephone
redemptions is $500. We may reject a telephone redemption request if we deem
it advisable to do so.

The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.

SYSTEMATIC WITHDRAWAL PLAN

If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals from the Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.

Page 12 of 18
<PAGE>

RECEIVING YOUR MONEY

REDEMPTIONS IN KIND

INVOLUNTARY SALES OF YOUR SHARES

SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES

The Fund may suspend your right to sell your shares if the NYSE restricts
trading, the SEC declares an emergency or for other reasons. More information
about this is in our Statement of Additional Information.

Page 13 of 18
<PAGE>

HOW TO EXCHANGE YOUR SHARES

You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.

IF YOU RECENTLY PURCHASED SHARES BY CHECK, YOU MAY NOT BE ABLE TO EXCHANGE YOUR
SHARES UNTIL YOUR CHECK HAS CLEARED (WHICH MAY TAKE UP TO 15 BUSINESS DAYS).
This exchange privilege may be changed or canceled at any time upon 60 days'
notice.

When you exchange shares, you are really selling your shares and buying other
shares. So, your sale price and purchase price will be based on the NAV next
calculated after the Fund receives your exchange request in good order.

TELEPHONE TRANSACTIONS

Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Fund has certain safeguards and
procedures to confirm the identity of callers and the authenticity of
instructions, the Fund is not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with the Fund over the telephone, you will
generally bear the risk of any loss.

AUTHORIZED INTERMEDIARIES

SHAREHOLDER SERVICING

The Fund is permitted to pay a shareholder servicing fee to certain shareholder
organizations for providing services to their customers who hold shares of the
Fund. These services may include assisting in the processing of purchase,
redemption and exchange requests and providing periodic account statements. The
shareholder servicing fee may be up to 0.40% of the average daily net asset
value of Fund shares held by clients of a shareholder organization.

Page 14 of 18
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

The Fund distributes its income quarterly.

The Fund makes distributions of capital gains, if any, at least annually. If you
own Fund shares on the Fund's record date, you will be entitled to receive the
distribution.

TAXES

PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax issues
that affect the Fund and its shareholders. This summary is based on current tax
laws, which may change.

The Fund will distribute substantially all of its income and capital gains, if
any. The dividends and distributions you receive may be subject to federal,
state and local taxation, depending upon your tax situation. Distributions you
receive from the Fund may be taxable whether or not you reinvest them. Income
distributions are generally taxable at ordinary income tax rates. Capital gains
distributions are generally taxable at the rates applicable to long-term capital
gains. EACH SALE OR EXCHANGE IS A TAXABLE EVENT.

The Fund may be able to pass along a tax credit for foreign income taxes it
pays. The Fund will notify you if it gives you the credit.

MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.

Page 15 of 18
<PAGE>

FINANCIAL HIGHLIGHTS

The tables that follow present performance information about shares of the
Fund. This information is intended to help you understand the Fund's
financial performance for the past five years, or, if shorter, the period of
the Fund's operations. Some of this information reflects financial
information for a single Fund share. The total returns in the table represent
the rate that you would have earned (or lost) on an investment in the Fund,
assuming you reinvested all of your dividends and distributions. This
information has been audited by ___________________, independent public
accountants. Their report, along with the Fund's financial statements,
appears in the annual report that accompanies our Statement of Additional
Information. You can obtain the annual report, which contains more
performance information, at no charge by calling (800) 446-1012 (from
overseas, call (617) 557-8280).

Page 16 of 18
<PAGE>

EXCELSIOR FUNDS, INC.

INVESTMENT ADVISER

United States Trust Company of New York
114 W. 47th Street
New York, New York 10036

U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905

DISTRIBUTOR

Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829

More information about the Fund is available without charge through the
following:

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI dated August 1, 1999 includes detailed information about Excelsior
Funds, Inc. The SAI is on file with the SEC and is incorporated by reference
into this prospectus. This means that the SAI, for legal purposes, is a part of
this prospectus.

ANNUAL AND SEMI-ANNUAL REPORTS

These reports list the Fund's holdings and contain information from the Fund's
managers about strategies, and recent market conditions and trends. The reports
also contain detailed financial information about the Fund.

TO OBTAIN MORE INFORMATION:

BY TELEPHONE: CALL (800) 446-1012 (FROM OVERSEAS, CALL (617) 557-8280.

BY MAIL:
Excelsior Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913

BY E-MAIL: [VAR:FUND.EMAILADDRESS]]

BY INTERNET: [VAR:FUND.INTERNETADDRESS]]

Page 17 of 18
<PAGE>

FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about the Excelsior Funds, Inc., from the SEC's
website ("HTTP://WWW.SEC.GOV"). You may review and copy documents at the SEC
Public Reference Room in Washington, DC (for information call 1-800-SEC-0330).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-6009. Excelsior Funds, Inc.'s Investment Company
Act registration number is 811-4088.

Page 18 of 18
<PAGE>

EXCELSIOR FUNDS, INC.

Institutional Shares
PROSPECTUS
AUGUST 1, 1999

MONEY FUND
GOVERNMENT MONEY FUND

INVESTMENT ADVISER
UNITED STATES TRUST COMPANY OF NEW YORK
U.S. TRUST COMPANY

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED ANY FUND SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. IT IS A CRIME FOR ANYONE TO TELL
YOU OTHERWISE.

Page 1 of 18
<PAGE>

HOW TO READ THIS PROSPECTUS

Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals and strategies.
This prospectus gives you important information about the Institutional
Shares of the Money Fund and Government Money Fund (each, a Fund) that you
should know before investing. United States Trust Company of New York and
U.S. Trust Company (together, U.S. Trust or the Adviser) serve as investment
adviser to the Funds. Please read this prospectus and keep it for future
reference.

<TABLE>
<CAPTION>
PAGE
<S> <C>
MONEY FUND XXX
GOVERNMENT MONEY FUND XXX
PRINCIPAL INVESTMENT STRATEGIES AND RISKS XXX
PERFORMANCE INFORMATION AND EXPENSES XXX
MORE INFORMATION ABOUT RISK XXX
EACH FUND'S OTHER INVESTMENTS XXX
EACH FUND'S INVESTMENT OBJECTIVE XXX
THE INVESTMENT ADVISER XXX
PURCHASING, SELLING AND EXCHANGING FUND SHARES XXX
DIVIDENDS, DISTRIBUTIONS AND TAXES XXX
FINANCIAL HIGHLIGHTS XXX
HOW TO OBTAIN MORE INFORMATION ABOUT
EXCELSIOR FUNDS, INC. Back Cover
</TABLE>

Page 2 of 18
<PAGE>

INTRODUCTION

Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.

Each Fund has an investment goal and strategies for reaching that goal. The
investment managers invest Fund assets in a way that they believe will help a
Fund achieve its goal. Still, investing in each Fund involves risk and there
is no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate
actual market movements, economic conditions or company performance, and
these judgments may affect the return on your investment. In fact, no matter
how good a job an investment manager does, you could lose money on your
investment in a Fund, just as you could with other investments. A Fund
share is not a bank deposit and it is not insured or guaranteed by the
Federal Deposit Insurance Corporation (FDIC) or any government agency.

THE FUNDS TRY TO MAINTAIN A CONSTANT PRICE PER SHARE OF $1.00, BUT THERE IS NO
GUARANTEE THAT A FUND WILL ACHIEVE THIS GOAL.

Page 3 of 18
<PAGE>

MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with preserving
capital and maintaining liquidity

INVESTMENT FOCUS Money market instruments

SHARE PRICE VOLATILITY Very low

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of high quality
short-term debt securities designed to allow
the Fund to maintain a stable net asset value
per share

INVESTOR PROFILE Conservative investors seeking current income
from their investment

INVESTMENT STRATEGY OF THE MONEY FUND

The Money Fund invests substantially all of its assets in high quality U.S.
dollar-denominated money market instruments, such as bank certificates of
deposit, bankers' acceptances, commercial paper, corporate debt, obligations
issued or guaranteed by the U.S. government, and its agencies and
instrumentalities and fully collateralized repurchase agreements. In managing
the Fund, the Adviser assesses current and projected market conditions,
particularly interest rates. Based on this assessment, the Adviser uses gradual
shifts in portfolio maturity to respond to expected changes and selects
securities that it believes offer the most attractive risk/return trade off.

The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments as to maturities, issuers and providers of
credit support.

PRINCIPAL RISKS OF INVESTING IN THE MONEY FUND

An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the investment return generated by
the Fund may be less than the rate of inflation. A Fund share is not a bank
deposit and is not insured or guaranteed by the FDIC or any government agency.
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.

Page 4 of 18
<PAGE>

PERFORMANCE INFORMATION

Institutional Shares of the Fund have less than one calendar year's performance.
For this reason, the performance information shown below is for the Fund's other
class of shares (Shares) that is not offered in this prospectus. The Fund's
Institutional Shares and Shares are invested in the same portfolio of
securities. IN REVIEWING THIS PERFORMANCE INFORMATION, HOWEVER, YOU SHOULD BE
AWARE THAT SHARES HAVE A _____% (ANNUALIZED) ____ FEE, WHILE INSTITUTIONAL
SHARES DO NOT. IF THE EXPENSES OF THE INSTITUTIONAL SHARES WERE REFLECTED,
PERFORMANCE WOULD BE HIGHER.

The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the past performance of
Shares of the Fund does not necessarily indicate how the Fund will perform in
the future.

This bar chart shows changes in the performance of the Fund's Shares from year
to year.

<TABLE>

<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE SHOWS THE AVERAGE ANNUAL TOTAL RETURNS OF THE FUND'S SHARES FOR THE
PERIODS ENDING DECEMBER 31, 1998.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Money Fund (Shares) X.XX% X.XX% X.XX%
</TABLE>

Call 1-800-XXX-XXXX for the Fund's most current 7-day yield.

FUND FEES AND EXPENSES

Page 5 of 18
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment Advisory Fees .XX%
Other Expenses
Administrative Servicing Fee .XX%
Other Operating Expenses .XX%
Total Other Expenses .XX%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%*
</TABLE>

* THE FUND'S ANNUAL OPERATING EXPENSES ARE BASED ON ACTUAL FEES AND ESTIMATED
EXPENSES FOR THE CURRENT FISCAL YEAR.

MONEY FUND (INSTITUTIONAL SHARES) ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

This Example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated and that you sell your shares at the end
of the period.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$---- $----
</TABLE>

Page 6 of 18
<PAGE>

GOVERNMENT MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with preserving
capital and maintaining liquidity

INVESTMENT FOCUS Money market instruments issued or
guaranteed by the U.S. government, its
agencies and instrumentalities

SHARE PRICE VOLATILITY Very low

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of high quality
short-term debt securities issued by the
U.S. government, its agencies and
instrumentalities designed to allow the
Fund to maintain a stable net asset value
per share

INVESTOR PROFILE Conservative investors seeking current
income from their investment

INVESTMENT STRATEGY OF THE GOVERNMENT MONEY FUND

The Government Money Fund invests substantially all of its assets in high
quality U.S. dollar-denominated money market instruments issued or guaranteed by
the U.S. government, its agencies and instrumentalities and fully collateralized
repurchase agreements. In managing the Fund, the Adviser assesses current and
projected market conditions, particularly interest rates. Based on this
assessment, the Adviser uses gradual shifts in portfolio maturity to respond to
expected changes and selects securities that it believes offer the most
attractive risk/return trade off.

PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT MONEY FUND

Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies are
backed by the U.S. Treasury, while others are backed solely by the ability of
the agency to borrow from the U.S. Treasury or by the agency's own resources.

Page 7 of 18
<PAGE>

PERFORMANCE INFORMATION

This bar chart shows changes in the performance of the Fund's Shares from year
to year.

<TABLE>

<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE SHOWS THE AVERAGE ANNUAL TOTAL RETURNS OF THE FUND'S SHARES FOR THE
PERIODS ENDING DECEMBER 31, 1998.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Fund (Shares) X.XX% X.XX% X.XX%
</TABLE>

Call 1-800-XXX-XXXX for the Fund's most current 7-day yield.

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

* THE FUND'S ANNUAL OPERATING EXPENSES ARE BASED ON ACTUAL FEES AND ESTIMATED
EXPENSES FOR THE CURRENT FISCAL YEAR.

GOVERNMENT MONEY FUND (INSTITUTIONAL SHARES) ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$---- $----
</TABLE>

Page 8 of 18
<PAGE>

MORE INFORMATION ABOUT RISK

CALL RISK - During periods of falling interest rates, certain debt
obligations with high interest rates may be prepaid (or "called") by
the issuer prior to maturity. This may cause the Fund's average
weighted maturity to fluctuate, and may require the Fund to invest the
resulting proceeds at lower interest rates.

CREDIT RISK - The possibility that an issuer will be unable to make
timely payments of either principal or interest.

EVENT RISK - Securities may suffer declines in credit quality and
market value due to issuer restructurings or other factors. This risk
should be reduced because of the Fund's multiple holdings.

MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are fixed income
securities representing an interest in a pool of underlying mortgage loans. They
are sensitive to changes in interest rates, but may respond to these changes
differently from other fixed income securities due to the possibility of
prepayment of the underlying mortgage loans. As a result, it may not be possible
to determine in advance the actual maturity date or average life of a
mortgage-backed security. Rising interest rates tend to discourage refinancings,
with the result that the average life and volatility of the security will
increase, exacerbating its decrease in market price. When interest rates fall,
however, mortgage-backed securities may not gain as much in market value because
of the expectation of additional mortgage prepayments that must be reinvested at
lower interest rates. Prepayment risk may make it difficult to calculate the
average maturity of a portfolio of mortgage-backed securities and, therefore, to
assess the volatility risk of that portfolio.

Page 9 of 18
<PAGE>

YEAR 2000 RISK - The Funds depend on the smooth functioning of computer
systems in almost every aspect of their business. Like other mutual funds,
businesses and individuals around the world, the Funds could be adversely
affected if the computer systems used by their service providers do not
properly process dates on and after January 1, 2000, and distinguish between
the year 2000 and the year 1900. This is commonly known as the "Year 2000
Problem." The Adviser and the Funds' other service providers advise that they
are taking steps to address the Year 2000 Problem with respect to the
computer systems that they use. Currently, they do not anticipate that the
transition to the 21st Century will have any material impact on their ability
to continue to service the Funds at current levels. At this time, however,
there can be no assurance that their efforts will be sufficient to avoid any
adverse impact on the Funds as a result of the Year 2000 Problem. In
addition, the Funds and their shareholders may experience losses as a result
of computer difficulties experienced by issuers of portfolio securities or
third parties, such as custodians, banks, broker-dealers or others with which
the Funds do business.

Page 10 of 18
<PAGE>

EACH FUND'S OTHER INVESTMENTS

In addition to the investments and strategies described in this prospectus,
the Funds also may invest in other securities, use other strategies and engage
in other investment practices. These investments and strategies, as well as
those described in this prospectus, are described in detail in our Statement
of Additional Information. Of course, a Fund cannot guarantee that it will
achieve its investment goal.

EACH FUND'S INVESTMENT OBJECTIVE

The Money Fund seeks as high a level of current income as is consistent with
liquidity and stability of principal.

The Government Money Fund seeks as high a level of current income as is
consistent with liquidity and stability of principal.

INVESTMENT ADVISER

United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U. S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.

The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.

The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.

For the fiscal year ended March 31, 1999, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:

MONEY FUND _______%
GOVERNMENT MONEY FUND _______%

Page 11 of 18
<PAGE>

PURCHASING, SELLING AND EXCHANGING FUND SHARES

This section tells you how to buy, sell (sometimes called "redeem") or exchange
Institutional Shares of the Funds.

INSTITUTIONAL SHARES
- No sales charge
- No 12b-1 fees
- No minimum initial or subsequent investment

Institutional Shares are offered only to financial institutions investing for
their own or their customers' accounts. For information on how to open an
account and set up procedures for placing transactions call (800) 446-1012 (from
overseas, call (617) 557-8280). Customers of financial institutions should
contact their institutions for information on their accounts.

HOW TO PURCHASE FUND SHARES

You may purchase shares directly by:
- - Mail
- - Telephone, or
- - Wire

To purchase shares directly from us, please call (800) 446-1012 (from
overseas, call (617) 557-8280), or complete and send in the enclosed
application to Excelsior Funds, c/o Chase Global Funds Services Company, P.O.
Box 2798, Boston, MA 02208-2798. Unless you arrange to pay by wire, write
your check, payable in U.S. dollars, to "Excelsior Funds, Inc." and include
the name of the appropriate Fund(s) on the check. A Fund cannot accept
third-party checks, credit card checks or cash. To purchase shares by wire,
please call us for instructions. Federal funds and registration instructions
should be wired through the Federal Reserve System to:

The Chase Manhattan Bank
ABA #021000021
Excelsior Funds
Credit DDA 910-2-733046
[Account Registration]
[Account Number]
[Wire Control Number]

You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures. Your institution may charge a fee for its services, in addition to
the fees charged by the Fund. You will also generally have to address your
correspondence or questions regarding a Fund to your institution.

Page 12 of 18
<PAGE>

The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of a
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.

GENERAL INFORMATION

The price per share (the offering price) will be the net asset value per
share (NAV) next determined after a Fund receives your purchase request in
good order. We consider requests to be in "good order" when all required
documents are properly completed, signed and received.

Each Fund calculates its NAV twice each Business Day at 1:00 p.m., Eastern
time and at the regularly-scheduled close of normal trading on the NYSE
(normally, 4:00 p.m., Eastern time). For you to be eligible to receive
dividends declared on the day you submit your purchase request, a Fund must
receive your request in good order before 1:00 p.m., Eastern time and federal
funds (readily available funds) before the regularly-scheduled close of
normal trading on the NYSE.

HOW WE CALCULATE NAV

NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.

In calculating NAV for the Funds, we generally value the securities in a
Fund's investment portfolio using the amortized cost valuation method, which
is described in detail in our Statement of Additional Information. If this
method is determined to be unreliable during certain market conditions or for
other reasons, a Fund may value its portfolio at market price or fair value
prices may be determined in good faith using methods approved by the Board of
Directors.

HOW TO SELL YOUR FUND SHARES

You may sell shares directly by:
- - Mail, or
- - Telephone

Holders of Institutional Shares may sell (sometimes called "redeem") shares by
following procedures established when they opened their account or accounts. If
you have questions, call (800) 446-1012 (from overseas, call (617) 557-8280).

Page 13 of 18
<PAGE>

You may sell your shares by sending a written request for redemption to:

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

Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.

The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.

RECEIVING YOUR MONEY

Normally, we will send your sale proceeds the next Business Day after we receive
your redemption request in good order. Your proceeds can be wired to your bank
account or sent to you by check. IF YOU RECENTLY PURCHASED YOUR SHARES BY CHECK,
REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED (WHICH MAY
TAKE UP TO 15 BUSINESS DAYS).

REDEMPTIONS IN KIND

INVOLUNTARY SALES OF YOUR SHARES

Page 14 of 18
<PAGE>

SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES

A Fund may suspend your right to sell your shares if the NYSE restricts
trading, the SEC declares an emergency or for other reasons. More information
about this is in our Statement of Additional Information.

HOW TO EXCHANGE YOUR SHARES

You may exchange your shares on any Business Day for Institutional Shares of any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged directly by mail, or by
telephone if you previously selected the telephone exchange option on the
account application.

TELEPHONE TRANSACTIONS

Purchasing, selling and exchanging Fund shares over the telephone is
extremely convenient, but not without risk. Although the Funds have certain
safeguards and procedures to confirm the identity of callers and the
authenticity of instructions, the Funds are not responsible for any losses or
costs incurred by following telephone instructions we reasonably believe to
be genuine. If you or your financial institution transact with a Fund over
the telephone, you will generally bear the risk of any loss.

AUTHORIZED INTERMEDIARIES

SHAREHOLDER SERVICING

Page 15 of 18
<PAGE>

account statements. The shareholder servicing fee may be up to 0.40% of the
average daily net asset value of Fund shares held by clients of a shareholder
organization.

DIVIDENDS, DISTRIBUTIONS AND TAXES

Each Fund declares a dividend daily and paying accumulated dividends monthly.

Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive
the distribution.

Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends
and distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice.

TAXES

PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT
FEDERAL, STATE AND LOCAL INCOME TAXES. Below we have summarized some
important tax issues that affect the Funds and their shareholders. This
summary is based on current tax laws, which may change.

MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.

Page 16 of 18
<PAGE>

EXCELSIOR FUNDS, INC.

INVESTMENT ADVISER

United States Trust Company of New York
114 W. 47th Street
New York, New York 10036

U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905

DISTRIBUTOR

Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829

More information about each Fund is available without charge through the
following:

STATEMENT OF ADDITIONAL INFORMATION (SAI)

ANNUAL AND SEMI-ANNUAL REPORTS

These reports list each Fund's holdings and contain information from the Fund's
managers about strategies and recent market conditions and trends. The reports
also contain detailed financial information about the Funds.

TO OBTAIN MORE INFORMATION:

BY TELEPHONE: CALL (800) 909-1989 (FROM OVERSEAS, CALL (617) 557-1755)

BY MAIL:
Excelsior Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913

BY E-MAIL: [VAR:FUND.EMAILADDRESS]]

BY INTERNET: [VAR:FUND.INTERNETADDRESS]]

Page 17 of 18
<PAGE>

FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about Excelsior Funds, Inc., from the SEC's website
("HTTP://WWW.SEC.GOV"). You may review and copy documents at the SEC Public
Reference Room in Washington, DC (for information call 1-800-SEC-0330). You may
request documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section,
Washington, DC 20549-6009. Excelsior Funds, Inc.'s Investment Company Act
registration number is 811-4088.

Page 18 of 18
<PAGE>

EXCELSIOR FUNDS, INC.

INTERNATIONAL FUNDS

PROSPECTUS
AUGUST 1, 1999

INTERNATIONAL FUND
LATIN AMERICA FUND
PACIFIC/ASIA FUND
PAN EUROPEAN FUND
EMERGING MARKETS FUND

INVESTMENT ADVISER
UNITED STATES TRUST COMPANY OF NEW YORK
U.S. TRUST COMPANY

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED ANY FUND SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. IT IS A CRIME FOR ANYONE TO TELL YOU
OTHERWISE.

Page 1 of 34
<PAGE>

HOW TO READ THIS PROSPECTUS

Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals and strategies.
This prospectus gives you important information about the International, Latin
America, Pacific/Asia, Pan European, and Emerging Markets Funds (each, a Fund)
that you should know before investing. United States Trust Company of New York
and U.S. Trust Company (together, U.S. Trust or the Adviser) serve as investment
adviser to each Fund. Please read this prospectus and keep it for future
reference.

<TABLE>
<CAPTION>
PAGE
<S> <C>
INTERNATIONAL FUND XXX
LATIN AMERICA FUND XXX
PACIFIC/ASIA FUND XXX
PAN EUROPEAN FUND XXX
EMERGING MARKETS FUND XXX
MORE INFORMATION ABOUT RISK XXX
EACH FUND'S OTHER INVESTMENTS XXX
EACH FUND'S INVESTMENT OBJECTIVE XXX
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS XXX
PURCHASING, SELLING AND EXCHANGING FUND SHARES XXX
DIVIDENDS, DISTRIBUTIONS AND TAXES XXX
FINANCIAL HIGHLIGHTS XXX
HOW TO OBTAIN MORE INFORMATION ABOUT
EXCELSIOR FUNDS, INC. Back Cover
</TABLE>

Page 2 of 34
<PAGE>

INTRODUCTION

Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.

Each Fund has its own investment goal and strategies for reaching that goal. The
investment managers invest Fund assets in a way that they believe will help a
Fund achieve its goal. Still, investing in each Fund involves risk and there is
no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and it is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.

OVERVIEW OF INTERNATIONAL FUNDS

Each Fund invests primarily in securities of companies that are located in or
conduct a substantial amount of their business in foreign countries, including
emerging market countries. Prices of securities in foreign markets generally,
and emerging markets in particular, have historically been more volatile than
prices in U.S. markets. In addition, to the extent that a Fund focuses its
investments in a particular region, the effects of political and economic events
in that region on the value of your investment in a Fund will be magnified.

Page 3 of 34
<PAGE>

INTERNATIONAL FUND

FUND SUMMARY

INVESTMENT GOAL Total return

INVESTMENT FOCUS Foreign equity securities

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Investing in a diversified portfolio of equity
securities of issuers in developed foreign
countries and, to a lesser extent, emerging
markets

INVESTOR PROFILE Investors seeking total return, who are
willing to accept the risks and price
volatility of investing in companies located
in foreign countries

INVESTMENT STRATEGY OF THE INTERNATIONAL FUND

The International Fund invests primarily in equity securities of larger, more
established companies located in developed foreign markets, which include most
nations in western Europe and the more developed nations in the Pacific Basin
and Latin America. The Fund may invest to a lesser extent in less developed
countries and regions to capitalize on opportunities in emerging markets. The
Adviser generally does not attempt to hedge the effects of currency value
fluctuations on the Fund's investments on an on-going basis.

The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in a broad range of foreign markets, giving particular emphasis to each
company's scope of operations and economic ties to one or more specific
countries. While the Fund generally invests in companies in a variety of
countries, industries and sectors, the Adviser does not attempt to invest a
specific percentage of the Fund's assets in a given country, region or industry.
The Fund will make investments in companies located in emerging markets only
where the Adviser believes that such companies' growth/appreciation potential
transcends their location or operations in emerging market countries.

PRINCIPAL RISKS OF INVESTING IN THE INTERNATIONAL FUND

Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily

Page 4 of 34
<PAGE>

affect the U.S. economy or similar issuers located in the United States. In
addition, investments in foreign countries are generally denominated in a
foreign currency. As a result, changes in the value of those currencies compared
to the U.S. dollar may affect (positively or negatively) the value of a Fund's
investments. These currency movements may happen separately from and in response
to events that do not otherwise affect the value of the security in the issuer's
home country. These various risks will be even greater for investments in
emerging market countries since political turmoil and rapid changes in economic
conditions are more likely to occur in these countries.

The Fund is also subject to the risk that foreign equity securities may
underperform other segments of the equity markets or the equity markets as a
whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO1.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
International Fund X.XX% X.XX% X.XX%
[insert index name] X.XX% X.XX% X.XX%
</TABLE>

WHAT IS AN INDEX?

Page 5 of 34
<PAGE>

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

INTERNATIONAL FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$----- $---- $---- $----
</TABLE>

Page 6 of 34
<PAGE>

LATIN AMERICA FUND

FUND SUMMARY

INVESTMENT GOAL Long-term capital appreciation

INVESTMENT FOCUS Equity securities of Latin American
issuers

SHARE PRICE VOLATILITY Very high

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of equity
securities of companies located in Latin
America

INVESTOR PROFILE Investors seeking capital appreciation,
who are willing to accept the risks and
possibly extreme price volatility of
investing in Latin American issuers

INVESTMENT STRATEGY OF THE LATIN AMERICA FUND

The Latin America Fund invests primarily in equity securities of larger, more
established companies in Latin America, which includes Central and South
America. The Adviser generally does not attempt to hedge the effects of currency
value fluctuations on the Fund's investments on an on-going basis.

The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in the Latin American markets, giving particular emphasis to each company's
scope of operations and economic ties to one or more specific countries. While
the Fund generally invests in companies in a variety of countries, industries
and sectors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country or industry. The Fund will make investments in
debt securities only where the Adviser believes that they offer the potential
for capital appreciation.

PRINCIPAL RISKS OF INVESTING IN THE LATIN AMERICA FUND

The Fund invests primarily in securities of issuers located in a single
geographic region. The economic and political environments of countries in a
particular region frequently are interrelated and the value of regional markets
and issuers often will rise and fall together. As a result, the Fund is subject
to the risk that political and economic events will affect a larger portion of
the Fund's investments than if the Fund's investments were more geographically
diversified. The Fund's regional focus also increases its potential share price
volatility.

Page 7 of 34
<PAGE>

Emerging market countries are countries that the World Bank or the United
Nations considers to be emerging or developing. Emerging markets may be more
likely to experience political turmoil or rapid changes in market or economic
conditions than more developed countries. In addition, the financial stability
of issuers (including governments) in emerging market countries may be more
precarious than in other countries. As a result, there will tend to be an
increased risk of price volatility associated with the Fund's investments in
emerging market countries, which may be magnified by currency fluctuations
relative to the U.S. dollar.

The Fund is also subject to the risk that Latin American equity securities may
underperform other segments of the equity markets or the equity markets as a
whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO2.PERFORMANCE.TABLE.INDEX1.NAME].

Page 8 of 34
<PAGE>

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Latin America Fund X.XX% X.XX% X.XX%
[insert index name] X.XX% X.XX% X.XX%
</TABLE>

* Since December 31, 1992
** Since [calc. date for index]

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

LATIN AMERICA FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

Page 9 of 34
<PAGE>

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$----- $---- $---- $----
</TABLE>

Page 10 of 34
<PAGE>

PACIFIC/ASIA FUND

FUND SUMMARY

INVESTMENT GOAL Long-term capital appreciation

INVESTMENT FOCUS Equity securities of Asian issuers

SHARE PRICE VOLATILITY Very high

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of equity
securities of companies located in Asia

INVESTOR PROFILE Investors seeking capital appreciation,
who are willing to accept the risks and
possibly extreme price volatility of
investing in Asian issuers

INVESTMENT STRATEGY OF THE PACIFIC/ASIA FUND

The Pacific/Asia Fund invests primarily in equity securities of larger, more
established companies located in Asia and the Pacific Basin, including
Australia, New Zealand and India. The Adviser generally does not attempt to
hedge the effects of currency value fluctuations on the Fund's investments on an
on-going basis.

The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in the Pacific Basin markets, giving particular emphasis to each company's scope
of operations and economic ties to one or more specific countries. While the
Fund generally invests in companies in a variety of countries, industries and
sectors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country or industry. The Fund will make investments in
debt securities only where the Adviser believes that they offer the potential
for capital appreciation.

PRINCIPAL RISKS OF INVESTING IN THE PACIFIC/ASIA FUND

Page 11 of 34
<PAGE>

response. These factors contribute to price volatility, which is the principal
risk of investing in the Fund.

The Fund is also subject to the risk that Pacific Basin equity securities may
underperform other segments of the equity markets or the equity markets as a
whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO3.PERFORMANCE.TABLE.INDEX1.NAME].

Page 12 of 34
<PAGE>

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific/Asia Fund X.XX% X.XX% X.XX%
[insert index name] X.XX% X.XX% X.XX%
</TABLE>

* Since December 31, 1992
** Since [calc. date for index]

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

PACIFIC/ASIA FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

Page 13 of 34
<PAGE>

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$----- $---- $---- $----
</TABLE>

Page 14 of 34
<PAGE>

PAN EUROPEAN FUND

FUND SUMMARY

INVESTMENT GOAL Long-term capital appreciation

INVESTMENT FOCUS Equity securities of European issuers

SHARE PRICE VOLATILITY High

PRINCIPAL INVESTMENT STRATEGY Investing in a diversified portfolio of
equity securities of companies located in
Europe

INVESTOR PROFILE Investors seeking capital appreciation,
who are willing to accept the risks and
price volatility of investing in European
issuers

INVESTMENT STRATEGY OF THE PAN EUROPEAN FUND

The Pan European Fund invests primarily in equity securities of larger, more
established companies located in the more developed countries of Europe. The
Fund may invest to a lesser extent in the less developed countries to capitalize
on opportunities in the emerging markets of Eastern Europe. The Adviser
generally does not attempt to hedge the effects of currency value fluctuations
on the Fund's investments on an on-going basis.

The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in the European markets, giving particular emphasis to each company's scope of
operations and economic ties to one or more specific countries. While the Fund
generally invests in companies in a variety of countries, industries and
sectors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country or industry. The Fund will make investments in
debt securities only where the Adviser believes that they offer the potential
for capital appreciation.

PRINCIPAL RISKS OF INVESTING IN THE PAN EUROPEAN FUND

Page 15 of 34
<PAGE>

response. These factors contribute to price volatility, which is the principal
risk of investing in the Fund.

The Fund is also subject to the risk that European equity securities may
underperform other segments of the equity markets or the equity markets as a
whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO4.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Pan European Fund X.XX% X.XX% X.XX%
[insert index name] X.XX% X.XX% X.XX%
</TABLE>

* Since December 31, 1992
** Since [calc. date for index]

Page 16 of 34
<PAGE>

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

PAN EUROPEAN FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$----- $---- $---- $----
</TABLE>

Page 17 of 34
<PAGE>

EMERGING MARKETS FUND

FUND SUMMARY

INVESTMENT GOAL Long-term capital appreciation

INVESTMENT FOCUS Equity securities of emerging markets
issuers

SHARE PRICE VOLATILITY Very high

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of equity
securities of companies located in
emerging markets

INVESTOR PROFILE Investors seeking capital appreciation,
who are willing to accept the risks and
extreme price volatility of investing in
emerging markets issuers

INVESTMENT STRATEGY OF THE EMERGING MARKETS FUND

The Emerging Markets Fund invests primarily in equity securities of companies
located in emerging market countries. Emerging market countries are those that
major international financial institutions, such as the World Bank, generally
consider to be less economically mature than developed nations, such as the
United States or most nations in Western Europe. These securities are sometimes
called "high yield" or "junk bonds." The Adviser generally does not attempt to
hedge the effects of currency value fluctuations on the Fund's investments on an
on-going basis.

The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in emerging markets, giving particular emphasis to each company's scope of
operations and economic ties to one or more specific countries. While the Fund
generally invests in companies in a variety of countries, industries and
sectors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country or industry. The Fund will make investments in
debt securities only where the Adviser believes that they offer the potential
for capital appreciation.

PRINCIPAL RISKS OF INVESTING IN THE EMERGING MARKETS FUND

Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily

Page 18 of 34
<PAGE>

The Fund is also subject to the risk that emerging market equity securities may
underperform other segments of the equity markets or the equity markets as a
whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO5.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
- ------------------------------------------------------------
<S> <C> <C>
Emerging Markets Fund X.XX% X.XX%
[insert index name] X.XX% X.XX%
</TABLE>

* Since January 2, 1998
** Since [calc. date for index]

Page 19 of 34
<PAGE>

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

EMERGING MARKETS FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

Page 20 of 34
<PAGE>

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$----- $---- $---- $----
</TABLE>

Page 21 of 34
<PAGE>

MORE INFORMATION ABOUT RISK

EQUITY RISK - Equity securities include public and privately All Funds
issued equity securities, common and preferred stocks, warrants,
rights to subscribe to common stock and convertible securities, as
well as instruments that attempt to track the price movement of
equity indices. Investments in equity securities and equity
derivatives in general are subject to market risks that may cause
their prices to fluctuate over time. The value of securities
convertible into equity securities, such as warrants or
convertible debt, is also affected by prevailing interest rates,
the credit quality of the issuer and any call provision.

FOREIGN SECURITY RISKS - Investments in securities of foreign All Funds
companies or governments can be more volatile than investments
in U.S. companies or governments. Diplomatic, political, or
economic developments, including nationalization or
appropriation, could affect investments in foreign countries.
Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets. In addition, the value
of securities denominated in foreign currencies, and of
dividends from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S.
dollar. Foreign companies or governments generally are not
subject to uniform accounting, auditing, and financial
reporting standards comparable to those applicable to domestic
U.S. companies or governments. Transaction costs are generally
higher than those in the U.S. and expenses for custodial
arrangements of foreign securities may be somewhat greater than
typical expenses for custodial arrangements of similar U.S.
securities. Some foreign governments levy withholding taxes
against dividend and interest income. Although a portion of
these taxes is recoverable, the non-recovered portion will
reduce the income received from the securities comprising the
portfolio.

CURRENCY RISK - Investments in foreign securities denominated in All Funds
foreign currencies involve additional risks, including:

- A Fund may incur substantial costs in connection
with conversions between various currencies.

- Only a limited market currently exists for hedging
transactions relating to currencies in certain
emerging markets.

Page 22 of 34
<PAGE>

YEAR 2000 RISK - The Funds depend on the smooth functioning of All Funds
computer systems in almost every aspect of their business. Like
other mutual funds, businesses and individuals around the
world, the Funds could be adversely affected if the computer
systems used by their service providers do not properly process
dates on and after January 1, 2000, and distinguish between the
year 2000 and the year 1900. This is commonly known as the
"Year 2000 Problem." The Adviser and the Funds' other service
providers advise that they are taking steps to address the Year
2000 Problem with respect to the computer systems that they
use. Currently, they do not anticipate that the transition to
the 21st Century will have any material impact on their ability
to continue to service the Funds at current levels. At this
time, however, there can be no assurance that their efforts
will be sufficient to avoid any adverse impact on the Funds as
a result of the Year 2000 Problem. In addition, the Funds and
their shareholders may experience losses as a result of
computer difficulties experienced by issuers of portfolio
securities or third parties, such as custodians, banks,
broker-dealers or others with which the Funds do business.

Furthermore, many foreign countries are not as prepared as the All Funds
U.S. for the year 2000 transition. As a result, computer
difficulties in foreign markets and with foreign institutions as
a result of the Year 2000 Problem may add to the possibility of
losses to the Funds shareholders.

Page 23 of 34
<PAGE>

EACH FUND'S OTHER INVESTMENTS

EACH FUND'S INVESTMENT OBJECTIVE

The International Fund seeks total return on its assets through capital
appreciation and income.

The Latin America Fund seeks long-term capital appreciation.

The Pacific/Asia Fund seeks long-term capital appreciation.

The Pan European Fund seeks long-term capital appreciation.

The Emerging Markets Fund seeks long-term capital appreciation. This
objective may be changed without shareholder approval.

INVESTMENT ADVISER

United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.

Page 24 of 34
<PAGE>

Trust had approximately $65 billion in aggregate assets under management. United
States Trust Company of New York has its principal offices at 114 W. 47th
Street, New York, NY 10036. U.S. Trust Company has its principal offices at 225
High Ridge Road, East Building, Stamford, CT 06905.

The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.

The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.

For the fiscal year ended March 31, 1999, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:

<TABLE>
<S> <C>
INTERNATIONAL FUND _______%
LATIN AMERICA FUND _______%
PACIFIC/ASIA FUND _______%
PAN EUROPEAN FUND _______%
EMERGING MARKETS FUND _______%
</TABLE>

PORTFOLIO MANAGERS

Rosemary Sagar has served as the International and Pan European Funds' portfolio
manager since 1996. Ms. Sagar, Managing Director of U.S. Trust's Global
Investment Division, has been with U.S. Trust since 1996. Prior to joining U.S.
Trust, Ms. Sagar was Senior Vice President for international equity investments
for General Electric Investments Corp. in Stamford, CT. Ms. Sagar is primarily
responsible for the day-to-day management of the International and Pan European
Funds' portfolios. Research, analyses, trade execution and other facilities
provided by U.S. Trust and other personnel also play a significant role in
portfolio management and performance.

All investment decisions for the Latin America and Emerging Markets Funds are
made by a committee of investment professionals and no person is primarily
responsible for making recommendations to that committee.

David J. Linehan has served as the Pacific/Asia Fund's portfolio manager since
1998. Mr. Linehan, a Senior Vice President in U.S. Trust's Global Investment
Division, has been with U.S. Trust since July 1998. Prior to joining U.S. Trust,
Mr. Linehan was an international investment manager with Cowen Asset Management
in New York. Prior to 1995, Mr. Linehan was an international equity trader with
Morgan Grenfell in New York (19XX-19XX) and an associate portfolio manager with
Kemper Financial Services in Chicago (19XX-19XX). Mr. Linehan is primarily
responsible for the day to day management of the Pacific/Asia Fund's portfolio.
Research, analyses, trade execution and other facilities provided by U.S. Trust
and other personnel also play a significant role in portfolio management and
performance.

PURCHASING, SELLING AND EXCHANGING FUND SHARES

This section tells you how to buy, sell (sometimes called "redeem") or exchange
shares of the Funds.

Page 25 of 34
<PAGE>

HOW TO PURCHASE FUND SHARES

You may purchase shares directly by:
- - Mail
- - Telephone
- - Wire, or
- - Automatic Investment Program

To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire or through the automatic
investment program, write your check, payable in U.S. dollars, to "Excelsior
Funds, Inc." and include the name of the appropriate Fund(s) on the check. A
Fund cannot accept third-party checks, credit cards, credit card checks or cash.
To purchase shares by wire, please call us 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 Number 9102732915

For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration
(including account number)

Page 26 of 34
<PAGE>

GENERAL INFORMATION

HOW WE CALCULATE NAV

NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.

In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Adviser thinks that they are
unreliable, fair value prices may be determined in good faith using methods
approved by the Board of Directors. Fixed income investments with remaining
maturities of 60 days or less generally are valued at their amortized cost,
which approximates their market value.

Some Funds may hold securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the market value of a Fund's investments may change on days
when you cannot purchase or sell Fund shares.

MINIMUM PURCHASES

To purchase shares for the first time, you must invest at least $500 ($250 for
IRAs) in any Fund.

Your subsequent investments in any Fund must be made in amounts of at least $50.

A Fund may accept investments of smaller amounts at its discretion.

AUTOMATIC INVESTMENT PROGRAM

If you have a checking, money market or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.

With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.

Page 27 of 34
<PAGE>

HOW TO SELL YOUR FUND SHARES

You may sell shares directly by:
- - Mail
- - Telephone, or
- - Systematic Withdrawal Plan

You may sell your shares by sending a written request for redemption to:

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

Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.

If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares.

If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 446-1012
(from overseas, call (617) 557-8280). The minimum amount for telephone
redemptions is $500. We may reject a telephone redemption request if we deem
it advisable to do so.

The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.

SYSTEMATIC WITHDRAWAL PLAN

Page 28 of 34
<PAGE>

RECEIVING YOUR MONEY

REDEMPTIONS IN KIND

INVOLUNTARY SALES OF YOUR SHARES

SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES

HOW TO EXCHANGE YOUR SHARES

You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.

Page 29 of 34
<PAGE>

TELEPHONE TRANSACTIONS

Purchasing, selling and exchanging Fund shares over the telephone is
extremely convenient, but not without risk. Although the Funds have certain
safeguards and procedures to confirm the identity of callers and the
authenticity of instructions, the Funds are not responsible for any losses or
costs incurred by following telephone instructions we reasonably believe to
be genuine. If you or your financial institution transact with a Fund over
the telephone, you will generally bear the risk of any loss.

AUTHORIZED INTERMEDIARIES

SHAREHOLDER SERVICING

DIVIDENDS, DISTRIBUTIONS AND TAXES

Each Fund distributes dividends from its income semi-annually.

Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.

Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends and
distributions in the form of additional Fund shares unless you elect to receive
payment in cash. To elect cash payment, you must notify the Fund in writing
prior to the date of the distribution. Your election will be effective for
dividends and distributions paid after the Fund receives your written notice. To
cancel your election, simply send the Fund written notice.

TAXES

Page 30 of 34
<PAGE>

Each Fund may be able to pass along a tax credit for foreign income taxes it
pays. The Fund will notify you if you are entitled to a credit.

MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.

Page 31 of 34
<PAGE>

FINANCIAL HIGHLIGHTS

The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund's
financial performance for the past five years, or, if shorter, the period of
the Fund's operations. Some of this information reflects financial
information for a single Fund share. The total returns in the table represent
the rate that you would have earned (or lost) on an investment in a Fund,
assuming you reinvested all of your dividends and distributions. This
information has been audited by ____________, independent public accountants.
Their report, along with each Fund's financial statements, appears in the
annual report that accompanies our Statement of Additional Information. You
can obtain the annual report, which contains more performance information, at
no charge by calling (800)-446-1012 (from overseas, call (617) 557-8280).

Page 32 of 34
<PAGE>

EXCELSIOR FUNDS, INC.

INVESTMENT ADVISER

United States Trust Company of New York
114 W. 47th Street
New York, New York 10036

U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905

DISTRIBUTOR

Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829

More information about each Fund is available without charge through the
following:

STATEMENT OF ADDITIONAL INFORMATION (SAI)

ANNUAL AND SEMI-ANNUAL REPORTS

TO OBTAIN MORE INFORMATION:

BY TELEPHONE: CALL (800) 446-1012 (FROM OVERSEAS, CALL (617) 557-8280)

BY MAIL:
Excelsior Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913

BY E-MAIL: [VAR:FUND.EMAILADDRESS]]

BY INTERNET: [VAR:FUND.INTERNETADDRESS]]

Page 33 of 34
<PAGE>

Page 34 of 34
<PAGE>

EXCELSIOR FUNDS, INC.

Fixed Income Funds

PROSPECTUS
AUGUST 1, 1999

SHORT-TERM GOVERNMENT SECURITIES FUND
INTERMEDIATE-TERM MANAGED INCOME FUND
MANAGED INCOME FUND

INVESTMENT ADVISER
UNITED STATES TRUST COMPANY OF NEW YORK
U.S. TRUST COMPANY

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED ANY FUND SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. IT IS A CRIME FOR ANYONE TO TELL YOU
OTHERWISE.

Page 1 of 25
<PAGE>

HOW TO READ THIS PROSPECTUS

Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals and strategies.
This prospectus gives you important information about the Short-Term Government
Securities, Intermediate-Term Managed Income and Managed Income Funds (each, a
Fund) that you should know before investing. United States Trust Company of New
York and U.S. Trust Company (together, U.S. Trust or the Adviser) serve as
investment adviser to each Fund. Please read this prospectus and keep it for
future reference.

THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT THE FUND. FOR MORE DETAILED INFORMATION ABOUT
EACH FUND, PLEASE SEE:

<TABLE>
<CAPTION>
PAGE
<S> <C>
SHORT-TERM GOVERNMENT SECURITIES FUND XXX
INTERMEDIATE-TERM MANAGED INCOME FUND XXX
MANAGED INCOME FUND XXX
MORE INFORMATION ABOUT RISK XXX
EACH FUND'S OTHER INVESTMENTS XXX
EACH FUND'S INVESTMENT OBJECTIVE XXX
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS XXX
PURCHASING, SELLING AND EXCHANGING FUND SHARES XXX
DIVIDENDS, DISTRIBUTIONS AND TAXES XXX
FINANCIAL HIGHLIGHTS XXX
HOW TO OBTAIN MORE INFORMATION ABOUT
EXCELSIOR FUNDS, INC. Back Cover
</TABLE>

Page 2 of 25
<PAGE>

INTRODUCTION

Each Fund is a mutual Fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.

Each Fund has its own investment goal and strategies for reaching that goal. The
investment managers invest Fund assets in a way that they believe will help the
Fund achieve its goal. Still, investing in each Fund involves risk and there is
no guarantee that the Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and it is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.

Page 3 of 25
<PAGE>

SHORT-TERM GOVERNMENT SECURITIES FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with relative
stability of principal

INVESTMENT FOCUS Short-term fixed income securities issued or
guaranteed by the U.S. government, its
agencies and instrumentalities

SHARE PRICE VOLATILITY Low

PRINCIPAL INVESTMENT STRATEGY Investing in U.S. government securities,
while maintaining a dollar-weighted average
maturity of 1 to 3 years

INVESTOR PROFILE Investors seeking to preserve capital and
earn current income

INVESTMENT STRATEGY OF THE SHORT-TERM GOVERNMENT SECURITIES FUND

The Short-Term Government Securities Fund invests primarily in fixed income
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Interest payments on these securities generally will be
exempt from state and local taxes.

The Fund generally maintains a dollar-weighted average portfolio maturity of 1
to 3 years. The Adviser manages the Fund's average portfolio maturity in light
of current market and economic conditions to provide a competitive current yield
with relative stability of principal. In selecting particular investments, the
Adviser looks for securities that offer relative value, based on its assessment
of real interest rates and the yield curve. There is no limit on the maximum
maturity for a particular security.

PRINCIPAL RISKS OF INVESTING IN THE SHORT-TERM GOVERNMENT SECURITIES FUND

The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.

Page 4 of 25
<PAGE>

The Fund is also subject to the risk that short-term government securities may
underperform other segments of the fixed income markets or the fixed income
markets as a whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO1.PERFORMANCE.TABLE.INDEX1.NAME].

1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------- ----------- -------------- -------------------
<S> <C> <C> <C>
Short-Term Government Securities Fund X.XX% X.XX% X.XX%*
[insert index name] X.XX% X.XX% X.XX%**
</TABLE>

* Since December 31, 1992
** Since [calc. date for index]

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

Page 5 of 25
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
- ---------------------------------------------------------------- ---------------------------
<S> <C> <C>
Investment Advisory Fees .XX%
Other Expenses
Administrative Servicing Fee .XX%
Other Operating Expenses .XX%
Total Other Expenses .XX%
- ---------------------------------------------------------------- ---------------------------
Total Annual Fund Operating Expenses X.XX%
</TABLE>

SHORT-TERM GOVERNMENT SECURITIES FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>

$ $ $ $
----- ------ ------ -------
</TABLE>

Page 6 of 25
<PAGE>

INTERMEDIATE-TERM MANAGED INCOME FUND

FUND SUMMARY

INVESTMENT GOAL Current income

INVESTMENT FOCUS Investment grade fixed income securities

SHARE PRICE VOLATILITY Medium

PRINCIPAL INVESTMENT STRATEGY Investing in investment grade government
and corporate fixed income securities

INVESTOR PROFILE Investors seeking current income, and
who are willing to accept the risks of
investing in fixed income securities

INVESTMENT STRATEGY OF THE INTERMEDIATE-TERM MANAGED INCOME FUND

The Intermediate-Term Managed Income Fund invests primarily in fixed income
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities, and corporate issuers rated at the time of investment in one
of the three highest rating categories by a major rating agency. The Fund also
may invest up to 25% of its assets in dollar-denominated fixed income securities
of foreign issuers and may place a portion of its assets in fixed income
securities that are rated below investment grade. These securities are sometimes
called "high yield" or "junk" bonds.

The Fund maintains a dollar-weighted average portfolio maturity of 3 to 10
years. The Adviser manages the Fund's average portfolio maturity in light of
current market and economic conditions to provide a competitive current yield
with reasonable risk of price volatility. In selecting particular investments,
the Adviser looks for securities that offer relative value, based on its
assessment of real interest rates and the yield curve. The fixed income
securities held by the Fund also may have the potential for moderate price
appreciation. There is no limit on the maximum maturity for a particular
security.

PRINCIPAL RISKS OF INVESTING IN THE INTERMEDIATE-TERM MANAGED INCOME FUND

Junk bonds involve greater risks of default or downgrade and are more volatile
than investment grade securities. Junk bonds involve greater risk of price
declines than investment grade securities due to actual or perceived changes in
an issuer's creditworthiness. In addition, issuers of junk bonds may be more
susceptible than other issuers to economic downturns. Junk bonds are subject to
the risk that the issuer may not be able to pay interest or dividends and
ultimately to

Page 7 of 25
<PAGE>

repay principal upon maturity. Discontinuation of these payments could
substantially adversely affect the market value of the security.

The Fund is also subject to the risk that intermediate-term fixed income
securities may underperform other segments of the fixed income markets or the
fixed income markets as a whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO2.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
- ------------------------------------------------ ------------- ------------- -------------------
<S> <C> <C> <C>
Intermediate-Term Managed Income Fund X.XX% X.XX% X.XX%*
[insert index name] X.XX% X.XX% X.XX%**
</TABLE>

* Since December 31, 1992
** Since [calc. date for index]

Page 8 of 25
<PAGE>

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------- --------------------------
Investment Advisory Fees .XX%
Other Expenses
Administrative Servicing Fee .XX%
Other Operating Expenses .XX%
Total Other Expenses .XX%
- ----------------------------------------------------------------- --------------------------
Total Annual Fund Operating Expenses X.XX%
</TABLE>

INTERMEDIATE-TERM MANAGED INCOME FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ $ $ $
----- ------ ------ -------
</TABLE>

Page 9 of 25
<PAGE>

MANAGED INCOME FUND

FUND SUMMARY

INVESTMENT GOAL Current income

INVESTMENT FOCUS Investment grade fixed income securities

SHARE PRICE VOLATILITY Medium

PRINCIPAL INVESTMENT STRATEGY Investing in investment grade government and
corporate fixed income securities

INVESTOR PROFILE Investors seeking current income, and who are
willing to accept the risks of investing in
fixed income securities of varying maturities

INVESTMENT STRATEGY OF THE MANAGED INCOME FUND

The Managed Income Fund invests primarily in fixed income securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities, and
corporate issuers rated at the time of investment in one of the three highest
rating categories by a major rating agency. The Fund also may invest up to 25%
of its assets in dollar-denominated fixed income securities of foreign issuers
and may place a portion of its assets in fixed income securities that are rated
below investment grade. These securities are sometimes called "high yield" or
"junk bonds."

There is no limit on the Fund's dollar-weighted average portfolio maturity or on
the maximum maturity of a particular security. The Adviser manages the Fund's
average portfolio maturity in light of current market and economic conditions to
provide a competitive current yield and reasonable principal volatility. In
selecting particular investments, the Adviser looks for securities that offer
relative value, based on its assessment of real interest rates and the yield
curve, and that have the potential for moderate price appreciation.

PRINCIPAL RISKS OF INVESTING IN THE MANAGED INCOME FUND

Junk bonds involve greater risks of default or downgrade and are more
volatile than investment grade securities. Junk bonds involve greater risk of
price declines than investment grade securities due to actual or perceived
changes in an issuer's creditworthiness. In addition, issuers of junk bonds
may be more susceptible than other issuers to economic downturns. Junk bonds
are subject to the risk that the issuer may not be able to pay interest or
dividends and ultimately to repay principal upon maturity. Discontinuation of
these payments could substantially adversely affect the market value of the
security.

Page 10 of 25
<PAGE>

The Fund is also subject to the risk that long-term fixed income securities may
underperform other segments of the fixed income markets or the fixed income
markets as a whole.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE
[VAR:PORTFOLIO3.PERFORMANCE.TABLE.INDEX1.NAME].

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed Income Fund X.XX% X.XX% X.XX%
[insert index name] X.XX% X.XX% X.XX%
</TABLE>

WHAT IS AN INDEX?

Page 11 of 25
<PAGE>

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------- ---------------------------
Investment Advisory Fees .XX%
Other Expenses
Administrative Servicing Fee .XX%
Other Operating Expenses .XX%
Total Other Expenses .XX%
- ---------------------------------------------------------------- ---------------------------
Total Annual Fund Operating Expenses X.XX%
</TABLE>

MANAGED INCOME FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ $ $ $
----- ------ ------ -------
</TABLE>

Page 12 of 25
<PAGE>

MORE INFORMATION ABOUT RISK

<TABLE>
<CAPTION>
<S><C>
FIXED INCOME RISK - The market value of fixed income investments All Funds
change in response to interest rate changes and other factors.
During periods of falling interest rates, the values of
outstanding fixed income securities generally rise. Moreover,
while securities with longer maturities tend to produce higher
yields, the prices of longer maturity securities are also subject
to greater market fluctuations as a result of changes in interest
rates.

CALL RISK - During periods of falling interest rates, All Funds
certain debt obligations with high interest rates may be
prepaid (or "called") by the issuer prior to maturity. This
may cause a Fund's average weighted maturity to fluctuate, and
may require a Fund to invest the resulting proceeds at lower
interest rates.

CREDIT RISK - The possibility that an issuer will be All Funds
unable to make timely payments of either principal or interest.

EVENT RISK - Securities may suffer declines in credit All Funds
quality and market value due to issuer restructurings or
other factors. This risk should be reduced because of a/the
Fund's multiple holdings.

HIGH-YIELD, LOWER RATED SECURITIES (or "junk bonds") are subject Intermediate-Term Managed Income Fund
to additional risks associated with investing in high-yield Managed Income Fund
securities, including:

- - Greater risk of default or price declines due to changes
in the issuer's creditworthiness.

- - A thinner and less active market, which may increase price volatility and
limit the ability of a Fund to sell these securities at their carrying
values.

- - Prices for high-yield, lower rated securities may be affected by investor
perception of issuer credit quality and the outlook for economic growth, such
that prices may move independently of interest rates and the overall bond
market.

Page 13 of 25
<PAGE>

MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are fixed All Funds
income securities representing an interest in a pool of underlying
mortgage loans. They are sensitive to changes in interest rates,
but may respond to these changes differently from other fixed
income securities due to the possibility of prepayment of the
underlying mortgage loans. As a result, it may not be possible to
determine in advance the actual maturity date or average life of a
mortgage-backed security. Rising interest rates tend to
discourage refinancings, with the result that the average life and
volatility of the security will increase, exacerbating its
decrease in market price. When interest rates fall, however,
mortgage-backed securities may not gain as much in market value
because of the expectation of additional mortgage prepayments that
must be reinvested at lower interest rates. Prepayment risk may
make it difficult to calculate the average maturity of a portfolio
of mortgage-backed securities and, therefore, to assess the
volatility risk of that portfolio.

FOREIGN SECURITY RISKS-- Investments in securities of foreign Intermediate-Term Managed Income Fund
companies or governments can be more volatile than investments in Managed Income Fund
U.S. companies or governments. Diplomatic, political, or economic
developments, including nationalization or appropriation, could
affect investments in foreign countries. Foreign securities
markets generally have less trading volume and less liquidity than
U.S. markets. In addition, the value of securities denominated in
foreign currencies, and of dividends from such securities, can
change significantly when foreign currencies strengthen or weaken
relative to the U.S. dollar. Foreign companies or governments
generally are not subject to uniform accounting, auditing, and
financial reporting standards comparable to those applicable to
domestic U.S. companies or governments. Transaction costs are
generally higher than those in the U.S. and expenses for custodial
arrangements of foreign securities may be somewhat greater than
typical expenses for custodial arrangements of similar U.S.
securities. Some foreign governments levy withholding taxes
against dividend and interest income. Although in some countries
a portion of these taxes is recoverable, the non-recovered portion
will reduce the income received from the securities comprising the
portfolio.

Page 14 of 25
<PAGE>

YEAR 2000 RISK - The Funds on the smooth functioning of computer All Funds
systems in almost every aspect of their business. Like other
mutual funds, businesses and individuals around the world, the
Funds could be adversely affected if the computer systems used
by their service providers do not properly process dates on and
after January 1, 2000, and distinguish between the year 2000
and the year 1900. This is commonly known as the "Year 2000
Problem." The Adviser and the Fund's other service providers
advise that they are taking steps to address the Year 2000
Problem with respect to the computer systems that they use.
Currently, they do not anticipate that the transition to the
21st Century will have any material impact on their ability to
continue to service the Funds at current levels. At this time,
however, there can be no assurance that their efforts will be
sufficient to avoid any adverse impact on the Funds as a result
of the Year 2000 Problem. In addition, the Funds and their
shareholders may experience losses as a result of computer
difficulties experienced by issuers of portfolio securities or
third parties, such as custodians, banks, broker-dealers or
others with which the Funds do business.
</TABLE>

Page 15 of 25
<PAGE>

EACH FUND'S OTHER INVESTMENTS

EACH FUND'S INVESTMENT OBJECTIVE

The Short-Term Government Securities Fund seeks a high level of current income
consistent with stability of principal.

The Intermediate-Term Managed Income Fund seeks as high a level of current
interest income as is consistent with relative stability of principal.

The Managed Income Fund seeks high current income consistent with what is
believed to be prudent risk of capital.

INVESTMENT ADVISER

United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.

The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.

The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.

Page 16 of 25
<PAGE>

For the fiscal year ended March 31, 1999, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:

<TABLE>
<S> <C>
SHORT-TERM GOVERNMENT SECURITIES FUND _____%
INTERMEDIATE-TERM MANAGED INCOME FUND _____%
MANAGED INCOME FUND _____%
</TABLE>

PORTFOLIO MANAGERS

G. Michael O'Neil, III has served as the Short-Term Government Securities Fund's
portfolio manager since December 1996. Mr. O'Neil is a Senior Vice President and
Manager of Money Market Investments at U.S. Trust and has been with U.S. Trust
since 1989. Mr. O'Neil is primarily responsible for the day to day management of
the Short-Term Government Securities Fund's portfolio. Research, analyses, trade
execution and other facilities provided by U.S. Trust and other personnel also
play a significant role in portfolio management and performance.

Frank A. Salem has served as the Intermediate-Term Managed Income Fund's
portfolio manager since August 1998. Mr. Salem is a Senior Vice President in
U.S. Trust's Fixed-Income division and has been with U.S. Trust since 1998.
Prior to joining U.S. Trust, Mr. Salem was a Director and Portfolio Manager in
the Fixed-Income Department of Mackay Shields in New York. Mr. Salem is
primarily responsible for the day to day management of the Intermediate-Term
Managed Income Fund's portfolio. Research, analyses, trade execution and other
facilities provided by U.S. Trust and other personnel also play a significant
role in portfolio management and performance.

Alexander R. Powers has served as the Managed Income Fund's portfolio manager
since August 1997. Mr. Powers, Managing Director of Taxable Fixed Income
Investments, has been with U.S. Trust since 1996. Prior to joining U.S. Trust,
Mr. Powers was a Manager of Fixed Income Instruments with Chase Asset
Management. Mr. Powers is primarily responsible for the day to day management of
the Managed Income Fund's portfolio. Research, analyses, trade execution and
other facilities provided by U.S. Trust and other personnel also play a
significant role in portfolio management and performance.

PURCHASING, SELLING AND EXCHANGING FUND SHARES

This section tells you how to buy, sell (sometimes called "redeem") or exchange
shares of the Funds.

HOW TO PURCHASE FUND SHARES

You may purchase shares directly by:
- - Mail
- - Telephone
- - Wire, or
- - Automatic Investment Program

To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global

Page 17 of 25
<PAGE>

Funds Services Company, P.O. Box 2798, Boston, MA 02208-2798. Unless you arrange
to pay by wire or through the automatic investment program, write your check,
payable in U.S. dollars, to "Excelsior Funds, Inc." and include the name of the
appropriate Fund(s) on the check. A Fund cannot accept third-party checks,
credit cards, credit card checks or cash. To purchase shares by wire, please
call us 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 Number 9102732915

For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration
(including account number)

The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of a
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.

GENERAL INFORMATION

Page 18 of 25
<PAGE>

HOW WE CALCULATE NAV

NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.

MINIMUM PURCHASES

To purchase shares for the first time, you must invest at least $500 ($250 for
IRAs) in any Fund.

Your subsequent investments in any Fund must be made in amounts of at least $50.

A Fund may accept investments of smaller amounts at its discretion.

AUTOMATIC INVESTMENT PROGRAM

If you have a checking, money market or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.

With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.

HOW TO SELL YOUR FUND SHARES

You may sell shares directly by:
- - Mail
- - Telephone, or
- - Systematic Withdrawal Plan

Holders of Fund shares may sell (sometimes called "redeem") shares by following
procedures established when they opened their account or accounts. If you have
any questions, call (800) 446-1012 (from overseas, call (617) 557-8280).

You may sell your shares by sending a written request for redemption to:

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

Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.

Page 19 of 25
<PAGE>

If you own shares through an account with a broker or other institution, contact
that broker or institution to sell your shares.

If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 446-1012
(from overseas, call (617) 557-8280). The minimum amount for telephone
redemptions is $500. We may reject a telephone redemption request if we deem
it advisable to do so.

The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.

SYSTEMATIC WITHDRAWAL PLAN

RECEIVING YOUR MONEY

REDEMPTIONS IN KIND

INVOLUNTARY SALES OF YOUR SHARES

Page 20 of 25
<PAGE>

SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES

HOW TO EXCHANGE YOUR SHARES

You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.

TELEPHONE TRANSACTIONS

Purchasing, selling and exchanging Fund shares over the telephone is
extremely convenient, but not without risk. Although the Funds have certain
safeguards and procedures to confirm the identity of callers and the
authenticity of instructions, the Funds are not responsible for any losses or
costs incurred by following telephone instructions we reasonably believe to
be genuine. If you or your financial institution transact with a Fund over
the telephone, you will generally bear the risk of any loss.

AUTHORIZED INTERMEDIARIES

SHAREHOLDER SERVICING

Page 21 of 25
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

Each Fund distributes its income by declaring a dividend daily and paying
accumulated dividends monthly.

Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.

Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends
and distributions will be paid in the form of additional Fund shares unless
you elect to receive payment in cash. To elect cash payment, you must notify
the Fund in writing prior to the date of the distribution. Your election will
be effective for dividends and distributions paid after the Fund receives
your written notice. To cancel your election, simply send the Fund written
notice.

TAXES

Each Fund will distribute substantially all of its income and capital gains, if
any. The dividends and distributions you receive may be subject to federal,
state and local taxation, depending upon your tax situation. Distributions you
receive from the Funds may be taxable whether or not you reinvest them. Income
distributions are generally taxable at ordinary income tax rates. Capital gains
distributions are generally taxable at the rates applicable to long-term capital
gains. EACH SALE OR EXCHANGE IS A TAXABLE EVENT.

MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.

Page 22 of 25
<PAGE>

FINANCIAL HIGHLIGHTS

The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund's
financial performance for the past five years, or, if shorter, the period of
the Fund's operations. Some of this information reflects financial
information for a single Fund share. The total returns in the table represent
the rate that you would have earned (or lost) on an investment in a Fund,
assuming you reinvested all of your dividends and distributions. This
information has been audited by __________________, independent public
accountants. Their report, along with each Fund's financial statements,
appears in the annual report that accompanies our Statement of Additional
Information. You can obtain the annual report, which contains more
performance information, at no charge by calling (800) 446-1012 (from
overseas, call (617) 557-8280).

Page 23 of 25
<PAGE>

EXCELSIOR FUNDS, INC.

INVESTMENT ADVISER

United States Trust Company of New York
114 W. 47th Street
New York, New York 10036

U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905

DISTRIBUTOR

Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829

More information about each Fund is available without charge through the
following:

STATEMENT OF ADDITIONAL INFORMATION (SAI)

ANNUAL AND SEMI-ANNUAL REPORTS

TO OBTAIN MORE INFORMATION:

BY TELEPHONE: CALL (800) 446-1012 (FROM OVERSEAS, CALL (617) 557-8280)

BY MAIL:
Excelsior Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913

BY E-MAIL: [VAR:FUND.EMAILADDRESS]]

BY INTERNET: [VAR:FUND.INTERNETADDRESS]]

Page 24 of 25
<PAGE>

Page 25 of 25
<PAGE>

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

PROSPECTUS
AUGUST 1, 1999

INVESTMENT ADVISER
UNITED STATES TRUST COMPANY OF NEW YORK
U.S. TRUST COMPANY

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED ANY FUND SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. IT IS A CRIME FOR ANYONE TO TELL
YOU OTHERWISE.

Page 1 of 31
<PAGE>

HOW TO READ THIS PROSPECTUS

Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. are mutual fund
families that offer shares in separate investment portfolios which have
individual investment goals and strategies. This prospectus gives you
important information about 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. (each, a Fund)
that you should know before investing. United States Trust Company of New
York and U.S. Trust Company (together, U.S. Trust or the Adviser) serve as
investment adviser to each Fund. The Money Fund and Government Money Fund
offer two classes of shares: Shares, which are offered in this prospectus,
and Institutional Shares, which are offered in a separate prospectus. Please
read this prospectus and keep it for future reference.

<TABLE>
<CAPTION>
PAGE
<S> <C>
MONEY FUND XXX
GOVERNMENT MONEY FUND XXX
TREASURY MONEY FUND XXX
TAX-EXEMPT MONEY FUND XXX
NEW YORK TAX-EXEMPT MONEY FUND XXX
MORE INFORMATION ABOUT RISK XXX
EACH FUND'S OTHER INVESTMENTS XXX
EACH FUND'S INVESTMENT OBJECTIVE XXX
THE INVESTMENT ADVISER XXX
PURCHASING, SELLING AND EXCHANGING FUND SHARES XXX
DIVIDENDS, DISTRIBUTIONS AND TAXES XXX
FINANCIAL HIGHLIGHTS XXX
HOW TO OBTAIN MORE INFORMATION ABOUT EXCELSIOR
FUNDS, INC. AND EXCELSIOR TAX-EXEMPT FUNDS, INC. Back Cover
</TABLE>

Page 2 of 31
<PAGE>

INTRODUCTION

Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.

Each Fund has its own investment goal and strategies for reaching that goal. The
investment managers invest Fund assets in a way that they believe will help a
Fund achieve its goal. Still, investing in each Fund involves risk and there is
no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and it is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.

THE FUNDS TRY TO MAINTAIN A CONSTANT PRICE PER SHARE OF $1.00, BUT
THERE IS NO GUARANTEE THAT A FUND WILL ACHIEVE THIS GOAL.

Page 3 of 31
<PAGE>

MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with preserving
capital and maintaining liquidity

INVESTMENT FOCUS Money market instruments

SHARE PRICE VOLATILITY Very low

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of high quality
short-term debt securities designed to
allow the Fund to maintain a stable net
asset value per share

INVESTOR PROFILE Conservative investors seeking current
income from their investment

INVESTMENT STRATEGY OF THE MONEY FUND

PRINCIPAL RISKS OF INVESTING IN THE MONEY FUND

Page 4 of 31
<PAGE>

PERFORMANCE INFORMATION

This bar chart shows changes in the performance of the Fund's Shares from
year to year.

<TABLE>
<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE SHOWS THE AVERAGE ANNUAL TOTAL RETURNS OF THE FUND'S SHARES FOR
THE PERIODS ENDING DECEMBER 31, 1998.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Money Fund (Shares) X.XX% X.XX% X.XX%
</TABLE>

Call 1-800-xxx-xxxx for the Fund's most current 7-day yield.

FUND FEES AND EXPENSES

Page 5 of 31
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

MONEY FUND (SHARES) ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 6 of 31
<PAGE>

GOVERNMENT MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with preserving
capital and maintaining liquidity

INVESTMENT FOCUS Money market instruments issued or
guaranteed by the U.S. government, its
agencies and instrumentalities

SHARE PRICE VOLATILITY Very low

INVESTOR PROFILE Conservative investors seeking current
income from their investment

INVESTMENT STRATEGY OF THE GOVERNMENT MONEY FUND

PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT MONEY FUND

Page 7 of 31
<PAGE>

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE SHOWS THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING
DECEMBER 31, 1998.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Fund X.XX% X.XX% X.XX%
</TABLE>

Call 1-800-xxx-xxxx for the Fund's most current 7-day yield.

FUND FEES AND EXPENSES

Page 8 of 31
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

GOVERNMENT MONEY FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 9 of 31
<PAGE>

TREASURY MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with preserving
capital and maintaining liquidity

INVESTMENT FOCUS U.S. Treasury securities

SHARE PRICE VOLATILITY Very low

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of short-term
obligations of the U.S. Treasury designed
to allow the Fund to maintain a stable
net asset value per share

INVESTOR PROFILE Conservative investors seeking current
income from their investment that is
generally exempt from state and local
taxes

INVESTMENT STRATEGY OF THE TREASURY MONEY FUND

The Treasury Money Fund invests substantially all of its assets in U.S. Treasury
obligations. The Fund also may invest, to a lesser extent, in high quality
obligations issued or guaranteed by U.S. government agencies and
instrumentalities. Generally, interest payments on obligations held by the Fund
will be exempt from state and local taxes. In managing the Fund, the Adviser
assesses current and projected market conditions, particularly interest rates.
Based on this assessment, the Adviser uses gradual shifts in portfolio maturity
to respond to expected changes and selects securities that it believes offer the
most attractive risk/return trade off.

PRINCIPAL RISKS OF INVESTING IN THE TREASURY MONEY FUND

Page 10 of 31
<PAGE>

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE SHOWS THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING
DECEMBER 31, 1998.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Money Fund X.XX% X.XX% X.XX%*
</TABLE>

* Since February 13, 1991

Call 1-800-xxx-xxxx for the Fund's most current 7-day yield.

FUND FEES AND EXPENSES

Page 11 of 31
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

TREASURY MONEY FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 12 of 31
<PAGE>

TAX-EXEMPT MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income exempt from Federal taxes
consistent with preserving capital and
maintaining liquidity

INVESTMENT FOCUS Municipal money market instruments

SHARE PRICE VOLATILITY Very low

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of high quality
short-term debt securities designed to
allow the Fund to maintain a stable net
asset value per share

INVESTOR PROFILE Conservative taxable investors in higher
tax brackets seeking current income
exempt from Federal income taxes

INVESTMENT STRATEGY OF THE TAX-EXEMPT MONEY FUND

The Tax-Exempt Money Fund invests substantially all of its assets in high
quality money market instruments issued by state and local governments and
agencies, and other U.S. territories and possessions, that pay interest exempt
from Federal taxes ("municipal money market instruments"). The Fund also may
invest in certain tax-exempt derivative instruments, such as floating rate trust
receipts. Banks and other creditworthy entities may provide letters of credit
and other credit enhancements as to municipal money market instruments. Such
institutions may also provide liquidity facilities that shorten the effective
maturity of some of the Fund's holdings. The Fund ordinarily will not invest in
obligations that pay interest treated as a preference item for purposes of the
alternative minimum tax. The Fund invests only in instruments with remaining
maturities of 13 months or less that the Adviser believes present minimal credit
risk. The Fund maintains an average weighted maturity of 90 days or less.

In managing the Fund, the Adviser assesses current and projected market
conditions, particularly interest rates. Based on this assessment and an
extensive credit analysis, the Adviser uses gradual shifts in portfolio maturity
to respond to expected changes in interest rates and selects securities that it
believes offer the most attractive risk/return trade off.

PRINCIPAL RISKS OF INVESTING IN THE TAX-EXEMPT MONEY FUND

The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes -- as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa. The volatility of lower rated securities is even
greater than that of higher rated securities. In addition, longer-term
securities are generally more volatile. Therefore the average maturity or
duration of these securities affects risk.

Page 13 of 31
<PAGE>

Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.

There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.

Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.

PERFORMANCE INFORMATION

This bar chart shows changes in the Fund's performance from year to year.

<TABLE>
<S> <C>
1989 X.XX%
1990 X.XX%
1991 X.XX%
1992 X.XX%
1993 X.XX%
1994 X.XX%
1995 X.XX%
1996 X.XX%
1997 X.XX%
1998 X.XX%

BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/X/XX) (X/X/XX)
</TABLE>

The Fund's performance from January 1, 1999 to June 30, 1999 was XX.XX%.

THIS TABLE SHOWS THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDING
DECEMBER 31, 1998.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Fund X.XX% X.XX% X.XX%
</TABLE>

Call 1-800-xxx-xxxx for the Fund's most current 7-day yield.

FUND FEES AND EXPENSES

Page 14 of 31
<PAGE>

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

TAX-EXEMPT MONEY FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 15 of 31
<PAGE>

NEW YORK TAX-EXEMPT MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income exempt from Federal, New
York State and New York City taxes
consistent with preserving capital and
maintaining liquidity

INVESTMENT FOCUS New York tax-exempt money market
instruments

SHARE PRICE VOLATILITY Very low

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of high quality
short-term debt securities which pay
interest exempt from Federal, New York
State and New York City taxes designed to
allow the Fund to maintain a stable net
asset value per share

INVESTOR PROFILE Conservative investors in higher tax
brackets seeking current income that is
exempt from Federal, New York State and
New York City income taxes

INVESTMENT STRATEGY OF THE NEW YORK TAX-EXEMPT MONEY FUND

The New York Tax-Exempt Money Fund invests substantially all of its assets in
high quality money market instruments issued by the State of New York, local
governments and agencies in New York and other governmental issuers including
U.S. territories and possessions that pay interest exempt from Federal, New York
State and New York City income taxes ("New York money market instruments"). The
Fund may invest in certain tax-exempt derivative instruments, such as floating
rate trust receipts. Banks and other creditworthy entities may provide letters
of credit and other credit enhancements for New York money market instruments.
Such institutions may also provide liquidity facilities that shorten the
effective maturity of some of the Fund's holdings. The Fund invests only in
instruments with remaining maturities of 13 months or less that the Adviser
believes present minimal credit risk. The Fund maintains an average weighted
maturity of 90 days or less.

In managing the Fund, the Adviser assesses current and projected market
conditions, particularly interest rates. Based on this assessment and an
extensive credit analysis, the Adviser uses gradual shifts in portfolio maturity
to respond to expected changes and selects securities that it believes offer the
most attractive risk/return trade off.

PRINCIPAL RISKS OF INVESTING IN THE NEW YORK TAX-EXEMPT MONEY FUND

An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the

Page 16 of 31
<PAGE>

investment return generated by the Fund may be less than the rate of inflation.
A Fund share is not a bank deposit and is not insured or guaranteed by the FDIC
or any government agency. Although a money market fund seeks to keep a constant
price per share of $1.00, you may lose money by investing in the Fund.

The Fund is non-diversified, which means that it may invest in the securities
of relatively few issuers. As a result, the Fund may be more susceptible to
a single adverse economic or political/regulatory occurrence affecting one or
more of these issuers, and may experience increased volatility due to its
investments in those securities.

The Fund's concentration of investments in securities of issuers located in a
single state subjects the Fund to economic and government policies of that
state.

PERFORMANCE INFORMATION

The Fund did not commence operations until August 3, 1998. Therefore, no
performance information is provided.

Call 1-800-XXX-XXXX for the Fund's most current 7-day yield.

FUND FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

NEW YORK TAX-EXEMPT MONEY FUND ____%

FOR MORE INFORMATION ABOUT THESE FEES, SEE "INVESTMENT ADVISER."

Page 17 of 31
<PAGE>

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$---- $---- $---- $----
</TABLE>

Page 18 of 31
<PAGE>

MORE INFORMATION ABOUT RISK

<TABLE>
<S><C>
FIXED INCOME RISK - The market value of fixed income investments change All Funds
in response to interest rate changes and other factors. During periods of
falling interest rates, the values of outstanding fixed income securities
generally rise. Moreover, while securities with longer maturities tend to
produce higher yields, the prices of longer maturity securities are also
subject to greater market fluctuations as a result of changes in interest
rates.

CALL RISK - During periods of falling interest rates, certain All Funds
debt obligations with high interest rates may be prepaid (or "called")
by the issuer prior to maturity. This may cause a Fund's average
weighted maturity to fluctuate, and may require a Fund to invest the
resulting proceeds at lower interest rates.

CREDIT RISK - The possibility that an issuer will be unable to All Funds
make timely payments of either principal or interest.

EVENT RISK - Securities may suffer declines in credit quality All Funds
and market value due to issuer restructurings or other factors. This
risk should be reduced because of the Fund's multiple holdings.

MUNICIPAL ISSUER RISK - There may be economic or political changes that Tax-Exempt Money Fund
impact the ability of municipal issuers to repay principal and to make New York Tax-Exempt Money Fund
interest payments on municipal securities. Changes to the financial
condition or credit rating of municipal issuers may also adversely
affect the value of the Fund's municipal securities. Constitutional or
legislative limits on borrowing by municipal issuers may result in
reduced supplies of municipal securities. Moreover, certain municipal
securities are backed only by a municipal issuer's ability to levy and
collect taxes.

In addition, the Fund's concentration of investments in issuers located New York Tax-Exempt Money Fund
in a single state makes the Fund more susceptible to adverse political
or economic developments affecting that state. The Fund also may be
riskier than mutual funds that buy securities of issuers in numerous
states.

Page 19 of 31
<PAGE>

MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are Money Fund
fixed income securities representing an interest in a pool of Government Money Fund
underlying mortgage loans. They are sensitive to changes in
interest rates, but may respond to these changes differently
from other fixed income securities due to the possibility of
prepayment of the underlying mortgage loans. As a result, it
may not be possible to determine in advance the actual maturity
date or average life of a mortgage-backed security. Rising
interest rates tend to discourage refinancings, with the result
that the average life and volatility of the security will
increase, exacerbating its decrease in market price. When
interest rates fall, however, mortgage-backed securities may
not gain as much in market value because of the expectation of
additional mortgage prepayments that must be reinvested at
lower interest rates. Prepayment risk may make it difficult to
calculate the average maturity of a portfolio of
mortgage-backed securities and, therefore, to assess the
volatility risk of that portfolio.

YEAR 2000 RISK - The Funds depend on the smooth functioning of All Funds
computer systems in almost every aspect of their business. Like
other mutual funds, businesses and individuals around the
world, the Funds could be adversely affected if the computer
systems used by their service providers do not properly process
dates on and after January 1, 2000, and distinguish between the
year 2000 and the year 1900. This is commonly known as the
"Year 2000 Problem." The Adviser and the Funds' other service
providers advise that they are taking steps to address the
Year 2000 Problem with respect to the computer systems that
they use. Currently, they do not anticipate that the
transition to the 21st Century will have any material impact on
their ability to continue to service the Funds at current
levels. At this time, however, there can be no assurance that
their efforts will be sufficient to avoid any adverse impact
on the Funds as a result of the Year 2000 Problem. In
addition, the Funds and their shareholders may experience
losses as a result of computer difficulties experienced by issuers
of portfolio securities or third parties, such as custodians,
banks, broker-dealers or others with which the Funds do
business. </TABLE>

Page 20 of 31
<PAGE>

EACH FUND'S OTHER INVESTMENTS

In addition to the investments and strategies described in this prospectus,
each Fund also may invest in other securities, use other strategies and
engage in other investment practices. These investments and strategies, as
well as those described in this prospectus, are described in detail in our
Statement of Additional Information. Of course, a Fund cannot guarantee it
will achieve its investment goal.

EACH FUND'S INVESTMENT OBJECTIVE

The Money Fund seeks as high a level of current income as is consistent with
liquidity and stability of principal.

The Government Money Fund seeks as high a level of current income as is
consistent with liquidity and stability of principal.

The Treasury Money Fund seeks current income with liquidity and stability of
principal.

The Tax-Exempt Money Fund seeks a moderate level of current interest income
exempt from federal income taxes consistent with stability of principal.

The New York Tax-Exempt Money Fund seeks a moderate level of current interest
income that is exempt from federal income tax and, to the extent possible, from
New York State and New York City personal income taxes, as is consistent with
liquidity and stability of principal. This objective may be changed without
shareholder approval.

INVESTMENT ADVISER

United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.

The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.

The Boards of Directors of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds,
Inc. supervise the Adviser and establish policies that the Adviser must follow
in its management activities.

Page 21 of 31
<PAGE>

For the fiscal year ended March 31, 1999, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:

<TABLE>
<S> <C>
MONEY FUND ______%
GOVERNMENT MONEY FUND ______%
TREASURY MONEY FUND ______%
TAX-EXEMPT MONEY FUND ______%
</TABLE>

U.S. Trust is entitled to recieve an advisory fee from the New York
Tax-Exempt Money Fund of 0.50% of the Fund's average daily net assets.

PURCHASING, SELLING AND EXCHANGING FUND SHARES

This section tells you how to buy, sell (sometimes called "redeem") or exchange
shares of the Funds.

HOW TO PURCHASE FUND SHARES

You may purchase shares directly by:
- - Mail
- - Telephone
- - Wire, or
- - Automatic Investment Program

To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire or through the automatic
investment program, write your check, payable in U.S. dollars, to "Excelsior
Funds, Inc." (or "Excelsior Tax-Exempt Funds, Inc." for shares of the Tax-Exempt
Money and New York Tax-Exempt Money Funds) and include the name of the
appropriate Fund(s) on the check. A Fund cannot accept third-party checks,
credit cards, credit card checks or cash. To purchase shares by wire, please
call us 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 Number 9102732915

For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration (including account number)

You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution,

Page 22 of 31
<PAGE>

you will have to follow its procedures, which may be different from the
procedures for investing directly. Your institution may charge a fee for its
services, in addition to the fees charged by the Fund. You will also generally
have to address your correspondence or questions regarding a Fund to your
institution.

The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of a
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.

GENERAL INFORMATION

Each Fund calculates its NAV twice each Business Day at 1:00 p.m., Eastern
time (12:00 noon, Eastern time for the Tax-Exempt Money and New York
Tax-Exempt Money Funds) and at the regularly-scheduled close of normal
trading on the NYSE (normally, 4:00 p.m., Eastern time). For you to be
eligible to receive dividends declared on the day you submit your purchase
request, a Fund must receive your request in good order before 1:00 p.m.,
Eastern time (12:00 noon, Eastern time for the Tax-Exempt Money and New York
Tax-Exempt Money Funds) and federal funds (readily available funds) before
the regularly-scheduled close of normal trading on the NYSE.

HOW WE CALCULATE NAV

NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.

In calculating NAV for the Funds, we generally value a Fund's investment
portfolio using the amortized cost valuation method, which is described in
detail in our Statement of Additional Information. If this method is determined
to be unreliable during certain market conditions or for other reasons, a Fund
may value its portfolio at market price or fair value prices may be determined
in good faith using methods approved by the Board of Directors.

MINIMUM PURCHASES

To purchase shares for the first time, you must invest at least $500 in any
Fund.

Your subsequent investments in any Fund must be made in amounts of at least $50.

Page 23 of 31
<PAGE>

A Fund may accept investments of smaller amounts at its discretion.

AUTOMATIC INVESTMENT PROGRAM

If you have a checking, money market, or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.

With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.

HOW TO SELL YOUR FUND SHARES

You may sell shares directly by:
- - Mail
- - Telephone, or
- - Systematic Withdrawal Plan

You may sell your shares by sending 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

Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.

If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares.

If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 446-1012
(from overseas, call (617) 557-8280). The minimum amount for telephone
redemptions is $500. We may reject a telephone redemption request if we deem
it advisable to do so.

Page 24 of 31
<PAGE>

If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares by writing
a check for at least $500 drawn on your account. Checks are available free of
charge, and may be obtained by calling (800) 446-1012 (from overseas, call (617)
557-8280). You cannot use a check to close your account.

The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.

SYSTEMATIC WITHDRAWAL PLAN

RECEIVING YOUR MONEY

Normally, we will send your sale proceeds within five Business Days after we
receive your redemption request in good order. Your proceeds can be wired to
your bank account (if more than $500) or sent to you by check. You can request
to have redemption proceeds wired to your bank account on the same day you call
us to sell your shares, as long as we hear from you by 1:00 p.m., Eastern time
(12:00 noon, Eastern time for the Tax-Exempt Money and New York Tax-Exempt Money
Funds) on that day. Otherwise, redemption proceeds will be wired the next
Business Day. Shares redeemed and wired on the same day will not receive the
dividend declared on that day. IF YOU RECENTLY PURCHASED YOUR SHARES BY CHECK,
REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED (WHICH MAY
TAKE UP TO 15 BUSINESS DAYS).

REDEMPTIONS IN KIND

INVOLUNTARY SALES OF YOUR SHARES

SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES

Page 25 of 31
<PAGE>

HOW TO EXCHANGE YOUR SHARES

You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.

TELEPHONE TRANSACTIONS

AUTHORIZED INTERMEDIARIES

SHAREHOLDER SERVICING

Page 26 of 31
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

Each Fund distributes its income by declaring a dividend daily and paying
accumulated dividends monthly.

Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.

Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends
and distributions will be paid in the form of additional Fund shares unless
you elect to receive payment in cash. To elect cash payment, you must notify
the Fund in writing prior to the date of the distribution. Your election will
be effective for dividends and distributions paid after the Fund receives
your written notice. To cancel your election, simply send the Fund written
notice.

Page 27 of 31
<PAGE>

TAXES

The Tax-Exempt Money and New York Tax-Exempt Money Funds intend to distribute
federally tax-exempt income. Each Fund may invest a portion of its assets in
securities that generate taxable income for federal or state income taxes.
Income exempt from federal tax may be subject to state and local taxes. Any
capital gains distributed by these Funds may be taxable.

MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.

Page 28 of 31
<PAGE>

FINANCIAL HIGHLIGHTS

The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund. This
information is intended to help you understand each Fund's financial performance
for the past five years, or, if shorter, the period of the Fund's operations.
Some of this information reflects financial information for a single Fund share.
The total returns in the table represent the rate that you would have earned (or
lost) on an investment in a Fund, assuming you reinvested all of your dividends
and distributions. This information has been audited by _____________________,
independent public accountants. Their report, along with each Fund's financial
statements, appears in the annual report that accompanies our Statement of
Additional Information. You can obtain the annual report, which contains more
performance information, at no charge by calling (800) 446-1012 (from overseas,
call (617) 557-8780).

Page 29 of 31
<PAGE>

EXCELSIOR FUNDS, INC.

INVESTMENT ADVISER

United States Trust Company of New York
114 W. 47th Street
New York, New York 10036

U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905

DISTRIBUTOR

Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829

More information about each Fund is available without charge through the
following:

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAIs dated August 1, 1999 include detailed information about Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. The SAIs are on file with the
SEC and are incorporated by reference into this prospectus. This means that the
SAIs, for legal purposes, are a part of this prospectus.

ANNUAL AND SEMI-ANNUAL REPORTS

TO OBTAIN MORE INFORMATION:

BY TELEPHONE: CALL (800) 446-1012 (FROM OVERSEAS, CALL (617) 557-8780)

BY MAIL:
Excelsior Funds, Inc. (or Excelsior Tax-Exempt Funds, Inc.)
73 Tremont Street
Boston, Massachusetts 02108-3913

BY E-MAIL: [VAR:FUND.EMAILADDRESS]]

BY INTERNET: [VAR:FUND.INTERNETADDRESS]]

Page 30 of 31
<PAGE>

FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about Excelsior Funds, Inc. and Excelsior
Tax-Exempt Funds, Inc., from the SEC's website ("HTTP://WWW.SEC.GOV"). You may
review and copy documents at the SEC Public Reference Room in Washington, DC
(for information call 1-800-SEC-0330). You may request documents by mail from
the SEC, upon payment of a duplicating fee, by writing to: Securities and
Exchange Commission, Public Reference Section, Washington, DC 20549-6009. The
Investment Company Act registration numbers of Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. are 811-4088 and 811-4101, respectively.

Page 31 of 31
<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 _______________,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended ______________ 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 -- Energy and Natural Resources Fund...........3
Additional Investment Policies -- Real Estate Fund............................4
Additional Information on Portfolio Instruments...............................7
Investment Limitations.......................................................17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................20
Purchase of Shares...........................................................22
Redemption Procedures........................................................24
Other Redemption Information.................................................26
INVESTOR PROGRAMS.................................................................27
Systematic Withdrawal Plan...................................................27
Exchange Privilege...........................................................28
Retirement Plans.............................................................28
Automatic Investment Program.................................................29
Additional Information.......................................................29
DESCRIPTION OF CAPITAL STOCK......................................................30
MANAGEMENT OF THE FUNDS...........................................................31
Directors and Officers.......................................................31
Investment Advisory and Administration Agreements............................37
Banking Laws.................................................................39
Shareholder Organizations....................................................40
Expenses.....................................................................41
Custodian and Transfer Agent.................................................41
PORTFOLIO TRANSACTIONS............................................................42
PORTFOLIO VALUATION...............................................................45
INDEPENDENT AUDITORS..............................................................46
COUNSEL...........................................................................46
ADDITIONAL INFORMATION CONCERNING TAXES...........................................46
PERFORMANCE INFORMATION...........................................................49
MISCELLANEOUS.....................................................................52
FINANCIAL STATEMENTS..............................................................53
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.

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.

<PAGE>

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.

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

-2-
<PAGE>

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

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

-3-
<PAGE>

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 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

-4-
<PAGE>

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 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

-5-
<PAGE>

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.

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.

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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 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

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<PAGE>

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 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.

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<PAGE>

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.

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.

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<PAGE>

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. 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.

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<PAGE>

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.

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.

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<PAGE>

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

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

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<PAGE>

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.

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.

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

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<PAGE>

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.

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 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

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<PAGE>

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

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
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.

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<PAGE>

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

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

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

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<PAGE>

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.

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

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<PAGE>

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 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.

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<PAGE>

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

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:

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<PAGE>

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.

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.

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<PAGE>

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 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.

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<PAGE>

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."

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.

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<PAGE>

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.

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

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<PAGE>

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>

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.

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<PAGE>

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 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.

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<PAGE>

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.

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-

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<PAGE>

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.

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.

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<PAGE>

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 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.

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<PAGE>

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.

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.

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<PAGE>

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.

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:

-31-
<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 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: 67 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: 72 (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 Energy
New York, NY 10020 Services Inc. (since 1996); Director, Parsons
Age: 55 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. (since
1993); 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.

-32-
<PAGE>

Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ------------- ------------------------
<S> <C> <C>
Joseph H. Dugan Director Retired; Director of the Company and Excelsior
913 Franklin Lake Road Tax-Exempt Fund (since 1984); Director of UST
Franklin Lakes, NJ 07417 Master Variable Series, Inc. (from 1994 to June
Age: 73 1997); and Trustee of Excelsior Institutional
Trust (since 1995).

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 Master Variable Series, Inc. (from 1994 to June
Age: 77 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).

W. Wallace McDowell, Jr. Director Director of the Company and Excelsior Tax-Exempt
c/o Prospect Capital Corp. Fund (since 1996); Trustee of Excelsior
43 Arch Street Institutional Trust and Excelsior Funds (since
Greenwich, CT 06830 1994); Private Investor (since 1994); Managing
Age: 61 Director, Morgan Lewis Githens & Ahn (from 1991 to
1994); and Director, U.S. Homecare Corporation
(since 1992), Grossmans, Inc. (from 1993 to 1996),
Children s Discovery Centers (since 1984), ITI
Technologies, Inc. (since 1992) and Jack Morton
Productions (since 1987).

Jonathan Piel Director Director of the Company and Excelsior Tax-Exempt
558 E. 87th Street Fund (since 1996); Trustee of Excelsior
New York, NY 10128 Institutional Trust and Excelsior Funds (since
Age: 59 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).

-33-
<PAGE>

Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ------------- ------------------------
<S> <C> <C>
Robert A. Robinson Director Director of the Company and Excelsior Tax-Exempt
Church Pension Fund Fund (since 1987); Director of UST
800 Second Avenue Master Variable Series, Inc. (from 1994 to June
New York, NY 10017 1997); Trustee of Excelsior Institutional Trust
Age: 72 (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).

Alfred C. Tannachion(2) Director Retired; Director of the Company and Excelsior
6549 Pine Meadows Drive Tax-Exempt Fund (since 1985); Chairman of the
Spring Hill, FL 34606 Board of Excelsior Fund and Excelsior Tax-Exempt
Age: 72 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

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath
Philadelphia National LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 40

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

-34-

<PAGE>

Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ------------- ------------------------
<S> <C> <C>
Edward 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 to
Boston, MA 02108-3913 November 1996).
Age: 37

John M. Corcoran Assistant Vice President, Director of Fund Administration,
Chase Global Funds Treasurer Chase Global Funds Services Company (since April
Services Company 1998); Vice President, Senior Manager of Fund
73 Tremont Street Administration, Chase Global Funds Services
Boston, MA 02108-3913 Company (from July 1996 to April 1998); Second
Age: 33 Vice President, Manager of Fund Administration,
Chase Global Funds Services Company (from October
1993 to July 1996); and Audit Manager, Ernst &
Young LLP (from August 1987 to September 1993).
</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 ________, 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.

-35-
<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
Aggregate Benefits Accured from the Company
Name of Compensation from as Part of and Fund Complex*
Person/Position the Company Fund Expenses Paid to Directors
- --------------- ----------------- ---------------- -------------------
<S> <C> <C> <C>
Donald L. Campbell
Director $_______ None $_______(3)**

Rodman L. Drake
Director $_______ None $_______(4)**

Joseph H. Dugan
Director $_______ None $_______(3)**

Wolfe J. Frankl
Director $_______ None $_______(3)**

W. Wallace McDowell, Jr.
Director $_______ None $_______(4)**

Jonathan Piel
Director $_______ None $_______(4)**

Robert A. Robinson
Director $_______ None $_______(3)**

Alfred C. Tannachion
Director $_______ None $_______(3)**

Frederick S. Wonham
Chairman of the Board,
President and Treasurer $_______ None $_______(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.

-36-
<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 $________ and $________ with respect to the Energy and Natural
Resources and Real Estate Funds, respectively. For the same period, U.S. Trust
waived advisory fees totaling $________ and $________ 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.

-37-
<PAGE>

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:

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>

-38-
<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 or period ended March 31, 1999, the Company paid CGFSC,
Federated Administrative Services and U.S. Trust $________ and $________ 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 $________ and
$________ 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.

-39-
<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 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 $________ and $________ with respect to the Energy and
Natural Resources and Real Estate Funds, respectively. Of these amounts,
$________ and $________ 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

-40-
<PAGE>

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.

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.

-41-
<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 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.

To the extent that a Fund effects brokerage transactions with any
broker-dealer affiliated directly or indirectly with U.S. Trust, such
transactions, including the frequency thereof, the receipt of any commissions
payable in connection therewith, and the selection of the affiliated

-42-
<PAGE>

broker-dealer effecting such transactions, will be fair and reasonable to the
shareholders of the Fund.

For the fiscal year ended March 31, 1999, the Energy and Natural Resources
and Real Estate Funds paid brokerage commissions aggregating $________ and
$________, respectively, of which $________ and $________ 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
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.

-43-
<PAGE>

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.

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 are as follows:

FUND AMOUNT OF TRANSACTIONS RELATED COMMISSION
<S> <C> <C>
Energy and Natural Resources Fund $_______ $_______
Real Estate Fund $_______ $_______
</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.

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<PAGE>

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: ____________.

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 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.

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<PAGE>

INDEPENDENT AUDITORS

_______________, independent auditors, [ADDRESS] , serve as auditors of the
Company. The Funds' Financial Highlights included in the Prospectus and the
financial statements for the period ended ______________ incorporated by
reference in this Statement of Additional Information have been audited by
_______________ 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),
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, 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.

Each Fund qualified for its last taxable year as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
expects to so qualify in future years. Such qualification generally relieves a
Fund of liability for federal income taxes to the extent its earnings are
distributed in accordance with the Code. 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.

Qualification as a regulated investment company under the Code requires,
among other things, that a Fund distribute to its shareholders an amount equal
to at least 90% of its investment company taxable income for each taxable year.
In general, a Fund's investment company taxable income will be its income
(including dividends and interest), 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. Each Fund intends to distribute
substantially all of its investment company taxable income each year. Such
dividends will be taxable as ordinary income to Fund shareholders who are not
currently exempt from federal income taxes, whether such income is received in
cash or reinvested in additional shares. (Federal income taxes for distributions
to IRAs and qualified pension plans are deferred under the Code.) The dividends
received deduction for corporations will apply to such ordinary income
distributions to the extent

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<PAGE>

of the total qualifying dividends received by a Fund from domestic corporations
for the taxable year.

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.

Each Fund will designate any distribution of the excess of net long-term
capital gain over net short-term capital loss as a capital gain dividend in a
written notice mailed to shareholders within 60 days after the close of the
Fund's taxable year. Such distributions are not eligible for the dividends
received deduction. Upon the sale or exchange of shares, if the shareholder has
not held such shares for more than six months, any loss on the sale or exchange
of those shares will be treated as long-term capital loss to the extent of the
capital gain dividends received with respect to the shares.

An Investor considering buying shares of a Fund on or just before the
record date of a dividend should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
him.

A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares depending upon the tax basis of such
shares and their price at the time of redemption, transfer or exchange.
Generally, a shareholder may include sales charges incurred upon the purchase of
shares in his 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 such shares for shares of another Fund within
90 days of the purchase and is able to reduce the sales charges otherwise
applicable to the new shares (by virtue of the exchange privilege), the amount
equal to such reduction may not be included in the tax

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<PAGE>

basis of the shareholder's exchanged shares for the purpose of determining gain
or loss, but may be included (subject to the same limitation) in the tax basis
of the new shares.

Qualification as a regulated investment company under the Code also
requires that each Fund satisfy certain requirements with respect to the source
of its income for a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. Since qualifying income does
not include income derived from the sale or other disposition of precious
metals, the extent to which the Energy and Natural Resources Fund invests in
precious metals may be limited. The Treasury Department may by regulation
exclude from qualifying income foreign currency gains which are not directly
related to a Fund's principal business of investing in stock or securities, or
options and futures with respect to stock or securities. Any income derived by a
Fund from a partnership or trust is treated for this purpose as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust.

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 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 and local taxes.

STATE AND LOCAL

Purchasers are advised to consult their tax advisers concerning the
application of state and local taxes, which may have different consequences from
those of the federal income tax law described above.

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<PAGE>

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:

to the power of 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

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<PAGE>

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 _____% and _____%, 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 _____%. 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 ____%. 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 ____%.

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 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 MONE
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

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<PAGE>

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.

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

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<PAGE>

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 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
____%.

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

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<PAGE>

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 _____, 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 May 19, 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, 23.6%;
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, 10.55% and
Eugene Higgins Residuary, c/o United States Trust Company of New York, 114
West 47th Street, New York, New York 10036, 8.71%

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the Company's Annual
Report to Shareholders for the fiscal year ended ____________ (the "____ Annual
Report") for the Funds are incorporated in this Statement of Additional
Information by reference. No other parts of the ____ Annual Report are
incorporated by reference herein. The financial statements included in the ____
Annual Report for the Funds have been audited by the Company's independent
auditors, _______________, whose reports thereon also appear in the ____ 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
____ 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

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
on favorable business, financial, and economic conditions for the obligor to
meet its financial 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 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 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>

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 investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.

"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.

A-2
<PAGE>

"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 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
BankWatch:

"TBW-1" - This designation represents Thomson 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 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 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.

A-3
<PAGE>

"TBW-4" - This designation represents Thomson 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.

"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

A-4
<PAGE>

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. This rating 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 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. 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 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 risks appear somewhat larger than in "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.

A-5
<PAGE>

"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 operation 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 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 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 and greater in periods of 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-6
<PAGE>

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 investment risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is very 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 investment 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 investment 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 investment
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 category.

"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 changes 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.

"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.

A-7
<PAGE>

"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved, and
"D" represents the lowest potential for recovery.

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

Thomson 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 Thomson BankWatch's 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
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.

A-8
<PAGE>

MUNICIPAL NOTE RATINGS

A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group 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 very strong
characteristics 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:

"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 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 and lack of margins of
protection.

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

A-9

<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 ________________,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended _____________ 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
Foreign Investment Risks...................................1
Additional Investment Policies.............................4
Additional Information on Portfolio Instruments............6
Investment Limitations....................................19
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................22
Purchase of Shares........................................24
Redemption Procedures.....................................25
Other Redemption Information..............................28
INVESTOR PROGRAMS..............................................28
Systematic Withdrawal Plan................................28
Exchange Privilege........................................29
Retirement Plans..........................................30
Automatic Investment Program..............................30
Additional Information....................................31
DESCRIPTION OF CAPITAL STOCK...................................31
MANAGEMENT OF THE FUNDS........................................33
Directors and Officers....................................33
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
</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
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.

<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 securities of certain

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<PAGE>

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 will

-3-
<PAGE>

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.

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 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.

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

-4-
<PAGE>

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 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

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<PAGE>

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 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

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<PAGE>

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 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.

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<PAGE>

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 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 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.

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<PAGE>

Bank obligations also include U.S. dolla denominated obligations of foreign
branches of U.S. banks and obligations of domestic branches of foreign banks.
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 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

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

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<PAGE>

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 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

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<PAGE>

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>

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 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

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<PAGE>

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.

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, currency
exchange rates and other economic 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.

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<PAGE>

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.

OPTIONS ON FUTURES CONTRACTS

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<PAGE>

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 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.

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<PAGE>

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.

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

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<PAGE>

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.

SM
WORLD EQUITY BENCHMARK SHARES

Each Fund may invest up to 5% of its total assets in World Equity Benchmark
SM
Shares 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 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

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<PAGE>

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

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
value 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

-18-
<PAGE>

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.

INVESTMENT LIMITATIONS

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;

-19-
<PAGE>

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;

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:

-20-
<PAGE>

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

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.

-21-
<PAGE>

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.

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

-22-
<PAGE>

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.

-23-
<PAGE>

PURCHASE OF SHARES

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

-24-
<PAGE>

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.

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)

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

-25-
<PAGE>

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

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.

-26-
<PAGE>

form for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).

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.

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

-27-
<PAGE>

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

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

-28-
<PAGE>

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

(4) A declining-balance withdrawal.

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.

-29-
<PAGE>

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.

AUTOMATIC INVESTMENT PROGRAM

-30-
<PAGE>

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

-31-
<PAGE>

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.

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

-32-
<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:

<TABLE>
<CAPTION>
Position with the Principal Occupation During Past 5 years and
Name and Address Company Other Affiliations
---------------- ----------------- --------------------------------------------
<S> <C> <C>
Frederick S. Wonham(1) Chairman of the Board, Retired; Director of the Company and Excelsior
238 June Road President and Treasurer Tax-Exempt Fund (since 1995);
Stamford, CT 06903 Trustee of Excelsior Funds and Excelsior
Age: 67 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).

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

-33-
<PAGE>

<CAPTION>
Position with the Principal Occupation During Past 5 years and
Name and Address Company Other Affiliations
---------------- ----------------- --------------------------------------------
<S> <C> <C>
Rodman L. Drake Director Director of the Company and Excelsior Tax-Exempt
Continuation Investments Group, Inc. Fund (since 1996); Trustee, Excelsior
1251 Avenue of the Americas, 9th Floor Institutional Trust and Excelsior Funds (since
New York, NY 10020 1994); Director, Parsons Brinkeroff Energy
Age: 55 Services Inc. (since 1996); Director, Parsons
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. (since
1993); 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 Excelsior
913 Franklin Lake Road Tax-Exempt Fund (since 1984); Director of UST
Franklin Lakes, NJ 07417 Master Variable Series, Inc. (from 1994 to June
Age: 73 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 Tax-Exempt Fund (since 1986);
Age: 77 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).

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<PAGE>

Robert A. Robinson Director Director of the Company and Excelsior Tax-Exempt
Church Pension Fund Fund (since 1987); Director of UST Master
800 Second Avenue Variable Series, Inc. (from 1994 to June 1997);
New York, NY 10017 Trustee of Excelsior Institutional Trust (since
Age: 72 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).

-35-
<PAGE>

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle & Reath
Philadelphia National LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath
Philadelphia National LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 39

Edward Wang Assistant Secretary Manager of Blue Sky Compliance, Chase Global
Chase Global Funds Funds Services Company (November 1996 to
Services Company present); and Officer and Manager of Financial
73 Tremont Street Reporting, Investors Bank & Trust Company
Boston, MA 02108-3913 (January 1991 to November 1996).
Age: 37

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

-36-
<PAGE>

<CAPTION>
Position with the Principal Occupation During Past 5 years and
Name and Address Company Other Affiliations
---------------- ----------------- --------------------------------------------
<S> <C> <C>
John M. Corcoran Assistant Treasurer Vice President, Director of Fund Administration,
Chase Global Funds Chase Global Funds Services Company (since April
Services Company 1998); Vice President, Senior Manager of Fund
73 Tremont Street Administration, Chase Global Funds Services
Boston, MA 02108-3913 Company (from July 1996 to April 1998); Second
Age: 33 Vice President, Manager of Fund Administration,
Chase Global Funds Services Company (from October
1993 to July 1996); and Audit Manager, Ernst &
Young LLP (from August 1987 to September 1993).
</TABLE>

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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.

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 $______ None $______ (3)**
Director

Rodman L. Drake $______ None $______ (4)**
Director

Joseph H. Dugan $______ None $______ (3)**
Director

Wolfe J. Frankl $______ None $______ (3)**
Director

W. Wallace McDowell, Jr. $______ None $______ (4)**
Director

Jonathan Piel $______ None $______ (4)**
Director

Robert A. Robinson $______ None $______ (3)**
Director

Alfred C. Tannachion $______ None $______ (3)**
Director

Frederick S. Wonham $______ None $______ (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.

-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 $_______, $________, $________, $________ and $________ 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 $_______, $________, $________, $________ and $________
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 $_______, $_______, $_______, $_______ and $_______ 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 $_______, $_______, $_______, $_______ and
$_______ 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.

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 wit
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

-41-
<PAGE>

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 he 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 ended March 31, 1999, 1998 and 1997, payments to
Shareholder Organizations totaled $_________, $134,970 and $87,203; $________,
$96,449 and $42,898; $__________, $67,805 and $65,606; and $_________, $120,297
and $48,947 with respect to the International, Latin America, Pacific/Asia and
Pan European Funds, respectively. Of these amounts, $_________, $133,194 and
$87,203; $_______, $86,789 and $42,877; $________, $67,453 and $65,398; and
$________, $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 $_______ and $994
respectively, with respect to the Emerging Markets Fund, $______ and $994, of
which was paid to affiliates of U.S. Trust.

EXPENSES

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<PAGE>

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 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.

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 $_______, $456,367 and $396,525; $________,
$529,715 and $254,681; $_________, $470,122 and $700,865; and $___________,
$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 $_______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.

-44-
<PAGE>

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 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.

Fund Amount of Transactions Related Commission
---- ---------------------- ------------------
<S> <C> <C>
International Fund $__________ $__________
Latin America Fund $__________ $__________
Pacific/Asia Fund $__________ $__________
Pan European Fund $__________ $__________
Emerging Markets Fund $__________ $__________
</TABLE>

-45-
<PAGE>

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. 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.

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 Funds did not hold any securities of the Company's regular brokers or
dealers or their parents.]

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.

-46-
<PAGE>

INDEPENDENT AUDITORS

________________, independent auditors, [ADDRESS] , serve as auditors of
--------
the Company. The Funds' Financial Highlights included in the Prospectus and the
financial statements for the fiscal year ended ______________ incorporated by
reference in this Statement of Additional Information have been audited by
________________ 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, 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

GENERALLY

The following supplements the tax information contained in the Prospectus.

Each Fund is treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to qualify as a
regulated investment company. Qualification as a regulated investment company
under the Code requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least 90% of its investment company income
for each taxable year. In general, a Fund's investment company taxable income
will be its income (including dividends, 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. (Federal income taxes for distributions to IRAs and qualified
pension plans are deferred under the Code.) It is anticipated that none of the
dividends paid by a Fund will be eligible for the dividends received deduction
for corporations.

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.

-47-
<PAGE>

Each Fund will designate any distribution of the excess of net long-term
capital gain over net short-term capital loss as a capital gain dividend in a
written notice mailed to shareholders within 60 days after the close of the
Fund's taxable year. Shareholders should note that, upon the sale or exchange of
Fund shares, if the shareholder has not held such shares for more than six
months, any loss on the sale or exchange of those shares will be treated as
long-term capital loss to the extent of the capital gain dividends received with
respect to the shares.

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.
Generally, a shareholder may include sales charges incurred upon the purchase of
shares in his 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 such shares for shares of another Fund within
90 days of the purchase and is able to reduce the sales charges otherwise
applicable to the new shares (by virtue of the exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares for the purpose of determining gain or loss, but
may be included (subject to the same limitation) in the tax basis of the new
shares

Qualification as a regulated investment company under the Code also
requires that a Fund satisfy certain requirements with respect to the source of
its income for a taxable year. At least 90% of the gross income of a Fund must
be derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Some of
the investments that a Fund may make (such as gold bullion) may not be
securities or may not produce qualifying income. Therefore, it may be necessary
for the Adviser to restrict the investments of a Fund to ensure that
non-qualifying income does not exceed 10% of such Fund's total gross income for
a taxable year.

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."

-48-
<PAGE>

tax considerations generally affecting the Funds and their shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Funds should consult their tax advisers with specific reference
to their own tax situations. Shareholders will be advised annually as to the
federal income tax consequences of distributions made each year. Shareholders
are advised to consult their tax advisers concerning their specific situations
and the application of state and local 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.

-49-
<PAGE>

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

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 _____%, _____% and _____%, 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
_____% and _____%; _____% and _____%, and _____% and _____%, 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
_____%.

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.

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. 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.

-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 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.

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

-51-
<PAGE>

As of ___________, 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 May 19, 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: INTERNATIONAL FUND: U.S. Trust Retirement Fund, c/o United
States Trust Company of New York, 114 West 47th Street, New York, New York
10036, 11.00%; LATIN AMERICA FUND: Charles Schwab & Co., Inc., Special
Custody A/C For Benefit of Customers, Attn: Mutual Funds, 101 Montgomery
Street, San Francisco, California 94104, 27.6%; and EMERGING MARKETS FUND: M&W
Eisenberg Family Foundation, c/o United States Trust Company of New York, 114
West 47th Street, New York, New York 10036, 6.52%; The Feinstein Family
Foundation, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 6.38%; U.S. Trust Retirement Fund, c/o
United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 21.43%; Prudence Miller Agency, c/o United States Trust Company
of New York, 114 West 47th Street, New York, New York 10036, 9.95%; and Dan
G. Weiden IMA, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 11.49%.

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the Company's Annual
Report to Shareholders for the fiscal year ended _____________ (the "____ Annual
Report") for the Funds are incorporated in this Statement of Additional
Information by reference. No other parts of the ____Annual Report are
incorporated by reference herein. The financial statements included in the ____
Annual Report for the Funds have been audited by the Company's independent
auditors, ___________, whose reports thereon also appear in the ____ 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
____ 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.

-52-
<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

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

"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 has failed to meet scheduled principal and/or interest
payments.

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

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

"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse

A-3
<PAGE>

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 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.

"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

A-4
<PAGE>

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.

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:

A-5
<PAGE>

"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.

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 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 and greater in periods of economic
stress.

A-6
<PAGE>

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.

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

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
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-8
<PAGE>

"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess very strong
characteristics 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 ample although not so large as in the preceding group.

"SG" - This designation denotes speculative quality and lack of margins of
protection.

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

A-9
<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 _______________,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended _______________ 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............................................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.......................................................................42
ADDITIONAL INFORMATION CONCERNING TAXES.......................................43
PERFORMANCE INFORMATION.......................................................45
MISCELLANEOUS.................................................................47
FINANCIAL STATEMENTS..........................................................48
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 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

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.

<PAGE>

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.

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

-2-
<PAGE>

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.

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.
Investments in unsponsored ADRs involve additional risk because financial
information based on generally accepted accounting principles ("GAAP") may not
be available for the foreign issuers of the underlying securities. ADRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. The Funds may also enter into foreign currency
exchange transactions for hedging purposes.

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

-3-
<PAGE>

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

-4-
<PAGE>

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

-5-
<PAGE>

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.

-6-
<PAGE>

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.

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.

-7-
<PAGE>

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>

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.

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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<PAGE>

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.

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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<PAGE>

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.

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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<PAGE>

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

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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

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 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.

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.

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

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

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>

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).

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.

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.

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<PAGE>

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

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<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.

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.

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<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 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

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<PAGE>

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

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.

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<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>

<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 Tax-Exempt
238 June Road Board, President Fund (since 1995); Trustee of Excelsior Funds and Excelsior
Stamford, CT 06903 and Treasurer Institutional Trust (since 1995); Vice Chairman of U.S. Trust
Age: 67 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 Tax-Exempt
333 East 69th Street Fund (since 1984); Director of UST Master Variable Series,
Apt. 10-H Inc. (from 1994 to June 1997); Trustee of Excelsior
New York, NY 10021 Institutional Trust (since 1995); and Director, Royal Life
Age: 72 Insurance Co. of New York (since 1991).

Rodman L. Drake Director Director of the Company and Excelsior Tax-Exempt Fund (since
Continuation Investments Group, Inc. 1996); Trustee of Excelsior Institutional Trust and Excelsior
1251 Avenue of the Americas Funds (since 1994); Director, Parsons Brinkerhoff Energy
9th Floor Services Inc. (since 1996); Director, Parsons Brinkerhoff,
New York, NY 10020 Inc. (engineering firm) (since 1995); President, Continuation
Age: 55 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. (since 1993); 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).
</TABLE>

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

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

-29-
<PAGE>

Wolfe J. Frankl Director Retired; Director of the Company and Excelsior Tax-Exempt Fund
2320 Cumberland Road (since 1986); Director of UST Master Variable Series, Inc.
Charlottesville, VA 22901 (from 1994 to June 1997); Trustee of Excelsior Institutional
Age: 77 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).

W. Wallace McDowell, Jr. Director Director of the Company and Excelsior Tax-Exempt Fund (since
c/o Prospect Capital Corp. 1996); Trustee of Excelsior Institutional Trust and Excelsior
43 Arch Street Funds (since 1994); Private Investor (since 1994); Managing
Greenwich, CT 06830 Director, Morgan Lewis Githens & Ahn (from 1991 to 1994); and
Age: 61 Director, U.S. Homecare Corporation (since 1992), Grossmans,
Inc. (from 1993 to 1996), Children s Discovery Centers (since
1984), ITI Technologies, Inc. (since 1992) and Jack Morton
Productions (since 1987).

Jonathan Piel Director Director of the Company and Excelsior Tax-Exempt Fund (since
558 E. 87th Street 1996); Trustee of Excelsior Institutional Trust and Excelsior
New York, NY 10128 Funds (since 1994); Vice President and Editor, Scientific
Age: 59 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).
</TABLE>

-30-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Robert A. Robinson Director Director of the Company and Excelsior Tax-Exempt Fund (since
Church Pension Fund 1987); Director of UST Master Variable Series, Inc. (from
800 Second Avenue 1994 to June 1997); Trustee of Excelsior Institutional Trust
New York, NY 10017 (since 1995); President Emeritus, The Church Pension Fund
Age: 72 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).

Alfred C. Tannachion(2) Director Retired; Director of the Company and Excelsior Tax-Exempt Fund
6549 Pine Meadows Drive (since 1985); Chairman of the Board of Excelsior Fund and
Spring Hill, FL 34606 Excelsior Tax-Exempt Fund (1991-1997) and Excelsior
Age: 72 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
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
Philadelphia National
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 40
</TABLE>

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

-31-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Edward Wang Assistant Manager of Blue Sky Compliance, Chase Global Funds Services
Chase Global Funds Secretary Company (November 1996 to present); and Officer and Manager of
Services Company Financial Reporting, Investors Bank & Trust Company (January
73 Tremont Street 1991 to November 1996).
Boston, MA 02108-3913
Age: 37

John M. Corcoran Assistant Vice President, Director of Fund Administration, Chase Global
Chase Global Funds Treasurer Funds Services Company (since April 1998); Vice President,
Services Company Senior Manager of Fund Administration, Chase Global Funds
73 Tremont Street Services Company (from July 1996 to April 1998); Second Vice
Boston, MA 02108-3913 President, Manager of Fund Administration, Chase Global Funds
Age: 33 Services Company (from October 1993 to July 1996); and Audit
Manager, Ernst & Young LLP (from August 1987 to September
1993).
</TABLE>

-32-
<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
Aggregate Benefits Total Compensation
Compensation Accrued as Part from the Company
Name of from of and Fund Complex*
Person/Position the Company Fund Expenses Paid to Directors
--------------- ----------- ------------- -----------------
<S> <C> <C> <C>
Donald L. Campbell $_______ None $_______(3)**
Director

Rodman L. Drake $_______ None $_______(4)**
Director

Joseph H. Dugan $_______ None $_______(3)**
Director

Wolfe J. Frankl $_______ None $_______(3)**
Director

W. Wallace McDowell, $_______ None $_______(4)**
Jr.
Director

Jonathan Piel $_______ None $_______(4)**
Director

Robert A. Robinson $_______ None $_______(3)**
Director

Alfred C. Tannachion $_______ None $_______(3)**
Director

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

-33-
<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 $__________, $__________, $__________ and $__________ 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 $__________, $__________, $__________ and $__________ 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.

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

-35-
<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 $______, $______, $______ and $______ 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 $_____, $_____, $_____ and $______ 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

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'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").

For the fiscal years or periods ended March 31, 1999, 1998 and 1997,
payments to Shareholder Organizations totaled $______, $182,660 and $132,737;
$______, $88,070 and $41,617; $______, $41,897 and $61,972; and $______, $1,501
and $0 with respect to the Blended Equity, Value and Restructuring, Small Cap
and Large Cap Growth Funds, respectively. Of these amounts, $______, $175,989
and $118,778; $______, $55,667 and $41,514; $______, $41,636 and $61,952; and
$______, $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.

-37-
<PAGE>

EXPENSES

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.

-38-
<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.

For the fiscal years ended March 31, 1999, 1998 and 1997, the Blended
Equity Fund paid brokerage commissions aggregating $______, $288,470 and
$271,411, respectively, $___, $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 $______, $412,406
and $271,334, respectively, of which $______, $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

-39-
<PAGE>

by the Fund to UST Securities Corp. were ____%, 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 ____%, 7.74% and 5.76%, respectively. For the same periods, the
average commissions per share paid by the Fund to UST Securities Corp. and other
unaffiliated brokers were $______ and $______, $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 $______, $131,936 and $122,184,
of which $______, $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 __% 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 __% 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 $___ and $____, 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 $_____ and $25,680,
respectively, of which $_____ 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 __%, 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 ___%. For the same period, the average
commissions per share paid by the Fund to UST Securities Corp. and other
unaffiliated brokers were $____ and $____, 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.

-40-
<PAGE>

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.

<TABLE>
<CAPTION>
Fund Amount of Transactions Related Commission
---- ---------------------- ------------------
<S> <C> <C>
Blended Equity Fund $________ $________
Value and Restructuring Fund $________ $________
Small Cap Fund $________ $________
Large Cap Growth Fund $________ $________
</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: ______.

-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.

INDEPENDENT AUDITORS

_______________, independent auditors, [ADDRESS] , serve as auditors
of the Company. The Funds' Financial Highlights included in the Prospectus and
the financial statements for the period ended _______________ are incorporated
by reference in this Statement of Additional Information have been audited by
_______________ 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

-42-
<PAGE>

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.

Each Fund qualified for its last taxable year as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and expects to so qualify in future years. Such qualification generally
relieves a Fund of liability for Federal income taxes to the extent its earnings
are distributed in accordance with the Code. 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.

Qualification as a regulated investment company under the Code
requires, among other things, that a Fund distribute to its shareholders an
amount equal to at least 90% of its investment company taxable income for each
taxable year. In general, a Fund's investment company taxable income will be its
income (including dividends and interest), 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. Each Fund intends to
distribute substantially all of its investment company taxable income each year.
Such dividends will be taxable as ordinary income to Fund shareholders who are
not currently exempt from Federal income taxes, whether such income is received
in cash or reinvested in additional shares. (Federal income taxes for
distributions to IRAs and qualified pension plans are deferred under the Code.)
The dividends received deduction for corporations will apply to such ordinary
income distributions to the extent of the total qualifying dividends received by
a Fund from domestic corporations for the taxable year.

Each Fund will designate any distribution of the excess of net
long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to shareholders within 60 days after the
close of the Fund's taxable year. Such distributions are not eligible for the
dividends received deduction. Upon the sale or exchange of shares, if the
shareholder has not held such shares for more than six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to the shares.

-43-
<PAGE>

Qualification as a regulated investment company under the Code also
requires that each Fund satisfy certain requirements with respect to the source
of its income for a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or trust is treated for this purpose
as derived with respect to the Fund's business of investing in stock, securities
or currencies only to the extent that such income is attributable to items of
income which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust.

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 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

-44-
<PAGE>

be changed by legislative or administrative action. Shareholders are advised to
consult their tax advisers concerning their specific situations and the
application of state and local taxes.

STATE AND LOCAL

Purchasers are advised to consult their tax advisers concerning the
application of state and local taxes, which may have different consequences from
those of the Federal income tax law described above.

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:

ERV TO THE POWER OF 1/n
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:

-45-
<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 Blended Equity, Value and Restructuring, Small Cap and
Large Cap Growth Funds for the one year period ended March 31, 1999 were _____%,
_____%, _____% and _____%, 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 _____%, _____% and _____%,
respectively. The average annual total returns for the shares of the Blended
Equity Fund for the ten year period ended March 31, 1999 was _____%. 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 _____% and _____%, 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 _____%.

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

-46-
<PAGE>

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.

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

-47-
<PAGE>

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 _____, 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 May 19, 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, 10.72%; 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 SW Macadam Avenue, Suite 2700,
Portland, Oregon 97201, 6.31%; 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, 19.98%; and SMALL CAP
FUND: U.S. Trust Retirement Fund, c/o United States Trust Company of New
York, 114 West 47th Street, New York, New York 10036, 21.20%.

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended _____________ (the "____
Annual Report") for the Funds are incorporated in this Statement of Additional
Information by reference. No other parts of the ____ Annual Report are
incorporated by reference herein. The financial statements included in the ____
Annual Report for the Funds have been audited by the Company's independent
auditors, _______________, whose reports thereon also appear in the ____ 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
____ 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.

-48-
<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

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

"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

A-1
<PAGE>

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.

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

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

A-3
<PAGE>

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.

"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.

A-4
<PAGE>

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:

A-5
<PAGE>

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 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 and greater in periods of economic
stress.

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 investment risk and are
assigned only in case of

A-6
<PAGE>

exceptionally strong capacity for timely payment of financial commitments. This
capacity is very unlikely to be adversely affected by foreseeable events.

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.

"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

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

"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

A-8
<PAGE>

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

"SG" - This designation denotes speculative quality and lack of margins of
protection.

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

A-9
<PAGE>

EXCELSIOR FUNDS, INC.

Income and 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 Income and
Growth Fund (the "Fund") 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
__________________, independent auditors, contained in the annual report to the
Fund's shareholders for the fiscal year ended _____________ 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............................................3
Additional Information on Portfolio Instruments...........................5
Investment Limitations...................................................12
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................15
Purchase of Shares.......................................................16
Redemption Procedures....................................................18
Other Redemption Information.............................................20
INVESTOR PROGRAMS.............................................................21
Systematic Withdrawal Plan...............................................21
Exchange Privilege.......................................................21
Retirement Plans.........................................................22
Automatic Investment Program.............................................23
Additional Information...................................................23
DESCRIPTION OF CAPITAL STOCK..................................................23
MANAGEMENT OF THE FUND........................................................25
Directors and Officers...................................................25
Investment Advisory and Administration Agreements........................31
Banking Laws.............................................................33
Shareholder Organizations................................................33
Expenses.................................................................34
Custodian and Transfer Agent.............................................34
PORTFOLIO TRANSACTIONS........................................................35
PORTFOLIO VALUATION...........................................................37
INDEPENDENT AUDITORS..........................................................38
COUNSEL.......................................................................38
ADDITIONAL INFORMATION CONCERNING TAXES.......................................38
PERFORMANCE INFORMATION.......................................................40
MISCELLANEOUS.................................................................43
FINANCIAL STATEMENTS..........................................................43
APPENDIX A...................................................................A-1
</TABLE>

<PAGE>

CLASSIFICATION AND HISTORY

Excelsior Funds, Inc. (the "Company") is an open-end, management
investment company. The 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."

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

The following information supplements the description of the
investment objectives, strategies and risks of the Fund as set forth in the
Prospectus. The investment objective of the Fund may not be changed without the
vote of the holders of a majority of its outstanding shares (as defined below).

INVESTMENT PHILOSOPHY AND STRATEGIES

In managing investments for the Fund, 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.

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.

Investment in such companies represents a very wide range of
investment potential, current income return rates, and exposure to fundamental
and market risks. Income

<PAGE>

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.

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 Fund's 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.

Although the Adviser generally will use the three strategies described
above in managing investments for the Fund, the Fund generally will invest in
those companies which are expected to generate the greater income. As a result,
the Fund is likely to have a relatively small portion of its assets invested in
Early Life Cycle companies. Finally, to complete the Adviser's investment
philosophy in managing the Fund, 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

Under normal market and economic conditions, the Fund will invest a
substantial portion of its assets in common stock, preferred stock and
securities convertible into common stock. The Fund's investments in equity
securities will be income-oriented, and it is expected that a portion of its
assets will be invested on a regular basis in debt obligations.

In managing the equity portion of the Fund, the Adviser will generally
select securities that are expected to pay dividends and other distributions
which will result in moderate current income when added to the income from the
Fund's non-equity investments. As a general matter, the Adviser will use the
problem/opportunity, transaction value, and early life cycle strategies
discussed above. The Adviser may also purchase equity securities for the Fund
from time to time without regard to the strategies outlined above if it
determines that the purchase is in furtherance of the Fund's investment
objectives.

Debt obligations may be acquired by the Fund to produce income and
(under certain conditions) capital appreciation, and may include both
convertible and non-convertible corporate and government bonds, debentures,
money market instruments, repurchase agreements collateralized by U.S.
government obligations, and other types of instruments described in this
Statement of Additional Information and the Fund's Prospectus. Except as stated
below, investments in debt obligations will be limited to those that are
considered to be investment grade-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. However, the Adviser may at any time acquire other, non-investment
grade obligations when it believes that their investment characteristics make
them desirable acquisitions for the Fund in light of its investment objectives
and current portfolio mix, so long as, under normal market and economic
conditions, no more than 5% of the Fund's total assets are invested in
non-investment grade debt obligations. Notwithstanding the foregoing, the Fund
may invest up to 35% of its total assets in non-investment grade convertible
debt obligations. Non-investment grade obligations (those that are rated "Ba" or
lower by Moody's and, at the same time, "BB" or lower by S&P or unrated
obligations), commonly referred to as "junk bonds," have speculative
characteristics. Risks associated with lower-rated debt securities are (a) the
relative youth and growth of the market for such securities, (b) the sensitivity
of such securities to interest rate and economic changes, (c) the lower degree
of protection of principal and interest payments, (d) the relatively low trading
market liquidity for the securities, (e) 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), and (f) the creditworthiness of the issuers of such
securities. During an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely effect 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 and adversely effect the value of outstanding bonds and the ability of the
issuers to repay principal and interest. If the issuer of a debt obligation held
by the Fund defaulted, the Fund could incur additional expenses to seek
recovery. Adverse publicity and investor perceptions, whether or not

-3-
<PAGE>

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.
See Appendix A for an explanation of ratings of obligations.

The Fund may invest up to 10% of its total assets in instruments such
as liquidating trust receipts; certificates of beneficial ownership; limited
partnership interests; creditor claims; loan participations; and warrants,
options and other rights to purchase securities. Such instruments may represent
ownership or credit or interests in a wide range of assets or businesses, and
may be acquired by the Fund for either income purposes (as would normally be the
case with instruments such as liquidating trust receipts) or capital
appreciation (as would be the case with warrants and options). Liquidating trust
receipts, as well as certificates of beneficial interest, acquired by the Fund
represent interests in trusts holding specific assets. In the case of a
liquidating trust, such assets may include airplanes, ships and trucks that have
been leased to third parties. Limited partnership interests acquired by the Fund
may represent equitable interests in enterprises engaged in activities related
to leasing of electronic, computer and other types of equipment. Normally, the
profits and losses attributable to the foregoing types of instruments pass
directly to the holders of the instruments and are not taxed at the trust or
partnership level.

Creditor claims (which may be in the form of notes or debentures)
acquired by the Fund comprise debt obligations of companies being reorganized
under bankruptcy or insolvency laws. Creditor claims normally sell at a
substantial discount from their face value, may be convertible into stock of the
reorganized company, and have a high degree of potential risk and reward. Loan
participations acquired by the Fund represent interests in either separate,
privately negotiated loans that have been made by lending institutions to third
parties or pools of privately negotiated loans maintained in the loan portfolios
of lending institutions. Lending institutions may sell loan participations to
the Fund and other institutional investors in order to achieve additional
revenues and to reduce their exposure on the loans involved, as well as for
other reasons. Loan participations are considered to be illiquid securities
subject to the 10% limitation on investments in illiquid securities described
below.

The instruments described above may provide a higher than normal rate
of return but may also entail greater risks. These risks include the absence of
any secondary or other organized market for certain instruments that the Fund
may acquire; the likelihood that the transfer of certain instruments will
otherwise be restricted because they have not been registered under federal or
state securities laws; the probability that certain instruments will represent
interests in a single asset or project and will be entirely dependent upon
market and economic factors affecting such asset or project and upon the skill
of project managers to produce value; the possibility of volatile changes in the
value of an instrument because of changes in the value of the asset underlying
the instrument; the possibility that certain instruments will be subject to
heavy cash flow dependency, defaults by borrowers, self-liquidation and the risk
that the underlying portfolio company will fail to qualify for favorable tax
treatment under the Internal Revenue Code of 1986, as amended (the "Code"); the
possibility that the Fund's loss with respect to an instrument may exceed the
amount of its investment; and, with respect to creditor claims and other debt
instruments, the quality of the credit extended. In addition, income from some
of the instruments described above may be non-qualifying income for purposes of
the Code

-4-
<PAGE>

and must be monitored by the Adviser so that the amount of any such
non-qualifying income does not exceed the amount permitted by the Code. The
Adviser will purchase such instruments only when it determines that the expected
return justifies the attendant risks.

The Fund may also 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.
Investments in unsponsored ADRs involve additional risk because financial
information based on generally accepted accounting principles (GAAP") may not be
available for the foreign issuers of the underlying securities. ADRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. As discussed below, the Fund may also enter
into foreign currency exchange transactions for hedging purposes.

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

OPTIONS

The Fund 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 the 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 Fund will be valued at the
last sale price or, in the absence of such a price, at the mean between bid and
asked prices.

The Fund may engage in writing covered call options (options on
securities owned by the 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 the Fund may not exceed 25% of the
value of its net assets. By writing a covered call option, the 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

-5-
<PAGE>

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 the 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. The 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 the Fund writes an option, an amount equal to the net premium
(the premium less the commission) received by the Fund is included in the
liability section of the 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 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 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 will realize a gain or loss. Premiums from expired call options
written by the Fund 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 Fund 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

The 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 Fund will enter into repurchase agreements only
with financial institutions

-6-
<PAGE>

that are deemed to be creditworthy by the Adviser, pursuant to guidelines
established by the Company's Board of Directors. The Fund 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 the 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 Fund's
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 the Fund
at not less than the repurchase price. Default or bankruptcy of the seller
would, however, expose the 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 the Fund
under the 1940 Act.

WHEN-ISSUED AND FORWARD TRANSACTIONS

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

The 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, the Fund may
dispose of or renegotiate a commitment after it is

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<PAGE>

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 the 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 the 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

The 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.

The 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 Fund 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. The 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 Fund
engages in forward currency transactions, certain asset segregation requirements
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When the 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 the 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

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<PAGE>

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 Fund 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 the 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, the 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, the 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 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.

REAL ESTATE INVESTMENT TRUSTS

The 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 the 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 Code, and to maintain exemption from the 1940 Act.
As a shareholder in a REIT, the 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 the Fund bears directly in
connection with its own operations.

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<PAGE>

SECURITIES LENDING

To increase return on its portfolio securities, the 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 the Fund exceeds 30% of the value of its total
assets. When the 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 the Fund if a material event affecting the investment is to occur.

MONEY MARKET INSTRUMENTS

The Fund 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 the Fund's total assets may be invested in any one branch, and no more
than 20% of the Fund's total assets at the time of purchase may be invested in
the aggregate in such obligations (see investment limitation No. 14 below under
"Investment Limitations"). Investments in time deposits are limited to no more
than 5% of the value of the Fund's total assets at the time of purchase.

Investments by the 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, the 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 Fund.

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<PAGE>

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 the 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 the 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.

GOVERNMENT OBLIGATIONS

The 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

The 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 the Fund bears
directly in connection with its own operations, as a shareholder of another
investment company, the 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 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.

BORROWING AND REVERSE REPURCHASE AGREEMENTS

The 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. The 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 the 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 the Fund may decline below the repurchase price of those securities.

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<PAGE>

ILLIQUID SECURITIES

The 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 Fund has valued the security. The 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 the Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.

PORTFOLIO TURNOVER

The Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
the Fund's investment objectives. 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 the 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 only by a vote of the
holders of a majority of the Fund's outstanding shares. As used herein, a "vote
of the holders of a majority of the outstanding shares" of the Company or the
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 the Fund, or
(b) 67% or more of the shares of the Company or the Fund present at a meeting if
more than 50% of the outstanding shares of the Company or the Fund are
represented at the meeting in person or by proxy. Investment limitations which
are "operating policies" with respect to the Fund may be changed by the
Company's Board of Directors without shareholder approval.

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

1. Make loans, except that (i) the 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
Fund may lend portfolio securities in an amount not exceeding 30% of

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<PAGE>

its total assets, and (iii) the Fund may purchase or hold creditor claims, loan
participations and other instruments in accordance with its investment
objectives and policies;

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;

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

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

8. 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;

9. 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; and provided that the
Income and Growth Fund may purchase options and other rights in accordance with
its investment objective and policies;

10. 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;

11. 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 or from investing
in liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objectives and policies;

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<PAGE>

12. 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;

13. 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.

14. 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; and

15. 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 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.

In addition to the above investment limitations, the 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 the Fund in units or attached
to securities will be deemed to be without value. The Fund also intends to
refrain from entering into arbitrage transactions.

The Fund may not purchase or sell commodities except as provided in
Investment Limitation No 11 above.

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<PAGE>

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

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 the 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 Fund. 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 Fund.

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 Fund 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
Fund. 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 the Fund is determined and the shares of the
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 the Fund are determined on each day the Exchange and the Adviser
are open for trading (a "Business Day"). Currently, the holidays which the Fund
observes 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. The 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.

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<PAGE>

PURCHASE OF SHARES

Shares of the Fund 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 Fund's 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 Fund, CGFSC
will send confirmations of such transactions and periodic account statements
directly to the shareholders of record. Shares in the Fund 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

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<PAGE>

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 the 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.

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<PAGE>

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 for the Fund. The minimum subsequent
investment for both types of investors is $50 for the 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

Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in the 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>

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).

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.

-19-
<PAGE>

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.

Except as described in "Investor Programs" below, Investors may be
required to redeem shares in the 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 the 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
the 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, the 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.

-20-
<PAGE>

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. ---------

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 the 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 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 the Fund while at the same time participating in the Systematic Withdrawal
Plan with respect to the 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

-21-
<PAGE>

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.

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 Fund 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 for the Fund and the minimum subsequent investment is $50 for
the Fund. Detailed information concerning eligibility, service fees and other
matters related to these plans can be obtained by calling (800)

-22-
<PAGE>

446-1012 (from overseas, call (617) 557-8280). Customers of Shareholder
Organizations may purchase shares of the Fund 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 for the Fund per transaction) at regular intervals selected by
the Investor. The minimum initial investment for an Automatic Investment Program
account is $50 for the 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

-23-
<PAGE>

Each share in the Fund represents an equal proportionate interest in
the 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 the 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 the Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to the 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.

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 the 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 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 the Fund's assets into money and, in
connection therewith, to cause all outstanding shares of the Fund to be redeemed
at their net asset value; or (c) combine the assets belonging to the 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

-24-
<PAGE>

connection therewith, to cause all outstanding shares of the Fund 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 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 the 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 FUND

DIRECTORS AND OFFICERS

The business and affairs of the Fund 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:

-25-
<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 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: 67 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).

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

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

-26-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Joseph H. Dugan Director Retired; Director of the Company and Excelsior
913 Franklin Lake Road Tax-Exempt Fund (since 1984); Director of UST
Franklin Lakes, NJ 07417 Master Variable Series, Inc. (from 1994 to June
Age: 73 1997); and Trustee of Excelsior Institutional
Trust (since 1995).

-27-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Robert A. Robinson Director Director of the Company and Excelsior Tax-Exempt
Church Pension Fund Fund (since 1987); Director of UST
800 Second Avenue Master Variable Series, Inc. (from 1994 to June
New York, NY 10017 1997); Trustee of Excelsior Institutional Trust
Age: 72 (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).

Alfred C. Tannachion(1) Director Retired; Director of the Company and Excelsior
6549 Pine Meadows Drive Tax-Exempt Fund (since 1985); Chairman of the
Spring Hill, FL 34606 Board of Excelsior Fund and Excelsior Tax-Exempt
Age: 72 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
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath
Philadelphia National LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 40

Edward 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 to
Boston, MA 02108-3913 November 1996).
Age: 37
</TABLE>

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

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

-28-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
John M. Corcoran Assistant Vice President, Director of Fund Administration,
Chase Global Funds Treasurer Chase Global Funds Services Company (since April
Services Company 1998); Vice President, Senior Manager of Fund
73 Tremont Street Administration, Chase Global Funds Services
Boston, MA 02108-3913 Company (from July 1996 to April 1998); Second
Age: 33 Vice President, Manager of Fund Administration,
Chase Global Funds Services Company (from October
1993 to July 1996); and Audit Manager, Ernst &
Young LLP (from August 1987 to September 1993).
</TABLE>

-29-
<PAGE>

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

Rodman L. Drake $_______ None $_______(4)**
Director

Joseph H. Dugan $_______ None $_______(3)**
Director

Wolfe J. Frankl $_______ None $_______(3)**
Director

W. Wallace McDowell, Jr. $_______ None $_______(4)**
Director

Jonathan Piel $_______ None $_______(4)**
Director

Robert A. Robinson $_______ None $_______(3)**
Director

Alfred C. Tannachion $_______ None $_______(3)**
Director

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

-30-
<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 Fund. 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 Fund.

Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Fund pursuant to advisory agreements substantially similar to the
Investment Advisory Agreements currently in effect for the Fund.

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

For the fiscal years ended March 31, 1999, 1998 and 1997, the Fund
paid U.S. Trust advisory fees of $________, $990,357 and $876,995, respectively.
For the same period, U.S. Trust waived advisory fees totaling $________,
$110,502 and $105,756, 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 Fund 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.

-31-
<PAGE>

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 Fund with general administrative
and operational assistance. Under the Administration Agreement, the
Administrators have agreed to maintain office facilities for the Fund, furnish
the Fund with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Fund, and to
compute the net asset value, net income and realized capital gains or losses, if
any, of the Fund. 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 Fund's financial accounts and records, and
generally assist in the Fund's 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.

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 the Fund, which
waivers may be terminated at any time.

For the fiscal years ended March 31, 1999, 1998 and 1997, the Fund
paid the Administrators $______, $223,661 and $200,249, respectively. For the
same period, the Administrators waived administration fees totaling $_____, $914
and $1,132, respectively.

-32-
<PAGE>

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 Fund, 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 Fund's method of operations would
affect their net asset values per share or result in financial loss to any
shareholder.

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 the 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 the Fund in an aggregate amount equal to administrative service fees
payable by the Fund.

-33-
<PAGE>

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").

For the fiscal years or periods ended March 31, 1999, 1998 and 1997,
the Fund paid Shareholder Organizations $______, $111,416 and $106,888,
respectively.

EXPENSES

Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Fund bears
the expenses incurred in its operations. Expenses of the Fund 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 Fund also pays 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 Fund's assets. Under the
Custodian Agreement, Chase has agreed to: (i) maintain a separate account or
accounts in the name of the Fund; (ii) make receipts and disbursements of money
on behalf of the Fund; (iii) collect and receive all income and other payments
and distributions on account of the Fund's 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 Fund's operations. Chase may,
at its own expense, open and maintain custody accounts with respect to the Fund
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.

-34-
<PAGE>

U.S. Trust New York serves as the Fund's 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 Fund to its
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 Fund's 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
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 Fund.

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

-35-
<PAGE>

To the extent that the Fund effects brokerage transactions with any
broker-dealer affiliated directly or indirectly with U.S. Trust, such
transactions, including the frequency thereof, the receipt of any commissions
payable in connection therewith, and the selection of the affiliated
broker-dealer effecting such transactions, will be fair and reasonable to the
shareholders of the Fund.

For the fiscal years ended March 31, 1999, 1998 and 1997, the Fund
paid brokerage commissions aggregating $______, $113,280 and $74,499,
respectively, $___, $0 and $0 of which was paid to affiliates of U.S. Trust.

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 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.

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 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.

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 Fund. Such information may be
useful to the Adviser in serving the Fund 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 Fund.

During the fiscal year ended March 31, 1999, the Adviser directed Fund
brokerage transactions to brokers because of research services provided. The
amount of such transactions and the related commissions were $______ and
$______, respectively.

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<PAGE>

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 Fund 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 Fund. When a purchase or sale of the same
security is made at substantially the same time on behalf of the 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 Fund or the
size of the position obtained by the Fund. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Fund 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 Fund as of the close of the most recent fiscal year. As of
March 31, 1999, the Fund held the following securities of the Company's regular
brokers or dealers or their parents: ______.

PORTFOLIO VALUATION

Assets in the Fund 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.

-37-
<PAGE>

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 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 Fund's portfolio,
and may use one or more independent pricing services in connection with this
service.

INDEPENDENT AUDITORS

___________________, independent auditors, [ADDRESS] , serve as
auditors of the Company. The Fund's Financial Highlights included in the
Prospectus and the financial statements for the period ended _______________
incorporated by reference in this Statement of Additional Information have been
audited by _________________ for the periods included in their reports thereon
which appear therein.

COUNSEL

ADDITIONAL INFORMATION CONCERNING TAXES

The following supplements the tax information contained in the
Prospectus.

The Fund qualified for its last taxable year as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and expects to so qualify in future years. Such qualification generally
relieves the Fund of liability for federal income taxes to the extent its
earnings are distributed in accordance with the Code. If, for any reason, the
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 the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction in the case of corporate shareholders.

Qualification as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders an
amount equal to at least 90% of its investment company taxable income for each
taxable year. In general, the Fund's investment company taxable income will be
its income (including dividends and interest), 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. The Fund intends to
distribute substantially

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<PAGE>

all of its investment company taxable income each year. Such dividends will be
taxable as ordinary income to Fund shareholders who are not currently exempt
from federal income taxes, whether such income is received in cash or reinvested
in additional shares. (Federal income taxes for distributions to IRAs and
qualified pension plans are deferred under the Code.) The dividends received
deduction for corporations will apply to such ordinary income distributions to
the extent of the total qualifying dividends received by the Fund from domestic
corporations for the taxable year.

The Fund will designate any distribution of the excess of net
long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to shareholders within 60 days after the
close of the Fund's taxable year. Such distributions are not eligible for the
dividends received deduction. Upon the sale or exchange of shares, if the
shareholder has not held such shares for more than six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to the shares.

An Investor considering buying shares of the Fund on or just before
the record date of a dividend should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
him.

A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares depending upon the tax basis of such
shares and their price at the time of redemption, transfer or exchange.
Generally, a shareholder may include sales charges incurred upon the purchase of
shares in his 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 such shares for shares of another fund within
90 days of the purchase and is able to reduce the sales charges otherwise
applicable to the new shares (by virtue of the exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares for the purpose of determining gain or loss, but
may be included (subject to the same limitation) in the tax basis of the new
shares.

Qualification as a regulated investment company under the Code also
requires that the Fund satisfies certain requirements with respect to the source
of its income for a taxable year. At least 90% of the gross income of the Fund
must be derived from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by the Fund from a partnership or trust is treated for this
purpose

-39-
<PAGE>

as derived with respect to the Fund's business of investing in stock, securities
or currencies only to the extent that such income is attributable to items of
income which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust.

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 Fund intends 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.

The 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 and local taxes.

STATE AND LOCAL

PERFORMANCE INFORMATION

The Fund may advertise the "average annual total return" for its
shares. Such total return figure reflects the average percentage change in the
value of an investment in the 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 the 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:

-40-
<PAGE>

ERV TO THE POWER OF 1/n
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.

The 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 Fund for the one year, five year and ten year periods
ended March 31, 1999 were _____%, _____% and _____%.

The Fund 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 the Fund's performance with other measures of investment return. For
example, in comparing the 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, the 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

-41-
<PAGE>

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 the 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 the 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 the Fund.
Advertisements, sales literature or reports to shareholders may from time to
time also include a discussion and analysis of the Fund's performance,
including, without limitation, those factors, strategies and techniques that,
together with market conditions and events, materially affected the Fund's
performance.

The Fund 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 the 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 Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of the 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 the 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 the Fund. The Fund 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 the 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 the 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 the 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.

-42-
<PAGE>

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 the 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 of the Fund, are conclusive.

As of _________, 1999, U.S. Trust and its affiliates held of record
substantially all of the Fund'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 May 19, 1999, the name, address and percentage ownership of
each person that owned beneficially or of record 5% or more of the
outstanding shares of the Fund were as follows: INCOME AND GROWTH FUND:
United States Trust Company of California, N.A. Trustee for Crucible Fund,
U.S. Trust Company of the Pacific Northwest, Attn: Sandra Woolcock, 4380 SW
Macadam Avenue, Suite 2700, Portland, Oregon 97201, 8.4%.

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended _____________ (the "____
Annual Report") for the Fund are incorporated in this Statement of Additional
Information by reference. No other parts of the ____ Annual Report are
incorporated by reference herein. The financial statements included in the ____
Annual Report for the Fund have been audited by the Company's independent
auditors, ___________________, whose reports thereon also appear in the ____
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 ____ 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

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.

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

"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

<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.

"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 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 investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.

"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.

A-2
<PAGE>

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

"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.

"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 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 BankWatch:

"TBW-1" - This designation represents Thomson 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 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 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>

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
non-payment.

"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. This "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 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 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 risks appear somewhat larger than in "Aaa"
securities.

A-5
<PAGE>

"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 operation 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 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 and greater in periods of
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

A-6
<PAGE>

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 category.

"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 changes 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.

"CCC", "CC", "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.

A-7
<PAGE>

"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the
highest potential for recovery of amounts outstanding on any securities
involved, and "D" represents the lowest potential for recovery.

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

Thomson 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 vulnerable to adverse developments
(both internal and external) than obligations with higher ratings.

"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.

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.

A-8
<PAGE>

MUNICIPAL NOTE RATINGS

A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group 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
very strong characteristics 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:

"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
obligations 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-9

<PAGE>

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 _______________,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended _______ 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
Additional Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . .1
Additional Information on Portfolio Instruments . . . . . . . . . . . . . . . .4
Special Considerations Relating to New York Municipal Securities. . . . . . . 12
Investment Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
NET ASSET VALUE AND NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . 29
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Redemption Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Other Redemption Information. . . . . . . . . . . . . . . . . . . . . . . . . 35
INVESTOR PROGRAMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Systematic Withdrawal Plan. . . . . . . . . . . . . . . . . . . . . . . . . . 36
Exchange Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Retirement Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Automatic Investment Program. . . . . . . . . . . . . . . . . . . . . . . . . 37
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Investment Advisory and Administration Agreements . . . . . . . . . . . . . . 44
Banking Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Shareholder Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . . . . . 48
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . . . . . 51
Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Tax-Exempt Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
YIELD INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
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
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
comparable

<PAGE>

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.)

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 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

-2-
<PAGE>

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 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.

-3-
<PAGE>

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.

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

-4-
<PAGE>

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.

WHEN-ISSUED AND FORWARD TRANSACTIONS

-5-
<PAGE>

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.

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

-6-
<PAGE>

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 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

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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.

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 multi-state
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 Securities 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 Securities may be
materially adversely affected by litigation or other conditions.

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<PAGE>

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 also invest in tax-exempt
derivative securities such as tender option bonds, participations, beneficial
interests in trusts, partnership interests 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 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

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<PAGE>

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 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

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<PAGE>

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 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

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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

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.

MISCELLANEOUS

The Money, Government Money, Treasury Money and Tax-Exempt 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.

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<PAGE>

STATE ECONOMY. New York State (the "State") is the third most
populous state 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.

The Annual Information Statement reflects estimates of receipts and
disbursements as formulated in the State Financial Plan released on June 25,
1998, as updated on a quarterly basis. The third quarterly update ("Third
Quarterly Update") was released on January 27, 1999 in connection with the
1999-2000 Executive Budget. 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.

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

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<PAGE>

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 Third Quarterly Update of the 1998-99 Financial Plan projected a
year-end available cash surplus of $1.79 billion in the General Fund, an
increase of $749 million over the surplus estimate in the Mid-Year Update.
Strong growth in receipts as well as lower-than expected disbursements during
the first nine months of the fiscal year account for the higher surplus
estimate. As of February 9, 1999, this amount was projected to be reduced by
the transfer of $1.04 billion to the tax refund reserve. The projected
remaining closing balance of $799 million in the General Fund is comprised of
$473 million in the TSRF, $226 million in the CPF, and $100 million in the CRF.

The Governor presented his 1999-2000 Executive Budget to the
Legislature on January 27, 1999. The 1999-2000 Financial Plan projects 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 constitute approximately 67 percent of all General Fund spending,
and include payments to local governments, non-profit providers and individuals.
Disbursements in this category are 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.

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.

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

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<PAGE>

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 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 on April 1, 1999. 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

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<PAGE>

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,
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
will modestly reduce projected borrowings in 1998-99. The State's 1998-99
borrowing plan now projects 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 has 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, it is anticipated that approximately $83 million
will be 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, is now
expected to be delayed until 1999-2000.

Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.85 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.

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.

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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) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to regulations promulgated by the
Superintendent of Insurance establishing certain excess medical malpractice
premium rates; (5) challenges to the constitutionality of Public Health Law
2807-d, which imposes a gross receipts tax from certain patient care services;
(6) action seeking enforcement of certain sales and excise taxes and tobacco
products and motor fuel sold to non-Indian consumers on Indian reservations;
(7) a challenge to the Governor's application of his constitutional line item
veto authority; and (8) a challenge to the enactment of the CLEAN WATER/CLEAN
AIR BOND ACT OF 1996.

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 1998-99 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

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<PAGE>

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.

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 the Governor
took office in 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

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<PAGE>

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 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.

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<PAGE>

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.

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 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 projects 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 reflects the impact
of scheduled tax reductions that will lower receipts by $38 million, as well as
the impact of two Executive Budget proposals that are 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.

In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 billion to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.

The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and 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

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<PAGE>

Plan shows 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 1999 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 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. 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 were voided, projected contracts for the City capital projects would
exceed the City's debt limit during fiscal year 1997-98. 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

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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. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. 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 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 includes $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 will
receive $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

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<PAGE>

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 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

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<PAGE>

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.

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;

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<PAGE>

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;

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

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<PAGE>

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 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;

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<PAGE>

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;

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

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<PAGE>

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.

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 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

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<PAGE>

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.

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 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 Tax-Exempt 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

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<PAGE>

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.

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

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<PAGE>

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:

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:

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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.

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.

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

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<PAGE>

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 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

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

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

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<PAGE>

the address listed above under 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.

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.

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<PAGE>

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 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.

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<PAGE>

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.

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

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<PAGE>

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.

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

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<PAGE>

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.

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 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.

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<PAGE>

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 (1) Chairman of the Board, Retired; Director of the Companies (since 1995); Trustee of
238 June Road President and Treasurer Excelsior Funds and Excelsior Institutional Trust (since
Stamford, CT 06903 1995); Vice Chairman of U.S. Trust Corporation and U.S. Trust
Age: 67 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 1984); Director of
333 East 69th Street UST Master Variable Series, Inc. (from 1994 to June 1997);
Apt. 10-H Trustee of Excelsior Institutional Trust (since 1995); and
New York, NY 10021 Director, Royal Life Insurance Co. of New York (since 1991).
Age: 72

Rodman L. Drake Director Director of the Companies (since 1996); Trustee of Excelsior
Continuation Investments Group, Inc. Institutional Trust and Excelsior Funds (since 1994);
1251 Avenue of the Americas Director, Parsons Brinkerhoff Energy Services Inc. (since
9th Floor 1996); Director, Parsons Brinkerhoff, Inc. (engineering firm)
New York, NY 10020 (since 1995); President, Continuation Investments Group,
Age: 55 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. (since 1993); 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 1984); Director of
913 Franklin Lake Road UST Master Variable Series, Inc. (from 1994 to June 1997); and
Franklin Lakes, NJ 07417 Trustee of Excelsior Institutional Trust (since 1995).
Age: 73
</TABLE>
- --------------------
(1). This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.

-40-
<PAGE>

<TABLE>
<CAPTION>
Position with the
----------------- Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- --------- ------------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the Companies (since 1986); Director of
2320 Cumberland Road UST Master Variable Series, Inc. (from 1994 to June 1997);
Charlottesville, VA 22901 Trustee of Excelsior Institutional Trust (since 1995);
Age: 77 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).

W. Wallace McDowell, Jr. Director Director of the Companies (since 1996); Trustee of Excelsior
c/o Prospect Capital Corp. Institutional Trust and Excelsior Funds (since 1994); Private
43 Arch Street Investor (since 1994); Managing Director, Morgan Lewis Githens
Greenwich, CT 06830 & Ahn (from 1991 to 1994); and Director, U.S. Homecare
Age: 61 Corporation (since 1992), Grossmans, Inc. (from 1993 to
1996), Children's Discovery Centers (since 1984), ITI
Technologies, Inc. (since 1992) and Jack Morton Productions
(since 1987).

Jonathan Piel Director Director of the Companies (since 1996); Trustee of Excelsior
558 E. 87th Street Institutional Trust and Excelsior Funds (since 1994); Vice
New York, NY 10128 President and Editor, Scientific American, Inc. (from 1986 to
Age: 59 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); Director of UST Master
Church Pension Fund Variable Series, Inc. (from 1994 to June 1997); Trustee of
800 Second Avenue Excelsior Institutional Trust (since 1995); President
New York, NY 10017 Emeritus, The Church Pension Fund and its affiliated companies
Age: 72 (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).

Alfred C. Tannachion (1) Director Retired; Director of the Companies (since 1985); Chairman of
6549 Pine Meadows Drive the Board of Excelsior Fund and Excelsior Tax-Exempt Fund
Spring Hill, FL 34606 (1991-1997) and Excelsior Institutional Trust (1996-1997);
Age: 72 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
</TABLE>

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

-41-
<PAGE>

<TABLE>
<CAPTION>
Position with the
----------------- Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- --------- ------------------------------
<S> <C> <C>
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 LLP.
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 40

Edward Wang Assistant Secretary Manager of Blue Sky Compliance, Chase Global Funds Services
Chase Global Funds Services Company Company (November 1996 to present); and Officer and Manager of
73 Tremont Street Financial Reporting, Investors Bank & Trust Company (January
Boston, MA 02108-3913 1991 to November 1996).
Age: 37

John M. Corcoran Assistant Treasurer Vice President, Director of Fund Administration, Chase Global
Chase Global Funds Services Company Funds Services Company (since April 1998); Vice President,
73 Tremont Street Senior Manager of Fund Administration, Chase Global Funds
Boston, MA 02108-3913 Services Company (from July 1996 to April 1998); Second Vice
Age: 33 President, Manager of Fund Administration, Chase Global Funds
Services Company (from October 1993 to July 1996); and Audit
Manager, Ernst & Young LLP (from August 1987 to September
1993).
</TABLE>

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 ________, 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.

-42-
<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 Total Compensation
Aggregate Benefits Accrued from the Companies
Name of Compensation from as Part of and Fund Complex*
Person/Position the Companies Fund Expenses Paid to Directors
- --------------- ------------- -------------- -----------------
<S> <C> <C> <C>
Donald L. Campbell
Director $_______ None $_______(3)**

Rodman L. Drake
Director $_______ None $_______(4)**

Joseph H. Dugan
Director $_______ None $_______(3)**

Wolfe J. Frankl
Director $_______ None $_______(3)**

W. Wallace McDowell, Jr.
Director $_______ None $_______(4)**

Jonathan Piel
Director $_______ None $_______(4)**

Robert A. Robinson
Director $_______ None $_______(3)**

Alfred C. Tannachion
Director $_______ None $_______(3)**

Frederick S. Wonham
Chairman of the Board,
President and Treasurer $_______ None $_______(4)**
</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.

-43-
<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 $_____, $_____ and $_____ 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 $_____ and
$_____ 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 $_____, $_____, $_____, $_____ and $_____ 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.

-44-
<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:

-45-
<PAGE>

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)

<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 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 $_____, $_____ and $_____ 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 $_____ and $_____
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 $_____ and $_____ with respect to the
_____ and _____ 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

-46-
<PAGE>

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

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 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

-47-
<PAGE>

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 totaled $_____, $231,371 and $215,140; $_____,
$168,833 and $184,235; $_____, $82,614 and $79,008; and $_____, $627,413 and
$502,764 with respect to the Money, Government Money, Treasury Money and
Tax-Exempt Money Funds, respectively. Of these respective amounts, $_____,
$231,347 and $215,090; $_____, $168,139 and $182,579; $_____, $82,614 and
$79,008; and $_____, $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 $_____ with respect to the New York Tax-Exempt
Money Fund. Of this amount, $_____ was paid to affiliates of U.S. Trust with
respect to the New York Tax-Exempt Money Fund.

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

-48-
<PAGE>

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 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.

-49-
<PAGE>

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.

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.

-50-
<PAGE>

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, 1998, none of the Funds held any securities of Excelsior Fund's or
Excelsior Tax-Exempt Fund's regular brokers or dealers or their parents.

INDEPENDENT AUDITORS

____________________, independent auditors, [address] ,
serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
___________________ incorporated by reference in this Statement of Additional
Information have been audited by _________________ 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),
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, 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.

Each Fund is treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to qualify as a
regulated investment company. 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.

-51-
<PAGE>

taxable as ordinary income to Fund shareholders who are not currently exempt
from Federal income taxes, whether such income is received in cash or reinvested
in additional shares. (Federal income taxes for distributions to IRAs and
qualified pension plans are deferred under the Code.) Because all of each
Fund's net investment income is expected to be derived from earned interest, it
is anticipated that no part of any distributions will be eligible for the
dividends received deduction for corporations.

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 be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends 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."

TAX-EXEMPT FUNDS

Each Tax-Exempt Fund's policy is to pay dividends each year equal to
at least the sum of 90% of its net exempt-interest income and 90% of its
investment company taxable income, if any. Dividends derived from
exempt-interest income ("exempt-interest dividends") may be treated by a Fund's
shareholders as items of interest excludable from their gross income under
Section 103(a) of the Code, unless, under the circumstances applicable to the
particular shareholder, exclusion would be disallowed.

If a Tax-Exempt Fund should hold certain "private activity bonds"
issued after August 7, 1986, the portion of dividends paid by the Fund which is
attributable to interest on such bonds must be included in a shareholder's
Federal alternative minimum taxable income, as an item of tax preference, for
the purpose of determining liability (if any) for the 26% to 28% alternative
minimum tax for individuals and the 20% alternative minimum tax applicable to
corporations. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for Federal
alternative minimum tax purposes. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.

Dividends payable by a Tax-Exempt Fund which are derived from taxable
income or from long-term or short-term capital gains, if any, will be subject to
Federal income tax, whether such dividends are paid in the form of cash or
additional shares. If a shareholder holds shares of a Tax-Exempt Fund for six
months or less and during that time receives an exempt-interest dividend on
those shares, any loss recognized on the sale or exchange of those shares will
be disallowed to the extent of the exempt-interest dividend.

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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.

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.

Interest on indebtedness incurred by a shareholder to purchase or
carry the Tax-Exempt Funds' shares generally is not deductible for Federal
income tax purposes.

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).

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NEW YORK TAX-EXEMPT MONEY FUND

Exempt-interest dividends (as defined for federal income tax purposes)
derived from interest on New York Municipal Securities (as defined above) will
be exempt from New York State and New York City personal income taxes (but not
corporate franchise taxes), provided the interest on such obligations is and
continues to be exempt from applicable Federal, New York State and New York City
income taxes. To the extent that Investors are subject to state and local taxes
outside of New York State and New York City, distributions by the New York
Tax-Exempt Money Fund may be taxable income for purposes thereof. Dividends and
distributions derived from income (including capital gains on all New York
Municipal Securities) other than interest on the New York Municipal Securities
described above are not exempt from New York State and New York City taxes.

Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the New York Tax-Exempt Money Fund generally is not
deductible for federal, New York State or New York City personal income tax
purposes.

STATE AND LOCAL

The Treasury Money Fund is structured to provide shareholders, to the
extent permissible by Federal and state law, with income that is exempt or
excluded from taxation at the state and local level. Most states -- by statute,
judicial decision or administrative action -- have taken the position that
dividends of a regulated investment company such as the Treasury Money Fund that
are attributable to interest on obligations of the U.S. Treasury and certain
U.S. Government agencies and instrumentalities (including those authorized for
purchase by the Fund) are the functional equivalent of interest from such
obligations and are, therefore, exempt from state and local income taxes. As a
result, substantially all dividends paid by the Treasury Money Fund to
shareholders residing in those states will be exempt or excluded from state
income tax.

Nevertheless in some jurisdictions, exempt-interest dividends and
other distributions paid by the Tax-Exempt Money Fund may be taxable to
shareholders under state or local law as dividend income, even though all or a
portion of such distributions is derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes.

MISCELLANEOUS

The foregoing summarizes some of the important tax considerations
generally affecting the Funds and their shareholders and is not intended as a
substitute for careful tax planning. The above 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. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situations
and the application of state and local taxes. Shareholders will be advised
annually as to the Federal, New York State and New York City personal income tax
consequences of distributions made each year.

* * *

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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 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

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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 ____%,
____%, ____%, ____% and ____%, respectively, and the effective yields for Retail
Shares of such respective Funds were ____%, ____%, ____%, ____% and ____%.

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
marginal federal income tax rate of 28%, a New York State and New York City
marginal income tax rate of 10.25% and an overall tax rate taking into account
the federal tax deduction for state and local taxes paid of 35.38%.

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, 1998 were _____%
and _____%.

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

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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 ______________, 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.

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended ___________________
(the "_______ Annual Reports") for the Funds are incorporated in this Statement
of Additional Information by reference. No other parts of the ________ Annual
Reports are incorporated by reference herein. The financial statements included
in the _________ Annual Reports for the Funds have been audited by the
Companies' independent auditors, ______________, whose reports thereon also
appear in the _________ 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 ________ 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.

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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.

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